The TMCA

School merch is big business. Students want sweats, mugs and the like to show they belong at the school. Alums want merch to show they went to the school. Other purchasers want merch as an aspirational statement, or to support the idea of the institution. Great demand naturally begets supply. Schools want to monopolize the market and have built substantial licensing businesses on having strong trademark rights. But recent business models have challenged such models, questioning whether all uses of school names and logos have to be licensed. Vintage Brand is one such business. It offers clothing and other merchandise featuring retro and current school names and logos without licenses. Vintage Brand staked its business on the belief that consumers buy the products to show support of the school, not because they believe the school has approved of the product. Vintage Brand has long defended its model on the basis that (1) many of the names and logos it uses are no longer protected as trademarks, (2) it uses protected marks for decoration, not to identify a source, and (3) it employs disclaimers to make clear the schools have not licensed the products. Unsurprisingly, schools disagreed. More than a dozen universities have filed infringement cases against Vintage Brand. Recall that to function as a trademark, a word, phrase, design or the like must function as a “source identifier.” That is, the mark must identify a source and differentiate the source from competitors. The purpose of requiring that a mark be a source identifier is to protect consumers who rely on the mark as shorthand for the quality of the goods. Words, and designs on a product that serve merely as decoration are not protectable as trademarks. But source identification and decoration are not mutually exclusive. A word or design can be both. A sweatshirt may feature a lion to make the shirt more attractive, the lion may also be a mascot of a school or team and used to identify the school and because the lion is decorative. Courts and experts have differed as to how to parse out what the function of a symbol is, as demonstrated in two recent cases involving Vintage Brand. In 2023, U.S. District Judge Alan Albright granted Baylor University’s summary judgment motion against Vintage Brand with regard to trademark infringement. The finding rested on use of a “per se” test that if consumers associate use of a school’s symbols with the institution, then unauthorized use of such marks is infringing. The parties subsequently entered a Consent Judgment that permanently enjoined Vintage Brand from using Baylor’s marks. In contrast, U.S. District Judge Matthew Brann, in a case brought by Penn State against Vintage Brand, rejected the per se approach, finding a mere mental association between a symbol and a trademark holder insufficient for infringement. Instead, Judge Brann required a fact-intensive inquiry into whether consumers “believe that the trademark indicates that the trademark holder is the source, sponsor, or is otherwise affiliated with the good.” Judge Brann reflected on other cases, and many experts, who believe disclaimers and prominent branding by the seller of the goods can be sufficient for consumers to understand the trademark owner was not the source of the goods. Additionally, Judge Brann questioned whether consumer confusion arose from consumer’s incorrect belief that goods bearing a school’s symbols must be licensed. He indicated data shows support for the belief but pondered if the misconception should be corrected. It is unclear if the reason for the confusion matters. Trademark law does not require consumers understand the legal basis for confusion as to source, only that it be likely. One also wonders how requiring jurors, who are average consumers after all, to engage in extensive fact finding would work to correct any misconceptions as to why they believed confusion was likely. In instructing the jury, Judge Brann did not directly attempt to correct any misconception that all use of a mark must be licensed. He initially explained that confusion as to “affiliation” is sufficient for infringement. Expounding on that, he repeated that the core question of confusion was whether “consumers will be confused as to whether Penn State manufactured, sponsored, or approved Vintage Brand’s goods.” If consumers believe a trademark owner must approve all use of its marks, then the answer seems a foregone conclusion. If so, the “per se” approach seems the far more efficient approach. In answering the question in Penn State, the jury unanimously rejected Vintage Brand’s defenses and found it willfully infringed Penn State’s marks. The verdict sends a clear message that the jury believed Vintage Brand’s goods were made, approved or sponsored by Penn State and that Vintage Brand intended to cause such confusion. The jury awarded Penn State $28,000 in compensatory damages based on Vintage Brand’s sales of 1,269 products bearing Penn State marks, its revenue of approximately $23,000 and the 10% royalty rate Penn State’s licensees typically pay to use the Penn State marks for similar merchandise. Since the verdict, Penn State has filed motions requesting a permanent injunction to halt Vintage Brand’s use and sale of any products with Penn State trademarks and to request attorneys’ fees on the basis that the case was sufficiently exceptional under the Lanham Act (15 U.S.C. Section 1117(a)). Vintage Brand has opposed both motions and indicated it will appeal the decision. Despite the alternative approaches used by the judges, both cases appear to have reached the same conclusion: consumers expect some authorized relationship between the mark’s owner and the seller. Further, the Penn State jury’s willfulness finding indicates that disclaimers are not only insufficient to prevent consumer confusion, but do not mitigate a defendant’s intent to deceive. While neither case is precedential, the decisions send a clear warning that unauthorized use of trademarks is done at great peril, particularly in university and sports markets. We will stay tuned to see if any of the findings change on appeal.

A few months’ back, the TMCA wrote about a copyright dispute between the campaign committee of former Iowa Congressman Steve King and Laney Griner, the owner of the photograph used in the popular “Success Kid” meme. The Eighth Circuit Court of Appeals has since affirmed the jury’s finding that the campaign was liable for copyright infringement for using the meme in a fundraising message for King’s unsuccessful reelection campaign. Of most interest, the Eight Circuit affirmed the jury’s rejection of the campaign’s fair use defense. The campaign had claimed that Griner, who took the photograph of her son, Sam, the “Success Kid,” should not be allowed to encourage use of the photograph generally but then also target the campaign’s commercial use of the photograph. They based their argument on the first, third, and fourth fair use factors. The Eighth Circuit’s analysis focused primarily on the first factor, the purpose and character of the use. This case marks the first time that the Eighth Circuit has applied the Supreme Court’s recent seminal fair use case, Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 598 U.S. 508, 143 S. Ct. 1258, 215 L. Ed. 2d 473 (2023). As discussed by the TMCA, after Warhol, courts assessing the first fair use factor must focus on: (i) whether and to what extent the challenged use has a purpose that is different from that of the original work; and (ii) whether the challenged use is commercial or non-commercial. The campaign argued that its use of “Success Kid” was like the billions of other uses of the photograph: the creation and dissemination of a meme. The Eighth Circuit was unpersuaded, however, largely because of the campaign’s admittedly commercial use of the meme for fundraising purposes. Quoting Warhol, the Court noted that “the ‘commercial nature of the use’—while ‘not dispositive’—‘is to be weighed against the degree to which the use has a further purpose or different character.’” The Court explicitly stated that fair use is more difficult to establish when memes are used for commercial purposes. In the Court’s own words: “Memes used commercially in advertising or fundraising are subject to stricter copyright standards than memes used noncommercially, which are often fair use.” This statement clarifies that memes are to be treated no differently than other uses. The campaign did not satisfy that stricter standard because its use was not transformative, so there was nothing to weigh against the commerciality of the use when assessing the first fair use factor. The Court rejected the campaign’s claim that their fundraising meme was transformative because the original purpose for Griner photographing her son had nothing to do with memes. The Eighth Circuit disagreed, focusing not on Griner’s original purpose for taking the photograph, but instead on her reason for asserting her copyright rights in the photograph: to control the commercial use of the photograph in memes. The Court thus found that the campaign’s use of the photograph in a meme did not add to or alter the purpose or character of the original work. The Court was also sure to note that, like other uses, memes are transformative to differing degrees, depending on the circumstances. But here, any evidence of transformativeness was lacking because the purpose of the use was the same as Griner’s use. As the Court noted: “The fact that everyone else is doing it is not a particularly compelling justification, especially considering the vast majority of these uses are non-commercial.” The Eighth Circuit also held that the third fair use factor—the amount and substantiality of the portion used in relation to the copyrighted work as a whole—favored Griner because the photograph of “Success Kid,” which was the heart of the template used to create memes, was used in the campaign’s meme. The fourth fair use factor was neutral. The effect of the campaign’s use on the market for the copyrighted photograph could not be determined. Griner had licensed the photograph to many well-known brands over the years, though licensing requests had decreased before the campaign’s use. There was no evidence that the campaign’s use increased the market for licensing the photograph, and a reasonable jury could have found that an association with King and his campaign could further dampen the licensing market. The Court also upheld the denial of attorneys’ fees to the campaign because it did not prevail, despite having made an offer of judgment for more than the statutory minimum of damages awarded to Griner. It also upheld the district court’s decision not to award attorneys’ fees to King himself, who did prevail on the merits below. The full text of the opinion can be found here.

