Licensor May Forfeit Rights to Future Guaranteed Royalties Under California Law by Terminating a License Agreement for Less than a “Total Breach”

Licensor May Forfeit Rights to Future Guaranteed Royalties Under California Law by Terminating a License Agreement for Less than a “Total Breach”

Josh Warrum

www.Beanstalk.com

I. Introduction

Since at least as early as 1931, licensees have challenged a licensor’s right to demand payment of all future minimum guaranteed royalties upon terminating a license agreement due to licensee’s breach.[1] Most recently, in February 2008, the US Court of Appeals for the Ninth Circuit addressed a licensor’s right to post-termination royalties under California law.[2] This article summarizes the guidelines set forth by California courts in determining when a licensor may collect post-termination royalties after terminating a license agreement.

II. Background

Most license agreements require the licensee to make minimum guaranteed royalty payments to the licensor regardless of the licensee’s actual sales of licensed products.[3] Such minimum guaranteed royalty payments are often spread throughout the term of the license agreement. For example, a license agreement may require the licensee to pay the licensor $100,000 on the first day of each contract year of the term of the agreement, which may be applied to royalties otherwise payable to licensor during the applicable contract year.

Most license agreements also contain a provision permitting the licensor to terminate the license agreement upon the licensee’s breach and failure to cure within a specified amount of time.[4] The termination provision usually makes the remaining minimum guaranteed royalty payments due in full immediately upon termination of the license agreement notwithstanding the original due date of the guaranteed royalty payments.[5] These accelerated guaranteed royalty payments are the source of much controversy in California courts. Terminating the license agreement also terminates the licensee’s right to manufacture and sell licensed products. However, the licensee is still forced to pay royalties on licensed products it expected to sell, but now legally cannot.

III. General Rule

If a licensor elects to terminate a license agreement upon licensee’s breach, the obligation to pay future royalties ceases as well.[6]

Fagol & Tate v. Baird-Bailhache Co. is regularly cited in California cases for the rule that a non-breaching party’s termination of a license agreement due to the other party’s breach, also terminates the breaching party’s obligation to pay future royalties.[7] In Fageol, a licensor granted a license to manufacture and sell heating devices covered by the licensor’s patents.[8] The license agreement required the licensee to pay the licensor minimum royalties every month throughout the term.[9] Under the agreement, the license agreement automatically terminated if the licensee failed to make any minimum royalty payment and did not cure the breach within 30 days of notice.[10]

The licensee eventually failed to make a minimum royalty payment and the licensor gave notice of default.[11] The licensee’s failure to cure the breach led to termination of the agreement and the licensor suing the licensee for past due royalties and future minimum guaranteed payments due under the agreement.[12]

The court noted that, upon the licensee’s breach, the licensor could either terminate the agreement or continue the agreement and insist on payment of future royalties as they became due.[13] However, they could not do both.[14] The court held that a properly terminated licensee is no longer liable for royalties that did not accrue before termination of the license.[15]

There is a line of cases applying a similar rule to franchise agreements.[16] In Postal, PIP, a printing business franchisor, entered into a long term franchise agreement with Sue and Steve Postal.[17] The agreement stated that the franchisor had the right to terminate the franchise agreement and recover damages, including the benefit of its bargain, if the franchisee committed a “material breach”.[18] The agreement explicitly stated that a “material breach” included any failure to make a monthly royalty or advertising fee due under the agreement within 10 days after notice of failure to do so.[19] After several years of properly operating under the Agreement, the franchisee failed to make several of their monthly payments.[20] PIP terminated the franchise agreement and sued Postal for breach of contract and was awarded damages for past and future royalties.[21]

On appeal, the Court of Appeal of California considered whether a licensee’s breach of a franchise agreement by failing to pay past royalties entitled a franchisor to terminate the franchise agreement and collect future royalties.[22] The court stated that a nonbreaching franchisor could only recover lost future profits that were proximately caused by the franchisee’s specific breach.[23] The court reasoned that the franchisor chose to forfeit its right to future royalties by terminating the agreement and that decision to terminate, not the licensee’s breach, was the “natural and direct” cause of franchisor’s loss of future royalty payments.[24] Therefore, PIP’s termination of the agreement, not Postal’s breach, was the proximate cause of PIP’s lost future profits and so Postal was not responsible for any future royalty payments.[25]

Despite involving a franchise agreement, the Postal rule that only those damages which are proximately caused by the breach may be recovered by a nonbreaching franchisor is relevant to cases involving lost future royalties under license agreements.[26] Most recently, a California US District Court applied the Postal rule to a license agreement in Susteen Inc. v. Sourcenext Corporation.[27]