Allegations Against What-A-Burger #13 Whataburger has once again found itself in the news over a lawsuit it filed over naming rights against a long-standing East Coast burger establishment for its purported infringement of the WHATABURGER trademark. On June 11, 2024, Whatabrands LLC, the Texas-based burger establishment, sued What-A-Burger #13, Inc., a North Carolina-based burger establishment, based on its use of the mark “What-A-Burger #13.” According to Whataburger’s complaint, it was founded in 1950 in Corpus Christi, Texas as a single location hamburger stand, but has since expanded its operations to over 1,000 restaurants in 16 states, with its rate of expansion increasing significantly since 2020. But burgers is not all that Whataburger offers. It also sells condiments, sauces, and other food items under the WHATABURGER mark in more than 5,000 grocery stores across 25 states and Mexico. In other words, Whataburger alleges it has garnered significant goodwill in its WHATABURGER mark, for which it first obtained a federal registration in 1957. With respect to What-A-Burger #13, the complaint alleges that, since no earlier than 1969, the North Carolina burger establishment has offered goods and services under the name and trademark “What-A-Burger #13” that are identical to those Whataburger offers—namely, restaurant services and food products—in connection with two North Carolina locations and a food truck. Critically, Whataburger alleges that What-A-Burger #13’s use of the mark began more than a decade after Whataburger registered its mark. Whataburger often receives publicity about expansion into additional states and, since 2022, this publicity has included speculation about Whataburger expanding into North Carolina. While that has yet to officially occur, in April 2024 Whataburger publicly announced its plans to expand its restaurant footprint into North Carolina in 2025. Whataburger began plotting its expansion into North Carolina as early as 2022. Pursuant to this plan, Whataburger reached out to What-A-Burger #13 in October 2022 to discuss its anticipated expansion and a likelihood of confusion between the entities, which resulted in the parties entering into a coexistence agreement in May 2023. Under the coexistence agreement, What-A-Burger #13 was permitted to use the What-A-Burger #13 mark solely in connection with their existing locations and single food truck “in limited ways.” However, Whataburger alleges that days before the coexistence agreement was signed, What-A-Burger #13 secretly formed a separate LLC called WAB #13, LLC “to circumvent the purpose and intention of” the agreement. According to Whataburger, the formation of WAB #13, as well as What-A-Burger #13’s use of its food truck, constituted breaches of the agreement. Based on these alleged events, Whataburger filed suit against What-A-Burger #13, its related entities and affiliates, and its owner, Zeb Bost, alleging federal trademark infringement, federal and common law unfair competition, breach of contract, and unfair and deceptive trade practices. What-A-Burger #13’s Response Although What-A-Burger #13 has not yet filed an answer or otherwise formally responded to the complaint, the law firm representing it provided the following statement: What-A-Burger is a small family business that originally opened in in the 1950s in Kannapolis North Carolina. Now in its third generation of ownership by the Bost family, Zeb Bost, who is the grandchild of one of the founders operates two What-A-Burger restaurants in Stanly and Cabarrus Counties. Starting in 1970, the Bost family entered into an agreement with the then-owner of WhatABurger out of Texas that it would operate without interference in Stanly and Cabarrus Counties. The Texas company broke that agreement in 2022. Now, after being in business for seventy years, What-A-Burger’s future is being threatened by this large national retailer, and the Bost family is being victimized by big money interests. The law firm’s response raises two noteworthy legal issues and potential defenses for What-A-Burger #13: (1) the assertion that What-A-Burger #13 opened in the 1950s belies the allegations in the complaint and gives rise to a potential good faith carveout for use of the mark, and (2) the assertion that Whataburger and What-A-Burger #13 entered into an agreement in 1970 under which Whataburger would not interfere with What-A-Burger #13’s operations in Stanly and Cabarrus Counties gives rise to a potential breach of contract counterclaim. In fact, as to the first point, the Mooresville-South Iredell Chamber of Commerce’s website states that What-A-Burger #13 was founded in 1956—one year prior to Whataburger’s federal registration for the WHATABURGER mark. As What-A-Burger expanded, each new location was named sequentially. What-A-Burger opened its first location in 1956 and its thirteenth location, What-A-Burger #13, in 1969. It will be interesting to see how What-A-Burger #13 claims that the current entity is the successor in interest to the rights commencing in 1956 and how it accounts for the variation in numbering. Analysis of What-A-Burger #13’s Potential Defenses as a Junior User We have seen similar situations play out in the courts before. A national brand with a federally registered trademark discovers that a smaller company is operating under the same or a similar name in a limited geographic region and, in some fashion, aggressively asserts its rights under the Lanham Act. Indeed, Whataburger itself did this with another geographically remote burger establishment using the Whataburger name in Virginia more than two decades ago. When this situation arises though, it is important to focus on the purpose of trademark law: trademarks exist to aid consumers in identifying and differentiating between brands. They allow trademark owners to protect their goodwill through the exclusive control over the use of their unique mark. When someone uses a confusingly similar name without authorization it could lead to consumer confusion regarding the products or services offered by the junior user and the affiliation or sponsorship of the senior user with those products or services. This would allow the junior user to unjustly benefit from the goodwill established by the first user in association with the mark. Thus, courts assessing trademark infringement focus on the likelihood of consumer confusion. Notably, when two parties are using similar marks in geographically remote areas, concurrent use may be permissible under certain circumstances without the junior user being considered an infringer. One such circumstance arises where the use of the mark by the senior and junior users are confined to geographically separate markets, with no likelihood that the senior user will expand its use into the junior user’s markets, so that no consumer confusion is possible, then the subsequent user is permitted to continue use of the mark concurrently. This is known as the Dawn Donut rule and is still widely accepted, including in the Fourth Circuit, where the Middle District of North Carolina is located. Importantly, this rule only applies where the senior user is not likely to expand its use of the trademark into the geographic area in which the junior user is using the trademark because without operating in the same area, there is no likelihood of consumer confusion. Another circumstance under which a junior user will not be considered an infringer is where (1) the junior user adopted the trademark without knowledge of the senior user’s earlier use, and (2) the junior user (or those in privity with it) has continuously used the trademark since before the senior user registered the trademark. This defense is available under Section 1115(b)(5) of the Lanham Act, and only applies to the area in which the junior use proves its continuous prior use. Under the facts alleged by Whataburger, it is clear that the court would find that the Dawn Donut rule does not apply because of Whataburger’s planned expansion into North Carolina. Although currently Whataburger is not operating in North Carolina, making What-A-Burger #13 a geographically remote junior user, Whataburger has clear plans to expand into North Carolina based on its own announced plans, and the discussions it has had with What-A-Burger #13. Thus, Whataburger is highly likely to expand into What-A-Burger #13’s market and the Dawn Donut rule would not apply. Though the Dawn Donut rule would not apply, What-A-Burger #13 should or could have a strong argument that it is not infringing Whataburger’s mark under Section 1115(b)(5) of the Lanham Act. Whataburger has not alleged that What-A-Burger #13 knew of its use of the mark in Texas prior to its adoption of the mark and there is no indication that it did. Moreover, it appears that What-A-Burger #13 has been using the mark since before Whataburger registered it. While Whataburger alleges that it registered its mark in 1957 and What-A-Burger #13 has been using the mark since no earlier than 1969, What-A-Burger #13’s statement and the Mooresville-South Iredell Chamber of Commerce’s website indicate that the owners of What-A-Burger #13 opened their first location under the “What-A-Burger” name in 1956. Therefore, What-A-Burger #13 has a strong argument that it has been operating in North Carolina since prior to Whataburger’s trademark registration. Assuming What-A-Burger #13 has sufficient proof of its earlier operation, it would likely succeed in asserting a defense under Section 1115(b)(5). What-A-Burger #13’s Potential Counterclaim In addition to asserting a defense under Section 1115(b)(5), it is likely based on What-A-Burger #13’s statement that it could assert a counterclaim against Whataburger for breach of contract. Assuming that the parties did, in fact, enter into a contract in the 1970s under which Whataburger agreed not to interfere in North Carolina in Stanly and Cabarrus Counties, then What-A-Burger #13 may have a claim that Whataburger breached this agreement by planning to expand into North Carolina. Conclusion This case is still in its infancy and the facts still need significant development, but it does serve as a cautionary reminder to trademark registrants seeking to expand into new geographical areas that the mere fact that its mark is registered does not give it carte blanche to enjoin any and all uses of similar marks. It also serves as a reminder to junior users that there are important exceptions to trademark priority that may be applicable to them to protect any goodwill they have established. Ultimately, nationwide protection is only available to federal trademark registrants, but the law protects good faith junior users to the extent of their continuous use. Therefore, trademark registrants should be careful to investigate the facts surrounding a junior user’s use of a mark before aggressively asserting any infringement claims.

The 2010s were a heyday for bridal fashion. TLC’s “Say Yes to the Dress” reality series captivated viewers watching brides navigate family opinions and emotions while shopping for “the dress” at Kleinfeld’s Bridal in New York City. Instagram became a new medium for the engaged to search for bridal fashion and plan the big day. The @misshayleypaige Instagram account used by bridal fashion designer Hayley Paige Gutman was particularly successful, amassing over 1.1 million followers by the end of 2020. Gutman was employed by JLM Couture, Inc., which manufactures and markets bridal fashion collections, including under a number of brands under the name “Hayley Paige” or variations thereof. The Instagram account features posts relating to both Hayley Paige designs and Gutman’s personal life. But, Gutman’s employment agreement with JLM contained provisions regarding the use of the names “Hayley,” “Paige,” “Hayley Paige,” and even “Hayley Paige Gutman.” Starting in 2019 into 2020, JLM began to take issue with Gutman’s use of the Instagram account, as well as her creation and use of a misshayleypage TikTok account. JLM accused Gutman of seizing control over the Instagram account and using “misshayleypage” handles to promote third party goods like olive oil, beer, and nutritional supplements without JLM’s approval. Things came to a head in late 2020, when JLM’s CEO confronted Gutman during a meeting at Kleinfeld’s, of all places. In December 2020, JLM sued Gutman in the Southern District of New York, alleging claims of trademark dilution, false designation of origin, unfair competition, and breach of Gutman’s employment agreement, among others. As The TMCA previously reported, JLM won a temporary restraining order that prohibited Gutman from using social media accounts bearing the misshayleypage name. Following the TRO ruling, Gutman resigned from JLM and took to Instagram on a new account tearfully describing the legal dispute and explaining that she was avoiding use her own name. In the years since then, the SDNY granted JLM a preliminary injunction, and the dispute bounced back and forth between the SDNY and Second Circuit Court of Appeals. In October 2023, JLM filed for chapter 11 bankruptcy with just $151,000 cash on hand, citing damage to its brand caused by litigation with Gutman as a primary driver of its financial decline. Gutman filed a motion seeking to convert JLM’s case to a liquidation under chapter 7 of the U.S. Bankruptcy Code, arguing the harm caused by the litigation to JLM’s relationships with vendors is so severe that JLM cannot successfully reorganize. On May 17, 2024, JLM filed a motion seeking bankruptcy court approval of a settlement with Gutman. The parties’ settlement agreement provides that JLM will dismiss its suit against Gutman and transfer a number of “Hayley Paige”-related intellectual property rights to Gutman in exchange for a payment that is not publicly disclosed. The transferred IP rights will include trademarks, rights of publicity, social media accounts, and copyrights embodied in Gutman’s copyrightable works owned by JLM, among other things. The bankruptcy court orally approved the settlement during a hearing on May 23, observing that the settlement payment will facilitate JLM’s reorganization. The court entered an order approving the settlement on May 24. Gutman has already recommenced posting on @misshayleypaige. The JLM-Gutman dispute showcases the power of a social media following. JLM’s CEO testified at the settlement hearing that JLM’s finances were negatively impacted by Gutman’s resignation and harsh criticism of the company on social media. JLM’s financial condition deteriorated notwithstanding its victories against Gutman and control of @misshayleypaige social media accounts, to the point that selling the disputed IP rights to Gutman is necessary for the company to have a chance at surviving. The case surely is and will continue to be a beacon for other brand owners seeking to establish and control social media presence.