Susteen involved a computer software license agreement in which Susteen licensed to Sourcenext the right to sell copyrighted computer software products in exchange for royalties.[28] Susteen accused Sourcenext of breaching the license agreement by sub-licensing to third parties in violation of a provision in the agreement prohibiting sub-licensing.[29] Consequently, Susteen terminated the license agreement and demanded immediate payment of all minimum annual royalty payments required during the entire term of the agreement.[30] Sourcenext refused to pay and so Susteen filed suit to compel payment of post-termination royalties.[31]

In a Motion for Summary Judgment, Sourcenext argued that California law prohibited post-termination royalties under a breach of contract claim where the licensor choose to terminate the contract.[32] The District Court applied the Postal rule to the facts of Susteen and focused on the causal relationship between the licensee’s breach and post-termination royalties the licensor sought.[33] As in Postal, the court found that the licensee’s breach of the agreement, sublicensing the software, was unrelated to future royalty payments due under the agreement.[34] Therefore, licensee’s breach was not the proximate cause of the lost future royalties and so was not liable for such royalties.[35]

IV. Exception to the General Rule

A non-breaching licensor is entitled to post-termination future royalties after terminating a license agreement only when the licensee commits a “total breach” of the agreement that prevents the licensor from the benefit of the agreement.[36]

In both Postal and Susteen, the plaintiffs argued that the defendants committed a “total breach” of their respective agreements and so the plaintiffs were entitled to post-termination future royalties.[37] In determining what constituted a “total breach”, the courts considered two California cases over 60 years old.

In Hollywood Cleaning & Pressing Co. v. Hollywood Laundry Service, Inc., the defendant agreed to exclusively promote the plaintiff’s dry cleaning and laundry service in exchange for a percentage of the defendant’s proceeds as a commission.[38] Both parties performed as required under the agreement for a short time until the defendant eventually breached the agreement by refusing to send any of its business to the plaintiff.[39] The trial court found that the defendant “totally breached” the contract by completely refusing to send any of its business to plaintiff as required under the agreement and so awarded the plaintiff future damages.[40]

In Gold Min. & Water Co. v. Swinerton, the lessor granted the lessee the right to extract minerals from the lessor’s land in exchange for royalties on the sale of the minerals the lessee extracted.[41] The lessee initially breached the lease by not entering the leased land and commencing mining within the required time frame.[42] Then, upon lessor’s refusal to allow the lessee to assign the lease, the lessee repudiated the lease by telling the lessor that they would not perform their obligations under the lease.[43]

The court stated that a “total breach” occurs where (1) “the promisor without justification and before he has committed a breach, makes a positive statement to the promisee indicating that he will not or cannot substantially perform his contractual duties” or (2) “there has been a partial breach by the promisor accompanied or followed by a repudiation of the contact by the promisor”.[44]

The court found that the lessee committed a total breach of the lease by never mining the leased land as required under the lease and then subsequently repudiating the lease by refusing to perform any of its obligations under the lease.[45] Therefore, the court found that the lessor was entitled to recover lost future royalties it would have earned had the lessee performed its obligations under the lease.[46]

In Susteen, the court distinguished Gold Mining and Hollywood Cleaning from the case at bar on the basis that both of those cases involved a “total breach” based on repudiation of the contract.[47] In contrast, the licensee in Susteen did not repudiate the agreement by completely refusing to perform all of its contractual obligations.[48] In fact, the licensee continued to perform under the agreement, including paying royalties, until the licensor terminated the agreement.[49] Thus, the court found that the licensee’s breach in sublicensing did not rise to the level of a “total breach” where the licensee did not repudiate the contract and continued to perform under the agreement (e.g., continued paying royalties until the licensor terminated the agreement).[50]

Similarly, the court in Postal distinguished Gold Mining and Hollywood Cleaning from Postal on the fact that both of those cases involved the breaching party’s complete failure to perform as opposed to the defendant in Postal, who failed to make several payments, but otherwise performed under the agreement.[51] Thus, the court found that the defendant’s failure to make several royalty and advertising payments was not a “total breach” because it did not involve a total failure to perform which directly prevented the plaintiff from receiving royalties.[52]

V. Conclusion

In both Postal and the District Court ruling in Susteen, the court focused on whether the defendant’s breach was the proximate cause of the plaintiff’s damages in determining whether to award post-termination future royalties.[53] These two opinions suggest that neither sublicensing in violation of a license agreement nor failing to make timely royalty payments are proximate causes of lost future royalties where the breaching party otherwise performs under the agreement.[54] Therefore, in both cases, post-termination future royalties are not appropriate.[55]