Years ago, Laney Griner took a picture of her then toddler son, Sam, at the beach clenching his fist in what appeared like a celebratory gesture. The photo went viral, and later became a widely used meme on the internet known as “Success Kid.” Griner registered the copyright in the photo, and has successfully licensed its use to several large companies. She also has encouraged non-commercial uses of the photograph by publishing instructions on how to create a meme using “Success Kid.” The campaign committee of former Iowa Congressman Steve King used “Success Kid” without Griner’s permission to fundraise for King’s unsuccessful bid at reelection, adding a fundraising message to the image of Sam that said: “Fund our memes.” Griner sued both King and his campaign for copyright infringement, and the jury found the campaign liable, awarding Griner the statutory minimum of $750. Despite being liable for only the statutory minimum, the campaign appealed on multiple grounds, including that the Eighth Circuit should apply a different standard to determining an implied license, that the jury incorrectly rejected the fair use defense, and that the district court erred when it refused to award attorneys’ fees to the campaign. King—whom the jury found not liable for copyright infringement—also appealed the trial court’s refusal to award him attorneys’ fees as a prevailing party. The Eighth Circuit Court of Appeals recently heard oral argument on the appeal, which potentially raises multiple issues relevant to copyright owners of works used widely on the internet for non-commercial and commercial purposes. The campaign relied heavily on claims that Griner should not be permitted to both allow and encourage wide-spread use of “Success Kid”—which counsel called one of the five most popular memes ever—to increase the photo’s value for commercial licensing, but then to selectively target the campaign’s admittedly commercial use of the meme. The campaign urged the Court to imply a license to use the photo through Griner’s conduct, rather than apply the traditional factors required for an implied license. Griner’s counsel noted that musicians use a similar business model: making their music available for non-commercial uses on platforms like the Instagram Music Library, but then licensing that music for commercial purposes. One member of the panel wondered what would be left of copyright law in the Internet age if the Court agreed with the campaign and found an implied license (or that works passed into the public domain) due to widespread use of the work in memes. Though it would be more interesting from a copyright law perspective for the Court to weigh in on these arguments, it may not do so because the campaign appeared to have waived its implied license argument at trial. The campaign also argued that the purpose and character of its use of “Success Kid” favored a finding of fair use because the use was political, was like billions of other uses of the photo, and Griner had acquiesced to and encouraged the use of the photo as a meme. The campaign failed to recognize or to cite to the Supreme Court’s seminal fair use case, Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, which had been decided a few months before the campaign filed its brief. The Eighth Circuit has yet to publish a decision applying Andy Warhol, but questioned both counsel about its effects in this case and more generally. One member of the panel even asked point blank: “What’s left of the fair use doctrine after the Andy Warhol case?” As it applies to this case, counsel for Griner argued that the campaign’s use was commercial, and was not otherwise sufficiently transformative, so the first fair use factor favored Griner. Other than adding a fundraising message to the photo, the campaign did not point to other evidence distinguishing its use. Though the case presents an opportunity for the Eighth Circuit to apply Andy Warhol, the extent to which it will do so may be limited. The fair use argument not only appears to favor Griner here, but also, as one panelist noted, the campaign “is pushing a big rock up a big hill” in its efforts to overturn the jury’s finding of infringement. If the Court upholds that verdict, the case supports a copyright owner’s continued right to control the commercial use of their work, even where it has been widely used online for non-commercial purposes, and even where the copyright owner has encouraged such non-commercial use (though the financial incentives for doing so under similar circumstances may be small). Relevant to the potential financial incentives and risks facing copyright owners, the panel also will decide whether the district court properly exercised its discretion in denying attorneys’ fees to the defendants. The Eighth Circuit has not directly addressed the intersection of Rule 68 and Section 505 of the Copyright Act. The district court applied Marek v. Chesney, 473 U.S. 1 (1985), and found that Section 505 only supports awarding fees to a defendant whose offer of judgment was more favorable than the final award if the defendant was a prevailing party. So, even though Griner had rejected a Rule 68 offer of judgment for $15,000, the campaign could not recover its post-offer fees because it did not prevail on the infringement claim. As to King, who prevailed on the copyright claim, the court exercised its statutory discretion to award attorneys’ fees in any copyright case and determined that fees were not appropriate in part because Griner’s claim was reasonable and—contrary to King’s claims that the lawsuit was politically motivated—her motivations were not malicious. On appeal, Griner urges the Eighth Circuit to weigh in on Rule 68 offers in copyright actions, to agree with the district court, and to expressly adopt the reasoning of the Seventh and Ninth Circuits to find that defendants are only potentially entitled to attorneys’ fees in copyright cases if they actually prevail on the merits of the infringement claim. Doing so would ensure that copyright owners who prove infringement would not be on the hook for the infringer’s attorneys’ fees. In questioning Griner’s counsel on this issue, the panel instead focused on the trial court’s broad discretion to award fees in copyright cases, potentially signaling a reluctance to adopt the bright-line position urged by Griner. The TMCA will monitor this case to see what guidance the Eighth Circuit may offer to copyright litigants on these issues, and will be sure to provide our valued readers with any relevant updates.

A 4-foot tall, bronze girl defiantly stands with her hands on her hips and chin held high. Better known as Fearless Girl, the statue was intended to promote the power of women in leadership. The statue has come also to symbolize missteps and the consequences of unthoughtful legal planning. An advertising agency engaged Kristen Visbal to create the sculpture, apparently without any agreement as to rights, or, according to Visbal, any notice the sculpture was for a corporate sponsorship. State Street Global Advisors, the asset management company sponsoring the project initially placed Fearless Girl as a temporary counterpoint to the iconic Charging Bull statue: Fearless Girl was a tremendous success and had an immense social impact from its unveiling. The response prolonged display of the statute and spawned legal controversies. The first of which involved Arturo Di Modica, Charging Bull’s sculptor’s claims that the placement of Fearless Girl implicated issues of Di Modica’s copyright and trademark rights, and further distorted his artistic message as an “advertising trick.” We blogged about these claims back in 2017. Although Di Modica ultimately did not sue Visbal or the State of New York regarding the placement of Fearless Girl, Fearless Girl was eventually relocated to stand outside of the New York Stock Exchange. Another set of disputes arose from a trio of agreements State Street and Visbal negotiated following the statue’s success. The agreements were an attempt to sort out what each party could do with regard to the associated rights around the statue, but, unfortunately, created more problems than they solved. In 2019, State Street brought a claim in New York state court against Visbal, requesting a temporary restraining order to prevent Visbal from participating in an event in Australia that allegedly violated the agreements. The TRO was denied, but a later preliminary injunction was ultimately upheld. Following various claims and counterclaims, the parties filed motions for summary judgment, which the United States District Court for the Southern District of New York partially granted and partially denied. Judge Gregory H. Woods’ summary judgement opinion grapples for 90+ pages over the numerous breaches of contract, copyright and trademark infringement claims, and questions of preclusion. While nothing in the decision is groundbreaking, the opinion meticulously analyzes several breach of contract claims, offering excellent instruction as to drafting considerations. For instance, each of Visbal and State Street alleged claims regarding the other party’s breach of its obligations to provide attribution, which yielded opposing outcomes based upon the language in the agreements. Visbal’s claim stemmed from no attribution being provided when Fearless Girl was relocated to the New York Stock Exchange. The relevant agreement required State Street to “give attribution to [Visbal] as the sculptor of [Fearless Girl] wherever and whenever practicable, such as, for example, . . . plaques placed with” State Street replicas. The court denied summary judgement on this point, finding questions of fact with regard to whether attribution to Visbal would have been practicable (despite attribution being provided at the prior Charging Bull location). In contrast, Visbal agreed that any reproductions of Fearless Girl Visbal provided “as part of any promotional or corporate event, conference, ceremony, banquet, retreat, awards dinner, or the like” would include the attribution “Statute commissioned by SSGA.” The court found that Visbal’s verbal acknowledgement of State Street’s role was insufficient to meet the requirements as it did not include the exact language and did not appear on the reproduction, and granted summary judgement to State Street on this breach of the agreement. The contrast is a good reminder to use exact language, and avoid subjective considerations, in drafting specific requirements. Visbal did have a win with regard to State Street’s copyright infringement claims. The claim stemmed from Visbal’s grant of an exclusive license to State Street in connection with “gender diversity issues in corporate governance and in the financial services sector.” Visbal sold a Fearless Girl replica to an executive who worked at a financial institution. That executive later displayed the replica at a gender diversity in corporate governance event. Judge Woods denied summary judgement for both direct and vicarious infringement, finding Visbal did not take any action with regard to the executive’s use of the replica and did not profit from such use. The decision is not especially favorable to one party over the other, and Visbal’s counsel has already indicated her intention to appeal. The history of the sculpture and various legal disputes do serve as a cautionary tale and a necessary reminder of how important it is to carefully draft legal agreements—and just as carefully comply with them. The TMCA will continue to monitor this case.

photo by Arthur Shevtsov / Shutterstock.com Sometimes, the best place to determine whether a work qualifies as art is in a courtroom. In a recent decision, Judge John H. Chun of the District Court for the Western District of Washington found that a driving simulator video game, Spintires, is an expressive work entitled to First Amendment protection. See Saber Interactive Inc. v. Oovee, Ltd., No. 2:21-cv-01201-JHC, Dkt. 51 (W.D. Wash. Oct. 6, 2022). Spintires simulates driving through various wilderness tracks in a variety of real-world vehicles. While Oovee has licensed some of the vehicles depicted in Spintires, it has not licensed all of them. For the unlicensed vehicles, Oovee provides the following disclaimer: All other trademarks are the property of their respective owners. All characters and vehicles appearing in Spintires® are fictitious (except where licensed). Any representations to real-life persons (living or dead), or real-world vehicle designs (except where licensed), is purely coincidental. It is, of course, one of the unlicensed vehicles appearing in Spintires, the K-700, that is at the heart of the dispute in Saber Interactive v. Oovee. photo by Filmbildfabrik / Shutterstock.com In November 2015, Oovee released an update to Spintires that included, and seemed to emphasize, the K-700, which is a distinctive tractor with articulated steering. Peterburgsky traktorny zavod JSC, which is known under the brand name “Kirovets,” manufactures and sells the K-700. Kirovets exclusively licensed certain of its intellectual property rights in its vehicle designs to a video game developer call Saber, which sells its own driving simulation video game, Mudrunner. The license with Kirovets gives Saber the right to take legal enforcement action against infringers of Kirovets’s licensed IP rights. Oovee’s unlicensed use of the K-700 in Spintires led Saber to sue Oovee on September 2, 2021. On April 26, 2022, Saber filed a Second Amended Complaint (“SAC”) which included three claims: (1) unfair competition under Section 43(a) of the Lanham Act, 15 U.S.C. § 1125; (2) unfair competition under Washington’s Consumer Protection Act (“WCPA”), Washington Revised Code (“RCW”) 19.86.010; and (3) unjust enrichment. Oovee moved to dismiss the SAC under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, arguing that the First Amendment bars Saber’s claims, and, even if it does not, Saber failed to plead facts sufficient to survive a motion to dismiss. The SAC alleged that Oovee engaged in unfair competition under the Lanham Act by using Saber’s trademark and trade dress without authorization. Saber argued that the First Amendment does not bar its unfair competition claim because Spintires is not an expressive work, and Spintires’ disclaimer is misleading. In the Ninth Circuit, courts use the “likelihood-of-confusion” test when evaluating an infringement claim under the Lanham Act unless artistic expression is at issue. When the alleged infringement involves artistic expression, courts apply a test set forth in Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989), which balances the First Amendment interest in protecting artistic expression against the interest in securing trademark rights under the Lanham Act. Rogers requires a defendant to make a threshold showing that its allegedly infringing use is part of an expressive work. If successful, the plaintiff then has the heightened burden of showing the likelihood-of-confusion test and one of Rogers’s two prongs: (1) the unauthorized use of the trademark has no artistic relevance to the underlying work whatsoever, or (2) the use of the trademark explicitly misleads as to the work’s source or content. Saber argued that Spintires is not an expressive work because it does not express ideas or social messages, it has no characters, dialogue, or plot, its music is simplistic and only in the background, and the simulated world is generic and computer-generated. Judge Chun cited a U.S. Supreme Court case and a Ninth Circuit case holding that video games may qualify for First Amendment protection, and then discussed another case in which the Ninth Circuit affirmed a district court’s conclusion that a race car driving simulation video game contained express elements such as the race car drivers being characters and the plot being the drama of the races. VIRAG, S.R.L. v Sony Computer Entertainment America LLC, No. 3:15-cv-01729-LB (N.D. Cal. Aug. 21, 2015), aff’d, 699 F. App’x 667, 668 (9th Cir. 2017). In view of the case law, Judge Chun determined that many of the features of Spintires alleged in the SAC establish that Spintires is an expressive work, explaining that “[u]sers interact with the virtual world by selecting a vehicle (which is like a character) and by navigating the virtual environment (which is like a plot).” As to the first Rogers prong, Saber failed to explain how Oovee’s use of the K-700 is artistically irrelevant, so the court did not consider the first prong. The court also determined that Saber could not meet the second prong, that Oovee’s use of the K-700 explicitly misleads consumers about its source or endorsement. The court concluded that Saber did not satisfy the second prong because it failed to point to an expressly misleading statement. The court noted that, while “the disclaimer is far from a model of clarity,” it does not explicitly mislead customers into thinking that Saber or Kirovets is associated with Spintires. Moreover, use of the K-700 mark alone is insufficient to satisfy the second Rogers prong. The court dismissed Saber’s claim for unfair competition under the Lanham Act, because the First Amendment protects Oovee’s use of the K-700. Under the same rational, the court also dismissed Saber’s claim for unfair competition under the WCPA. In addition, the court dismissed the trade dress claim because Saber failed to plead any facts to create a reasonable inference that the identified features of the K-700 are non-functional. Finally, the court dismissed the unjust enrichment claim because, under Rogers, Oovee did not impermissibly infringe Saber’s trademark rights and, therefore, did not receive a benefit at Saber’s expense. Accordingly, the court dismissed all claims against Oovee in the SAC but granted Saber leave to file a Third Amended Complaint. Saber Interactive is a win for anyone seeking validation for the idea that video games can be works of art, just like books, movies, etc. This decision also shows that courts take a broad view about what constitutes an expressive work in the context of video games. Video games do not require a traditional narrative structure, a memorable soundtrack, or stunning visuals to qualify for First Amendment protection. If a video game lets the player select their own vehicle, hop in, and take a drive through an interactive environment, that’s probably enough.

If you are a fan of legal decisions about professional wrestlers, tattoos, video games or video games about professional wrestlers with tattoos, 2020 has been an exciting year for you. This past Spring, in Solid Oak Sketches, LLC v. 2K Games, Inc., Judge Laura Taylor Swain dismissed a copyright claim filed by a tattoo owner against 2K Games for its realistic depiction of several tattooed NBA players in the NBA 2K series of video games. While that decision ticked off the boxes for tattoos and video games, professional wrestlers were conspicuously absent. Fortunately, two courts have recently issued decisions to fill that void. The first is a non-precedential, but still interesting Third Circuit decision, and it’s worth stating its colorful name in full: Lenwood Hamilton a/k/a Hard Rock or Skip Hamilton v. Lester Speight, a/k/a Rasta the Urban Warrior, a/k/a Augustus “Cole Train” Cole; Epic Games, Inc., Microsoft, Inc., a/k/a Microsoft Corp.; Microsoft Studios; and The Coalition. With so many aliases and nicknames, one would be forgiven for incorrectly assuming the mafia or superheroes were involved in this case. In fact, plaintiff Lenwood Hamilton is a professional wrestler and former football player, as is one of the defendants, Lester Speight, who is also the voice actor for Augustus Cole, an alien-fighting soldier in the Gears of War series of video games published by Microsoft. Microsoft also received an alias, but presumably has never wrestled professionally. Like other celebrities have sometimes done, Hamilton saw a character in a video game, in this case Augustus Cole, and felt like he was “looking in a mirror.” Accordingly, he filed a complaint alleging that the defendants had violated his right of publicity by using his likeness without his authorization. The district court granted summary judgment in the defendants’ favor, holding that their use of the character was protected by the First Amendment. On appeal, the Third Circuit considered whether the alleged depiction of Hamilton “is the very sum and substance of the work in question” or “whether the product containing [the plaintiff’s] likeness is so transformed that it has become primarily the defendant[s’] own expression.” The Court held that while there were similarities between Hamilton and Cole (e.g., skin color, facial features, hairstyles, etc.), no reasonable jury could conclude that Hamilton is the “sum and substance” of Cole. Other differences (e.g., Cole serves in the military and fights exotic aliens, but Hamilton has apparently done neither of those things) showed that Hamilton is at most one of the “raw materials from which [Cole] was synthesized.”  Thus, the defendants pinned Hamilton’s claims to the mat and walked away victorious, metaphorically waving an absurdly large belt over their heads. The second case, Alexander v. Take-Two Interactive Software Inc., et al., relates to the full trifecta of legal topics: professional wrestlers, video games, and tattoos.  Plaintiff Catherine Alexander filed suit against the defendants, which include, among others, video game company Take-Two and World Wrestling Entertainment, Inc. (“WWE”) for their roles in creating the WWE 2K series of video games. Alexander is a former tattoo artist responsible for six tattoos on professional wrestler Randy Orton. Ms. Alexander has registered copyrights for five of the tattoos. The WWE 2K games contain realistic depictions of WWE wrestlers, including Orton and his tattoos. Take-Two has a license from WWE to depict WWE wrestlers in its games, and the license permits WWE to reject character designs if they are inaccurate. Thus, had Take-Two inaccurately depicted Orton’s tattoos, WWE would have rejected his character design. However, Alexander never licensed her tattoo designs to anyone, and negotiations in 2009 between WWE and Alexander for rights to the tattoos fell through. When Alexander saw her designs being used in the WWE 2K games, she sued for copyright infringement. Alexander moved for summary judgment as to copying, which the court granted since there was no real question that Take-Two had accurately copied the designs from Orton. Defendants also moved for summary judgment, arguing that three affirmative defenses apply: (1) implied license, (2) fair use, and (3) de minimis use. The court found that there were triable issues of material fact regarding the scope of any implied license, as it was unclear whether Alexander and Orton discussed permissible forms of copying, distribution, and sublicensing. In addition, the court found that there were disputes of material fact precluding summary judgment as to fair use, including the defendants’ purpose in using the tattoo designs, whether defendants’ use was sufficiently transformative, and whether there was market harm to Alexander. Finally, the court denied summary judgment as to the de minimis use defense because (1) the defendants provided no authority showing that de minimis use is a viable defense in the Seventh Circuit and (2) the defendants had copied the tattoos in their entirety. The Alexander court’s conclusion seems to be at odds with the Solid Oaks Sketches decision, which had very similar facts and legal issues. Surprisingly, despite the similarities and recentness of the Solid Oaks Sketches decision, the Alexander decision does not mention it. Alexander was previously set for trial during the week of October 19, 2020, but it has been rescheduled to February 16, 2021 due to COVID-19. That means that we will need to wait at least a few more months to find out whether there could be a budding split between the Second and Seventh Circuits with respect to realistic depictions of tattooed celebrities in video games.

In a case of first impression at the appellate level, the First Circuit recently issued a decision highlighting that U.S. copyright law authorizes implied, not merely express, sublicenses of copyrighted works. Photographic Illustrators Corporation v. Orgill, Inc., Case No. 19-452 (1st Cir. Mar. 13, 2020). The case involved photos. Not just any photos mind you, but photos of lightbulbs, numbering in the thousands. And not just any lightbulbs, but Sylvania lightbulbs. The photos were created not because their owner, plaintiff Photographic Illustrators Corporation (“PIC”), had some sort of blinding obsession with Sylvania lightbulbs, but because Sylvania hired PIC to take these photos for use in Sylvania’s marketing materials. Indeed, Sylvania took such a shine to PIC’s photos that it paid PIC roughly $3 million for a six-year license to use the photos for purposes of selling the bulbs to consumers. The license, which was in writing, included a clear provision that gave Sylvania “a non-exclusive, worldwide license in and to all the Images and the copyrights thereto to freely Use, sub-license Use, and permit Use, in its sole and absolute discretion, in perpetuity, anywhere in the world.” But, Sylvania was also required “to the extent reasonably possible and practical” to “include a copyright notice indicating PIC as the copyright owner and/or include proper attribution indicating [PIC’s principal] as the photographer.” The case arose because Sylvania made a glaring error: it gave the photos to defendant Orgill, Inc. (“Orgill”) so that Orgill could include them in lightbulb catalogs that were disseminated to Orgill’s network of dealers, but Sylvania forgot to tell Orgill about the attribution required by the PIC license. Incandescent at the absence of the required attributions, PIC initiated multiple lawsuits against Orgill dealers and Sylvania, most of which were consolidated and heard by an arbitrator. After hearing all of the evidence, the arbitrator ruled that the dealers were innocent of any wrongdoing, a decision that surely left them beaming, but the arbitrator cast Sylvania’s actions in a harsh light. Indeed, the arbitrator held that Sylvania had breached a covenant of the PIC license by failing to ensure that the attribution requirement was satisfied. As a consequence of running this legal red light, PIC was awarded approximately $8.5 million in damages from Sylvania. But what about Orgill? PIC’s claims against it were heard before a district court, and Orgill argued there that it had an implied sublicense from Sylvania to use PIC’s photos, such that it could not be liable for copyright infringement. Moving at the speed of light after the arbitration concluded, the district court agreed with Orgill and granted it summary judgment on its claim of an implied sublicense. On appeal, the First Circuit concluded that it was time to illuminate a murky area of copyright law – whether implied sublicenses are legally possible – because no circuit court had ever before addressed the issue. The court first considered PIC’s argument that copyright sublicenses had to be express, not implied, but it concluded that implied copyright sublicenses are cognizable as a matter of law, in the same way as implied copyright licenses. The First Circuit decision spotlights a number of cases from various appellate courts, including the First Circuit itself, that confirm the validity of implied copyright licenses. Given this crystal-clear authority, the First Circuit saw no reason not to recognize the existence of implied copyright sublicenses as well. The First Circuit also pointed out that the PIC-Sylvania license contained an express grant of sublicensing rights, without imposing any requirements that such sublicenses had to be express. In light of this, the court found that PIC had failed to require that such sublicenses be express, when it could have done so. As for PIC’s policy arguments that recognizing implied sublicenses would be contrary to the purposes of the Copyright Act, the First Circuit made light of them, holding that no policies underlying the statute would be undermined by recognizing the existence of implied copyright sublicenses. Next, the First Circuit considered PIC’s other argument: that the evidentiary record, viewed in the light most favorable to PIC, reflected genuine disputes of material fact as to the existence of an express or implied sublicense that should have precluded a grant of summary judgment. Once again, the First Circuit disagreed with PIC, holding that no reasonable factfinder could conclude that no implied or express sublicense existed. Indeed, the decision brings to light multiple aspects of the record showing the existence of such a sublicense, from the fact that Sylvania paid nearly $3 million for the photos and gave them to Orgill for purposes of marketing the lightbulbs they depicted, to Sylvania’s annual approval of the Orgill catalogs containing the photos, to the arbitrator’s decision awarding PIC nearly $8.5 million because Sylvania failed to ensure that Orgill properly credited PIC when using the photos. Based on all of this evidence, the First Circuit affirmed the grant of summary judgment to Orgill because the evidence showed that Sylvania had impliedly sublicensed Orgill to use the photos. What this decision shows is that if a copyright licensor wants to restrict any sublicensing rights granted to its licensee, the license had better reflect those restrictions in an unambiguous, bright-line manner.

A bong distributor with a reputation as a serial trademark plaintiff managed to persuade a Florida federal court that it should not be on the hook for the prevailing party’s attorney’s fees. In Sream Inc. et al. v. CIJ Enterprises Inc., Plaintiffs Roor, a German “water pipe” maker and its U.S. licensee, Sream, alleged that defendant CIJ infringed Plaintiffs’ trademark by selling a bong at its convenience store that bore the Roor mark. After CIJ prevailed at trial, it moved for attorney’s fees. On March 3, however, Judge Reinhart of the Southern District of Florida issued an order denying the motion on the grounds that CIJ had failed to establish that the case was exceptional under the Lanham Act. Judge Reinhart began with a brief overview of the applicable law regarding what constitutes an exceptional case. As another Southern District of Florida court noted, courts may consider whether there was purposeful, intentional or willful conduct that went beyond "mere negligence” in assessing whether a case is exceptional. An attorney’s fees award may also be justified when a plaintiff has brought an "obviously weak" Lanham Act claim and the evidence shows that the plaintiff acted in bad faith and with an "improper motive.” The policy reason for this doctrine is clear:  to, ahem, weed out frivolous claims. As this case demonstrates, however, it is no easy feat to recoup attorney's fees under the exceptional case doctrine. In this case, CIJ made three principal arguments in support of its position that this was an exceptional case justifying an award of attorney’s fees. CIJ first argued that Plaintiffs were on notice of the weakness of their case, as a judgment had been entered against them in a similar case, Sream, Inc. v. Smokers Edge, LLC, just nine months earlier. Notably, in Smokers Edge, the court had ruled it was an exceptional case meriting an award of attorney’s fees. Next, CIJ claimed that Plaintiffs’ “apparent business model” is to file trademark infringement lawsuits against “smaller, stand-alone, independent stores” and obtain settlements before trial an (oh no, not again) chronic litigant, if you will. According to CIJ, Plaintiffs likely earn more revenue from these settlements than from sales of their water pipes. Finally, CIJ contended that Plaintiffs’ attempt to obtain damages for allegedly infringing the mark of what it deemed an unlawful product made this an exceptional case. CIJ noted that Plaintiffs’ bongs had competed in the Cannabis Cup (the horror!) and that it had asserted the affirmative defense of illegality. Apparently, CIJ failed to see the irony in raising this argument given that its own presence in the bong market is what led to the suit to begin with. Judge Reinhart found CIJ’s Smokers Edge argument to be its strongest. In that case, the same plaintiffs had raised identical claims against a smoke shop that sold a counterfeit Roor water pipe. Nevertheless, Judge Reinhart found several reasons to distinguish the two cases. First, while the Smokers Edge court found that the bongs at issue were not “remotely similar in design, construction or quality,” the CIJ court found that a consumer seeing the two bongs next to each other could reasonably conclude that both came from the same source. Second, the defendant in Smokers Edge had twice made settlement offers that the plaintiffs rejected; in this case, however, there was no evidence that CIJ had offered to settle and been rebuffed (perhaps CIJ should have—please make it stop—tried to hash it out with Plaintiffs before trial?). Third, in Smokers Edge, despite the fact that the plaintiffs knew the identity of the distributor who sold the counterfeit bong to the defendant, they had never investigated the distributor nor sought to add them as a party, suggesting that the infringement was not actually causing Plaintiffs the harm they claimed. By contrast, in CIJ, there was nothing in the record regarding the distributor’s identity. Fourth, Judge Reinhart was also unpersuaded by CIJ’s argument that Plaintiffs did not actually care about the alleged infringement and only brought these actions to achieve settlement payments. As the court noted, there was no evidence Plaintiffs’ settlement proceeds exceeded their sales revenues (as CIJ had speculated), and Plaintiffs had a reasonable basis for bringing an infringement action, despite the fact they ultimately failed to prevail. Finally, the court rejected CIJ’s claim that the case was exceptional due to the alleged illegality of the water pipes. CIJ’s affirmative defenses did not include a claim that Plaintiffs had fraudulently procured their trademark by misrepresenting the nature of their water pipes. And, at least according to testimony from Plaintiffs’ corporate representative, Plaintiffs “advertise and market their water pipes only for tobacco use.” One suspects, of course, that most consumers of Roor bongs employ them for marijuana use. Absent evidence of misrepresentations to the USPTO, however, the fact that most consumers likely use Plaintiffs’ bongs to smoke an unlawful product does not make this case exceptional. It’s not at all surprising that winning trademark defendants are anxious to have their attorney’s fees paid—particularly when it appears to them that the plaintiff is in the trademark infringement litigation business. Judge Reinhart’s opinion reminds us once again that, absent truly exceptional cases, the expectation of an attorney’s fees award under the Lanham Act is generally nothing but … a pipe dream.

In the music world, performance rights organizations (“PROs”) serve an intermediary function between songwriters and music publishers and third parties who perform the protected works publicly. Among the largest PROs in the United States are the American Society of Composers, Authors and Publishers (“ASCAP”), Broadcast Music, Inc. (“BMI”), and SESAC (originally, the Society of European Stage Authors and Composers). According to § 106(4) of the Copyright Act, the owner of a copyright in musical works has the exclusive right to “perform the copyrighted work publicly.” Third parties who wish to perform copyrighted material registered with these PROs may obtain a non-exclusive license. Performance, in this case, does not only mean live performances (i.e., musicians playing songs on stage), but it also means playing recorded music, such as background music in a restaurant or dance music in a bar. After acquiring public performance rights from songwriters and publishers, the PROs grant music users the right to publicly perform the copyrighted music. The PROs collect license fees on behalf of the songwriters and music publishers and distribute them as royalties to those member copyright holders whose works have been performed. Licensees frequently include television networks and radio stations, podcasts and other new media, clubs, dance studios, bars, restaurants, and hotels. In its catalog, for example, BMI administers rights for over 14 million compositions. One only needs to take a quick look at the news to conclude that the PROs take their licensing rights seriously. See, for example: BMI sues Mississippi nightclub over music licensing. Owner calls fees legal 'extortion.' Old Town bar is being sued for playing ‘Fat Bottomed Girls,’ other popular songs ASCAP goes after Meadowlark Bar for $27,000 in music copyright lawsuit ASCAP Levels Lawsuit Against Sixth Street Music Venue the Nook Two cases from 2019 offer further illustration of the perils of not securing public performance licenses. First, in March, the Eastern District of Kentucky ruled on the public performance issue, after BMI and the owners of four compositions took action against the owner and manager of the Blue Moon, a bar located in Richmond, Kentucky. BMI became aware that Blue Moon was unlicensed and performing live music publicly. Blue Moon previously had a license with BMI, which had expired, and BMI offered to enter into a new license on multiple occasions. Despite notice from BMI, Blue Moon continued performing unlicensed music. The court ruled in favor of BMI on summary judgment, stating that Blue Moon publicly performed four copyrighted works without authorization. BMI proved that the defendants had publicly performed the works based on an affidavit from their investigator. (Note that the PROs employ private investigators who visit unlicensed establishments to observe whether a license is needed and then report back to the PROs). The defendants argued that they were exempt from the licensing requirements based on a statutory exemption found in the Copyright Act, in this case that the compositions were performed without “any purpose of direct or indirect commercial advantage.” The defendants argued that there is no cover charge when bands play, the band receives no compensation, and thus there is no cash generated from the performance. The court disagreed with this reasoning, and found that because Blue Moon was a profit-making enterprise, the exception did not apply. The court also enjoined Blue Moon from performing music held by BMI, and awarded BMI attorney’s fees, costs, and $14,000 in statutory damages. A few weeks before publication of this post, ASCAP artists scored a victory against an establishment in Nashville called “Frisky Frogs.” Beginning in 2016, ASCAP representatives repeatedly warned Frisky Frogs of the consequences of performing unlicensed ASCAP songs, and even attempted to arrange a license agreement with Frisky Frogs. Despite making over 80 attempts to contact Frisky Frogs, ASCAP’s requests were ignored. This included the owner of Frisky Frogs’ failure to appear at a pre-arranged meeting with ASCAP representatives. Despite ASCAP’s numerous warnings, Frisky Frogs continued to present unlicensed music through performances by a live band, piped-in music, and a disc jockey. The Middle District of Tennessee ruled that Frisky Frogs was directly liable for copyright infringement, stating that Frisky Frogs publicly performed four copyrighted works without authorization. The artists proved that the defendants had publicly performed the works based on the findings of ASCAP’s independent investigator. The principals of Frisky Frogs were also held vicariously liable for the copyright infringement, as they had the right and ability to supervise and control the public performance of the works at Frisky Frogs, and derived a direct financial benefit from the performance of these works. Moreover, given the number of times the defendants dodged ASCAP, and their continuous performance the works despite continuous warning, the court determined that the defendants’ infringement of ASCAP’s rights was a “glaring example of willful infringement.” The court also stated that this willful infringement was exacerbated by the defendants’ failure to cooperate after the initiation of proceedings. The court enjoined Frisky Frogs from performing music held by ASCAP, and awarded the artists’ attorney’s fees, costs, and $40,000 in statutory damages. These cases illustrate that the PROs – and the courts – take music public performance rights seriously. In both cases, the rulings were based on the defendants’ performance of only four songs. These instances serve as reminders that establishments that feature live or recorded music must properly secure public performance licenses prior to performance of the licensed music.

On November 6, 2019, I discussed a licensing dispute regarding Ms. Pac-Man between Bandai Namco and AtGames Holdings. At that time, Bandai Namco sought a preliminary injunction against AtGames based on AtGames’ alleged unauthorized infringement of Bandai Namco’s IP rights in Ms. Pac-Man. AtGames countered that it had not infringed Bandai Namco’s rights and had no plans to use Ms. Pac-Man without a license. Rather, AtGames had created a prototype of a potential Ms. Pac-Man arcade product, and it had been negotiating with Bandai Namco for over a year to acquire the rights it needs to commercialize the product. Since then, the players parties have progressed to the next level. On November 19, 2019, United States District Court Judge Vince Chhabria of the Northern District of California, denied Bandai Namco’s request for a preliminary injunction in a strongly-worded, one-paragraph order. Judge Chhabria ruled that “Bandai’s likelihood of success on the merits is questionable at best,” and its “allegations of reputational harm fall somewhere between speculative and fanciful.” Discouraging words like these might as well have been accompanied by the sound Ms. Pac-Man makes when she gets clobbered by a ghost: https://www.youtube.com/watch?v=jpkxkKcLsho. On November 14, 2019, a few days before the Court issued its order, AtGames filed its answer to Bandai Namco’s complaint. AtGames also asserted three counterclaims against Bandai Namco for (1) breach of contract, (2) declaratory judgement that Bandai Namco’s termination of certain agreements it had with AtGames is null, void, and without legal effect, and (3) breach of implied covenant of good faith and fair dealing. Thus, the dynamics of the litigation have shifted and not in Bandai Namco’s favor. With a preliminary injunction denied and the stakes raised by AtGames counterclaims, will Bandai Namco and AtGames be able to resolve their differences with a mutually beneficial settlement? Or will they litigate until one of them reaches the legal equivalent of a game over screen? Keep watch on TheTMCA.

1980 was a momentous year. Not only was it the year in which the Rubik’s Cube was first released, it was also when approximately 350 million people worldwide finally learned who shot J.R. on TV’s “Dallas” (spoiler alert: it was Kristin Shepard, J.R.’s angry mistress, obviously). But perhaps the most significant event of all was the creation of Pac-Man by a Japanese company named Namco. That same year, Pac-Man spread to the U.S. and the rest of the world like a virus through Namco’s licensed publisher, Bally Midway. The virus was known as Pac-Man Fever. As a child, I caught Pac-Man Fever when I received this primitive LED device for Christmas in 1981: That’s what fun looked like back in the early 1980s. Still in its original box. Pac-Man Fever has continued to spread with new Pac-Man-related games and products being released in a steady stream to this very day. But, as a game, Pac-Man was perfected in 1981 with the release of Ms. Pac-Man, one of the most popular arcade games of all time. Over the course of that game, Pac-Man and Ms. Pac-Man bonded over their shared love of dots and hatred of ghosts, and, despite their strong familial resemblance and same last name, married and had a child, Jr. Pac-Man. The Ms. Pac-Man game was very similar to the original Pac-Man, but it added tweaks to the graphics, mazes, and other details that made the game even more fun to play. Despite changing very little, these addictive games have let Namco, now Bandai Namco, use its Pac-Man and Ms. Pac-Man-related copyrights and trademarks to repeatedly sell children and nostalgic adults virtually the same game and associated merchandise for nearly 40 years. As Exhibit A, here are two different handheld versions of Ms. Pac-Man, licensed by Bandai Namco, that I, as an otherwise responsible adult, purchased this past year: My kids are not allowed to touch these until a week after my funeral. But behind the charming graphics, intuitive gameplay, and repetitive, yet hypnotic, “wakka, wakka, wakka” sound of Ms. Pac-Man, there is a darker, and even more interesting story about IP licensing that has recently led Namco Bandai to file suit in the Northern District of California this past September for alleged infringement of its rights to Ms. Pac-Man by AtGames Holdings, Ltd. That story begins many years ago with Ms. Pac-Man’s weird alter ego, Crazy Otto. In the 1970s, a group of MIT students formed a corporation called General Computer Corporation (“GCC”), which made and sold “enhancement kits” for arcade games. The enhancement kits were intended to modify the original game by making it harder and adding new features that would make an old game more fun and more profitable. Crazy Otto was a 1981 enhancement kit for Pac-Man. Being both smart and cautious, before releasing Crazy Otto, GCC approached Bally Midway for permission. Bally Midway liked Crazy Otto so much that they bought the rights to it and re-designed it into Ms. Pac-Man. According to Namco Bandai’s September 20, 2019 Complaint (“Complaint”), that purchase came with the requirement to pay ongoing royalties to the GCC rights holders for certain commercial uses of Ms. Pac-Man. That means that Bally Midway owned the rights to Ms. Pac-Man for which they paid royalties to GCC, while at the same time they licensed the rights to Pac-Man from Namco. Thus, from the very beginning, the ownership and licensing situation with respect to the rights to Pac-Man and Ms. Pac-Man was somewhat complicated. Over time, it became even murkier. According to the Complaint, GCC and Bally Midway had a dispute over Ms. Pac-Man that resulted in litigation that was settled by agreement in 1983. Around the same time, GCC and Namco entered into an agreement in which, according to the Complaint, GCC assigned whatever rights it still had in Ms. Pac-Man to Namco. Subsequently, in or around 1987, Bally Midway also assigned its rights in Ms. Pac-Man to Namco. Despite these allegations, GCC apparently believed it held on to at least some of its interests in Ms. Pac-Man, such as its rights to royalties. The Complaint fails to mention negotiations and an arbitration between GCC and Namco over unpaid royalties from 2002 to 2006, according to a 2016 Game Developers Conference presentation by a GCC developer. In addition, the Complaint itself states that, “[o]ver the course of a year, until late August 2019 BANDAI NAMCO and the GCC Successors continued to engage in active discussions relating to the GCC Agreement and Ms. PAC-MAN.” Presumably the terms of those agreements and the negotiation are confidential, but recent court filings suggest that Bandai Namco may have been trying to obtain GCC’s royalty interest. The latest stage of this story began when AtGames swooped in and purchased GCC’s rights before GCC could reach agreement with Bandai Namco in August 2019. AtGames makes “plug-and-play” replicas of old consoles that are packed with multiple games and playable on modern televisions. Since 2012, AtGames has licensed many properties from Bandai Namco, including Pac-Man. Recent filings by AtGames indicate that it had also been negotiating for the rights to Ms. Pac-Man for over a year. AtGames purports to have been granted the rights to make a plug-and-play Ms. Pac-Man mini-console but it was still actively seeking permission to sell a miniature replica of the Ms. Pac-Man arcade game. According to AtGames’ recent filings, Bandai Namco was concerned about further licensing of Ms. Pac-Man because it would have to pay royalties to a third party, GCC. In an alleged attempt to remove this obstacle, AtGames decided to acquire GCC’s rights to Ms. Pac-Man this past August. Unfortunately, that acquisition crossed a line with Bandai Namco, because it soon filed suit against AtGames and sought a temporary restraining order. The court denied that request but ordered AtGames to file a brief by October 31, 2019 showing why injunctive relief should not be granted. Bandai Namco evidently sees AtGames’ acquisition of these rights as part of a plan to sell unauthorized Ms. Pac-Man products, and it believes that those actions must be enjoined. But in AtGames’ October 31 filings, it claims that its so-called unauthorized products were merely prototypes, and it has never questioned that it would need Bandai Namco’s permission to commercialize them. It claims that the lawsuit and request for injunctive relief are really just retaliation against AtGames for acquiring GCC’s royalty rights. As any seasoned Ms. Pac-Man player knows, timing is key. The same is true in litigation. Bandai Namco tells a tale of infringement that must be stopped immediately, while AtGames tells a tale of a premature complaint filed for the wrong reasons. And underlying all of this is the 1981 agreement with GCC, which seems to haunt Bandai Namco like ghosts haunt Ms. Pac-Man. I’m looking forward to seeing how this story develops when Bandai Namco files its reply brief on November 5. Stay tuned on TheTMCA!

On May 20, 2019, the U.S. Supreme Court settled the question of whether licensees under trademark agreements rejected by bankruptcy debtors may continue to use licensed marks. In a highly anticipated decision in Mission Product Holdings, Inc. v. Tempnology, LLC, the Supreme Court ruled that yes indeed, they can – subject to non-bankruptcy law. “Rejection” of contracts is a power the Bankruptcy Code provides debtors to manage their estates. It is essentially a sanctioned breach of contract that frees the estate from performing burdensome obligations. Over the past nine years, federal courts have been divided with respect to whether trademark licensees have continuing rights to use licensed trademarks following a debtor’s rejection of related license agreements. Some courts, including the First Circuit Court of Appeals, deemed rejection an effective rescission of a trademark license agreement. Others, including the Seventh Circuit Court of Appeals, deemed rejection to have no impact on a trademark licensee’s rights, leaving it free to either carry on under the license agreement or assert a claim for damages. Yesterday, the high court held in Mission that the effect of rejection of any contract in bankruptcy is a breach, and not a rescission. Specifically, as to trademark licensees, the Court held that the breach effected by rejection “does not revoke the license or stop the licensee from doing what it allows.” The decision is a victory for trademark licensees.  However, it is sure to spur changes in how trademark licenses are drafted and how licensors prepare for bankruptcy proceedings. To read more about the decision, its implications, and the history of the issues, please read the e-update posted here. To read more about the Mission case, including the oral arguments before the Supreme Court, please read this prior post and the posts linked there.

In the coming months, the U.S. Supreme Court is expected to issue a decision in Mission Product Holdings, Inc. v. Tempnology, LLC that may (yes, we said “may”) resolve a circuit split as to whether trademark licensees can continue using trademarks after a licensor in bankruptcy rejects the license agreement under bankruptcy law. The TMCA has been following this case from the first decision by the U.S. Bankruptcy Court for the District of New Hampshire in 2015, through the decision by the Bankruptcy Appellate Panel for the First Circuit in 2016, the First Circuit’s decision in early 2018, and the Supreme Court’s grant of certiorari in late 2018. Along the way, we have explained that the Bankruptcy Code gives debtors the power to “reject” executory contracts (which relieves a debtor from its contractual obligations), and that federal courts have been divided for years regarding the effect of rejection of trademark license agreements. The blame for the circuit split can be placed largely on Congress. That is because the Bankruptcy Code—which Congress drafted—contains specific provisions for the post-rejection treatment of license agreements for “intellectual property,” but those do not cover trademarks, although they cover patents, copyrights, trade secrets, and mask works, among other things. When Congress implemented those protections, it noted the deliberate omission of trademarks from the statute because the issue warranted “more extensive study,” which we wrote about at length in our prior posts. The Supreme Court heard oral arguments in Mission on February 20, 2019. At oral argument the Justices focused primarily on the effect of a brand owner/licensor’s breach of a trademark license agreement in bankruptcy, as a debtor, as opposed to the effects of breach outside of bankruptcy. In addition, the arguments also touched on general contract law, the “negative inference” of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985) (see our previous posts for more on this case), and relevant provisions of the Bankruptcy Code, specifically sections 365(g) and 365(n), which concern, respectively the effect of a debtors’ rejection of a contract generally and rejection of an intellectual property license for intellectual property other than trademarks. So you don’t have to listen to the entire oral argument, we have selected the most interesting questions and issues, which, in our opinion, provide some tea leaves for those of us following the case: Off the bat, Justice Alito asked Mission whether a debtor-licensor’s cessation of quality control activities would imperil a trademark. Before Mission could answer, Justice Sotomayor asked Mission whether rejection of a trademark license revokes approval by the licensor that is a condition to the license. Mission responded that quality control obligations are imposed by trademark law, and not solely by contract, and rejection entitles a debtor-licensor to free itself only from contractual obligations. Mission added that, outside of bankruptcy, a licensor’s breach of a license agreement (breach being the effect of rejection on the agreement mandated by the Bankruptcy Code) does not take away a licensee’s right to use a trademark. Chief Justice Roberts asked Tempnology whether a licensee can continue using a trademark after rejection, so long as the licensee carries out quality control as the debtor-licensor did. Tempnology responded that ceasing quality control abandons a trademark, causing it to lose value and its status as a trademark (which didn’t exactly answer Justice Roberts’ question). Justice Breyer asked whether a person can use an abandoned mark, and Tempnology conceded one can. Several Justices pressed Tempnology for authority that a trademark licensor could unilaterally terminate a license agreement outside of bankruptcy by ceasing quality control. Tempnology relied on the general notions of trademark law, including a trademark’s signification of its owner and an owner’s duty to exercise control over the trademark, which did not appear to relieve the Justices concerns. Justice Sotomayor asked Tempnology, at two separate points, how the Court could limit its ruling to trademark agreements, e. rather than “any number of other contracts.” Tempnology stated it was only asking the Court to adhere to precedent that the effect of rejection is that the contract is no longer enforceable, but she did not seem to be persuaded by that argument. Questions by Justices Gorsuch and Sotomayor as to whether the trademark issues are moot signaled a possibility that the Court may not reach a decision on the effect of rejection. The Justices’ questions intimated that Mission may not have suffered damages, because Tempnology refused to supply Mission with goods that could bear the licensed mark prior to the rejection. Following the rejection, Mission did not use the trademark, but argued it was damaged because it was wrongly prevented by the bankruptcy court’s decision from using the trademark following rejection, including on goods it could have ordered from suppliers other than Tempnology. Tempnology asserted the issues are moot because Tempnology took no action against Mission that prevented Mission from using the trademark. Given that the Court granted cert for this case, we would be surprised if the Court declined to resolve this Circuit split and instead ruled on mootness grounds. Throughout the argument, the Justices and the litigants searched for property law scenarios analogous to the rejection of a trademark license agreement by a debtor—an apartment lease, a McDonald’s franchise, a photocopier lease, and an igloo lease. As to the igloo, Justice Breyer likened a licensor’s quality control obligations to a promise to air condition an igloo, stating, “. . . you break your promise to air condition, no more igloo.” (The amicus curiae arguing in support of Mission who received this analogy disagreed, responding that a licensee can continue using a trademark because abandonment is the only consequence of ceasing quality control and that takes some time.) These discussions—and the general struggle to find a suitable analogy—highlighted the unique nature of trademark rights as property and the Bankruptcy Code’s treatment of various contract rights respecting property. The oral argument provided a glimpse of the Court’s unenviable task of filling in the blanks of the Bankruptcy Code that Congress left to the Courts. While the Court is clearly concerned with reaching a result that makes sense under notions of trademark, property, contract and bankruptcy law, we are eager to see how it resolves their conflicts. Once the Court reaches a decision, you should expect to hear from us again.

Can a licensee sue for trademark infringement under Section 43(a) of the Lanham Act? On April 1, 2019, the Eleventh Circuit issued its decision in Kroma Makeup EU, LLC v. Boldface Licensing + Branding, Inc. et al., and held that the answer to this question depends on the language of the licensing agreement. In Kroma Makeup EU’s case, it had contracted away any right to enforce the KROMA trademark. KROMA is a federally registered trademark. Kroma Makeup EU obtained the exclusive license to import, sell, and distribute KROMA products in Europe through a licensing agreement with By Lee Tilllett, Inc. – the owner and registrant of the KROMA trademark in the United States. The dispute between Kroma Makeup EU and the Kardashians involved the use of “Khroma” in cosmetic manufacturer (and co-defendant) Boldface Licensing + Branding’s new cosmetic line “Khroma Beauty.” The Kardashian sisters, Kim, Kourtney, and Khloe, endorsed Khroma Beauty, and given the sisters’ popularity, this endorsement concerned Kroma Makeup EU. Kroma Makeup EU was worried that the similarity in names between the products would cause consumer confusion. Ultimately, in a lawsuit between By Lee Tillett and Boldface, a California federal district court enjoined Boldface from using Khoma Beauty and Boldface rebranded the line as “Kardashian Beauty.” Kroma Makeup EU was not involved in the California lawsuit and did not receive any of the settlement money that resulted from the case. Kroma Makeup EU filed an action in a Florida federal district court to enforce its rights under the Lanham Act against the Kardashian sisters and Boldface. Kroma Makeup EU also named By Lee Tillett as a defendant and is pursuing separate breach of contract claim against By Lee Tillett. In response to the lawsuit, By Lee Tillett invoked a mandatory arbitration clause from the license agreement and currently the federal case against By Lee Tillett is stayed pending the arbitration. The Kardashians moved to dismiss the case and alleged Kroma Makeup EU lacked standing. The district court held that the licensing agreement between Kroma Makeup EU and By Lee Tillett only provided By Lee Tillett with the right to enforce the KROMA mark. Kroma Makeup EU appealed the decision. The Eleventh Circuit concluded that the plain language of the licensing agreement expressed the intention that By Lee Tillett would retain all ownership and enforcement rights of the KROMA mark and affirmed the decision. At last, the Kardashian sisters can breathe a sigh of relief.

One of the philosophies of the world-famous Palm restaurant is to treat guests like family. That philosophy may need to be re-examined in light of a recent decision by the New York Supreme Court in Ganzi v. Ganzi, a case involving the families behind the renowned restaurant empire (for those of you not from the Empire State, the Supreme Court in New York is the trial-level court). Following a non-jury trial, Justice Andrea Masley of the Commercial Division found that Walter Ganzi, Jr. (Wally) and Bruce Bozzi, Sr.—grandchildren of the Palm’s founders—breached their fiduciary duties to two family-held corporations in part by issuing below-market license agreements for use of the Palm IP to restaurants and other entities owned by Wally and Bruce. The court awarded damages exceeding $73 million, which could balloon to over $120 million after accounting for interest and attorneys’ fees. The first Palm restaurant was opened in New York City in 1926 by Pio Bozzi and John Ganzi. The Palm IP includes various trademarks and service marks, as well as design and décor elements of the restaurant, including the display of photographs and caricatures. That IP has been put to great use by Wally and Bruce, who have an interest in other Palm restaurants that have opened around the world for the past 45-plus years. Wally and Bruce have built an empire through these “New Palms,” which collectively grossed $1.5 billion from 2006-2017. As revealed through the lawsuit, however, this empire was built in part on improper self-dealing by Wally and Bruce for which Wally’s cousins have now held them to account. The original Palm restaurant was owned by Just One More Restaurant Corp. (JOMR), which also owns the Palm IP. The land on which the original Palm was located was owned by Just One More Holding Corp. (JOMH). Over the years, majority ownership in JOMR and JOMH passed down to Wally and Bruce. Wally’s cousins Gary Ganzi, Claire Breen, and the estate of Charles Cook (another of Wally’s cousins) all hold minority shares in both JOMR and JOMH. After learning that JOMR actually owned the valuable Palm IP, and that it had been licensed for next-to-nothing, they sued Wally and Bruce in 2012 on behalf of themselves and derivatively on behalf of JOMR and JOMH. The trial involved three derivative claims for breach of fiduciary duty and one claim for diversion of corporate opportunity, all arising from three distinct courses of self-dealing by Bruce and Wally. First, JOMR entered into 54 license agreements in 2007 and 2011 with the New Palms through which the Palm IP was licensed for a mere $6,000 per year—the same price at which the Palm IP had been licensed for the first New Palm in Washington D.C. in 1972. Second, for $12,000 a year, JOMR entered into a license agreement with a management company owned by Wally and Bruce, permitting that company to sub-license the Palm IP to third parties, which it did at market rates. Those sub-licenses resulted in the establishment of a Palm restaurant at JFK airport, the creation of Palm-branded household goods for retail stores, and millions in sub-licensing fees for the management company. Third, JOMH leased the real estate where the original Palm was located to JOMR at below market rates. All of these actions were taken without the knowledge of Wally’s cousins, the minority shareholders. In fact, little to no corporate formalities had been observed since the 1970s. As the court put it, Wally and Bruce “treated JOMR as their own without any regard to the other shareholders.” In finding in favor of JOMR on the first claim for breach of fiduciary duty, the court noted that the 54 license agreements constituted a “textbook example of fiduciary misconduct” because those agreements “grossly” favored the New Palms (and thus Wally and Bruce), over JOMR, and deprived JOMR of fair market value for the Palm IP. The fair market value should have been based upon the revenues of the New Palms, and the court credited expert testimony that a royalty rate of five percent was appropriate, entitling JOMR to more than $68 million, plus interest. The court also declared all 54 of the licenses between JOMR and the New Palms as void, and enjoined Wally and Bruce from further harming JOMR through below-market licensing of the Palm IP. The second claim for breach fiduciary duty and the claim for diversion of corporate opportunity both arose out of the license agreement with Wally’s and Bruce’s management company. The court held that the license agreement was a “plainly self-interested transaction,” and noted that “[a] more obvious example of the breach of a fiduciary’s duty of loyalty is difficult to envision.” The court ruled that JOMR was entitled to $3,146,995 for these claims, which it calculated by subtracting the $12,000 per year that JOMR received from the management company from the sub-licensing revenues it earned through its deals pertaining to the JFK airport Palm and the branded household goods. The court also found in favor of JOMH based on Wally and Bruce undervaluing the real estate at which the original Palm was located. JOMH had charged JOMR $63,233 annually in rent for a property that should have commanded $223,000 in annual rent as of late 2006. JOMH was thus entitled to $1,742,000 in damages. Finally, the plaintiffs were awarded their attorneys’ fees under N.Y. B.C.L § 626(e). Counsel to Wally and Bruce has indicated that they intend to appeal the decision. It is notable to remember that, because this was a derivative action, although the damages award is sizeable, the damages are owed not directly to the plaintiff cousins, but instead to JOMR and JOMH, in which Wally and Bruce are still the majority shareholders. Nevertheless, following the award and the voiding of the license agreements, JOMR—and the cousins’ minority positions in JOMR—will increase in value significantly. Putting the family dynamics aside, the most interesting result of this case from an IP perspective is the court’s adoption of a five percent royalty rate as fair market value for IP licenses in the context of the hospitality industry. Licensors and licenses of similar business both should be aware of this precedent when determining fair market value for such IP.

As the U.S. cannabis market continues to grow at an extraordinary pace, a number of celebrities and companies have extended their names or brands to cannabis products via partnerships with licensed growers and dispensaries.  On the celebrity side, these partnerships include Willie’s Reserve (Willie Nelson), Bob Marley (Marley Natural), Whoopi Goldberg (Whoopi & Maya) and Snoop Dogg (Leafs by Snoop). But recent modifications to draft regulations in California threaten to restrict the ability of celebrities or companies to lend their names or brands to cannabis products sold in those states where adult or medicinal cannabis use is legal via intellectual property licensing arrangements to licensed sellers.  The proposed new rules, from the three state licensing authorities that regulate medicinal and recreational cannabis in California—the Bureau of Cannabis Control (“BCC”), the California Department of Public Health (“CDPH”) and the California Department of Food and Agriculture (“CDFA”)—came out in October as an update to the draft regulations that had been previously published in July. Among the updates contained in these proposed new rules is one that stands out for its potentially restrictive impact on brand and other types of IP licensing in the cannabis space.  While the regulations already require all commercial cannabis activity (other than authorized retail activity) to be conducted between licensed operators, the BCC’s updates to the draft regulations go further to provide that cannabis license holders cannot conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act.  The listed prohibited commercial cannabis activities are now defined to include the manufacturing or packaging of cannabis goods according to the specifications of a non-licensee, as well as packaging and labeling cannabis goods under a non-licensee’s brand. These updates are most likely intended to seek to curb the ability of unlicensed cannabis businesses to conduct regular business through licensed businesses by selling white-labeled products to such licensed businesses or otherwise.  However, the proposed changes could potentially have far-reaching implications for any authorized cannabis operators and IP licensors engaging with these companies who have an existing license deal or are considering entering into an operating relationship.  With the requirements for obtaining a cannabis license so arduous, a licensing deal seemed to be an easy option for non-licensees to get their brand into the cannabis industry.  But with the new restrictions, non-licensees may not have a direct licensing option to get their brand onto cannabis goods.  While authorized cannabis operators and non-licensees may be able to turn to more complex contractual structures in order to continue to do business together, parties will need to tread carefully. The deadline for public comment on the BCC’s changes was on November 5th. It remains to be seen whether the BCC’s proposed changes will ultimately be incorporated into the proposed rules and, eventually, continue through the formal rule making process until they are adopted as non-emergency regulations.

Earlier this year, we wrote about the First Circuit’s decision in In re Tempnology, LLC, a bankruptcy case in which the First Circuit cemented a circuit split over whether a trademark licensee could retain its trademark rights after a debtor rejected the trademark license under the Bankruptcy Code. That was our third post about the case—we first wrote about it in December 2015 and then again in March 2017—and we predicted that the issue was headed for the Supreme Court. It has now arrived at the Supreme Court, which granted cert. in October to hear the case, and is poised to put an end to this decades-old, circuit-dividing issue. Trademark owners, licensees, intellectual property lawyers, bankruptcy lawyers, and, of course, all of us here at The TMCA, are watching with bated breath. As we explained in our previous posts, under section 365(a) of the Bankruptcy Code, a debtor has the right to reject executory contracts, meaning that the parties to any rejected contract are relieved of their obligations to perform.  However, Congress included an exception for “intellectual property” licenses in section 365(n), which allows licensees to continue using the licensed intellectual property through the end of the term of the license even if the debtor rejected that license under section 365(a). Under the Bankruptcy Code, “intellectual property” is a defined term, which includes both copyrights and patents, but does not include trademarks. In drafting section 365, Congress had concerns about whether trademarks should be treated differently from other types of intellectual property because the enforcement of a trademark license requires a debtor to enforce and control the quality of its marks. Due to these concerns, Congress left it to the courts to figure out what to do with trademark licenses. Although some courts treated them like other intellectual property, a number of courts, like the First Circuit in In re Tempnology, relied on the absence of trademarks from the definition of intellectual property to conclude that Congress intended to exclude trademarks from the protection granted to other forms of intellectual property. As a result, the fate of a rejected trademark license has been subject to the jurisdiction in which the debtor trademark owner files for bankruptcy. That has not been a good outcome. Because Congress has failed to fix the problem by including trademarks in the definition of “intellectual property” or by formally excluding them, the issue is now before the Supreme Court.  While we cannot predict the outcome of the case, we can promise you this: as soon as the Supreme Court issues its decision, we will write about it and tell whether the Court got it right and how the Court’s ruling affects trademark licenses in bankruptcy going forward. Stay tuned!

Coffee addicts and meme fanatics are slightly less caffeinated and slightly less entertained after a California federal district court recently ruled that Grenade Beverage, LLC infringed the intellectual property rights of viral meme sensation Grumpy Cat, when Grenade Beverage sold ground coffee using her name and image in violation of its license agreement with Grumpy Cat’s owners. The case began back in 2012 when Tardar Sauce was just a newborn kitten with an underbite and feline dwarfism that caused her to look perpetually grumpy. Thanks to the internet’s obsession with all things “cat,” Tardar Sauce found herself at the center of a meme storm after one of her photos appeared on Reddit. Thereafter, Grumpy Cat was born, and the world started to learn about the many things she dislikes: being awake, neighbors and intellectual property infringement being just a few examples. Grumpy Cat Limited, started by Miss Sauce’s owners, seeks to promote the Grumpy Cat brand and owns several trademarks and copyrights related to the Grumpy Cat name and image, with over 1,000 products for sale on the website www.grumpycats.com. Notably, the company has collaborated with television and movie behemoths like Fox Broadcasting and Lifetime Television to exploit this valuable intellectual property. However, not all collaborations have come to a happy conclusion. In 2013, Grenade Beverage entered into a license agreement with Grumpy Cat Limited for the exclusive rights to use Grumpy Cat’s name and image on a line of coffee products. The line started with iced coffee products, but when Grenade Beverage expanded into ground coffee, Grumpy Cat Limited sued for copyright and trademark infringement. The case had a complicated procedural history: a jury trial was held in January 2018, but in accordance with a Final Pretrial Conference Order in December 2017, the parties agreed that the court would decide Grumpy Cat Limited’s cybersquatting and accounting claims and Grenade Beverage’s counterclaims for declaratory relief of non-infringement of copyright and trademark rights. Also prior to the jury trial, the court had held at the summary judgment stage that there was an issue of fact for the jury to decide as to whether, based on the intent of the parties, a “line of … coffee products’ included or excluded coffee products other than iced coffee.” After a four-day trial, the jury found that the scope of “a line of Grumpy Cat-branded coffee products” was limited to iced coffee and awarded over $700,000 in favor of Grumpy Cat Limited. Grenade Beverage then sought a declaratory judgment that a licensor cannot sue a licensee for infringement under an exclusive license or, alternatively, that Grumpy Cat Limited could only sue for breach of contract, not infringement. The court held that an exclusive licensee cannot infringe upon the copyrights licensed under the contract, but that it can infringe upon copyrights that fall outside the scope of the exclusive license. To decide what products fell within or outside the scope of the license granted, the court needed to determine whether Grenade Beverage had breached a covenant or condition of the contract. Covenants are promises to do or refrain from doing a specific act. Under California contract law, breach of a covenant will only support a claim for contract damages. On the other hand, conditions limit the scope of an agreed-upon right, and breach of a condition places the licensee outside the scope of that right. This in turn constitutes infringement of the licensor’s reserved rights and supports an infringement claim on top of contract damages. In this case, the jury had determined that the sale of coffee products other than iced coffee went beyond the scope of the exclusive license for a “line of Grumpy Cat-branded coffee products.” However, the court then needed to decide whether the phrase “additional products within the Product Category … that may, upon the Parties’ mutual approval, be marketed hereunder” is a covenant or condition. To answer that question, the court reviewed the “four corners” of the agreement to ascertain the mutual intention of the parties. In particular, the court placed weight on the parties’ use of the word “in” instead of “to.” Under the contract, Grenade Beverage had the right to use the licensed intellectual property “in” the specified product category as opposed to the right “to” the product category. According to the court, the use of “in” suggested a limited right, whereas “to” would have suggested an all-encompassing right. Therefore, “additional products” was a condition that excluded products other than iced coffee from the scope of the license grant absent mutual approval, which Grenade Beverage had not obtained for ground coffee. While this case turned on a close reading of the preposition used in one provision in one particular license agreement, California law governs many licensing agreements, so the potential impact of the general holding is broader. This should serve as a strong reminder to those in the licensing field that precise language matters. Grumpy Cat Limited and Grenade Beverage may not have intended to accord product definitional significance to the choice of the word “in” instead of “to.” But that word selection persuaded the court that the parties’ mutual intention was clear from the “four corners” of the agreement, when in fact it might not have reflected Grenade Beverage’s true desire and understanding. As it turns out, the risk of utilizing one preposition instead of another cost Grenade Beverage over $700,000. As of June 25, Grumpy Cat Limited filed a motion for an award of approximately $320,000 in attorneys’ fees based on their successful lawsuit against Grenade Beverage. The TCMA will continue to update you on any significant developments in the case.