In Susteen, the US Court of Appeals did not address the proximate cause issue in affirming the District Court’s denial of post-termination royalty payments.[56] In a three page unpublished memorandum, the court simply stated that the licensee did not commit a “total breach” of the agreement because sublicensing did not preclude the licensor from receiving the benefit of the bargain.[57] This seems to suggest that the court may focus on whether there was a “total breach” of the agreement instead of whether the breaching party’s breach was the proximate cause of the plaintiff’s damages in determining whether to award post-termination future damages. However, it is important to note that the appellate court’s decision in Susteen is unpublished and so is not precedent for future cases.[58]

Whether the court will apply a proximate cause test or “total breach” test in actions seeking post-termination future royalties is likely only academic as it is hard to image a “total breach” (i.e., repudiation or complete failure to perform) that is not also the proximate cause of a licensor’s loss of future royalties. Similarly, it is hard to image a breach of contract that is the proximate cause of a licensor’s loss of future royalties that is not also a “total breach” of the contract.[59] Thus, it appears that under California law, a licensor may only be entitled to post-termination future royalties where a licensee has committed a “total breach” of the license agreement or committed a breach that is the proximate cause of the licensor’s loss of future royalty payments.[60]

©2008 Josh Warrum. Josh Warrum is an attorney at The Beanstalk Group, an Omnicom Group-owned brand licensing agency and consultancy. The views expressed in this article are those of the author and are not intended to represent the views of The Beanstalk Group or Omnicom Group.


[1] Fageol & Tate v. Baird-Bailhache Co., 138 Cal. App. 1 (1931).

[2] Susteen Inc. v. Sourcenext Corp., No. 06-56040, 2008 U.S. App. LEXIS 3358 (9th Cir. Feb. 14, 2008). (unpublished)

[3] Example of minimum guarantee provision in a license agreement – “Licensee agrees to pay Licensor the difference between (i) the minimum guaranteed Royalty Payments (“Minimum Royalties”) set forth in Exhibit X; and (ii) running Royalty Payments actually paid in accordance with the applicable sections of this Agreement.”

[4] Example of a termination provision in a license agreement – “Without prejudice to any other rights, Licensor may terminate this Agreement upon written notice at any time, if Licensee fails to perform any of its obligations under this Agreement or is otherwise in breach of this Agreement. Licensee will have a period of Ten (10) days after receipt of written notice to cure the breach. If Licensee fails to do so, Licensor may immediately terminate the License.”

[5] Example of accelerated minimum guaranteed royalty provision – “Upon the termination of the license granted herein, all royalties on sales theretofore made shall become immediately due and payable and no previously paid Minimum Royalties will be repayable to Licensee. Any balances owing on the Minimum Royalties for the balance of the Term will be immediately due and payable.”

[6] Susteen Inc. v. Sourcenext Corp., No. 06-56040, 2008 U.S. App. LEXIS 3358 (9th Cir. Feb. 14, 2008). (unpublished)

[7] Fageol & Tate v. Baird-Bailhache Co., 138 Cal. App. 1, 4 (1931).

[8] Id. at 2.

[9] Id.

[10] Id. at 3.

[11] Id.

[12] Id.

[13] Id. at 4.

[14] Id.

[15] Id.

[16] Robert L. Ebe, L. Steinberg, and Brett R. Waxdeck, “Radison and the Potential Demise of the Postal-Barnes-Hinton Rule”, Franchise L. J. 27 ( Summer 2007), at 3.

[17] Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1706 (1996).

[18] Id. at 1707.

[19] Id. at 1707.

[20] Id. at 1707.

[21] Id. at 1707-1708.

[22] Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1706 (1996).

[23] Id. at 1708.

[24] Id. at 1713.

[25] Id. at 1713.

[26] Id. at 1712.

[27] Order Denying Defendant’s Motion to Dismiss on the Grounds of Forum Non Convenience and Granting in Part and Denying in Part Defendant’s Motion for Summary Judgment, Susteen Inc. v. Sourcenext Corp., SA CV 05-90 DOC ( C.D. Cal. December 20, 2005).

[28] Id.

[29] Id.

[30] Id

[31] Id.

[32] Id.

[33] Id.

[34] Id.

[35] Id.

[36] See Susteen Inc. v. Sourcenext Corp., No. 06-56040, 2008 U.S. App. LEXIS 3358 (9th Cir. Feb. 14, 2008). (unpublished)

[37] Sealy, 43 Cal. App. 4th at 1711.; Order Denying Defendant’s Motion to Dismiss on the Grounds of Forum Non Convenience and Granting in Part and Denying in Part Defendant’s Motion for Summary Judgment, Susteen Inc. v. Sourcenext Corp., SA CV 05-90 DOC ( C.D. Cal. December 20, 2005).

[38] Hollywood Cleaning & Pressing Co. v. Hollywood Laundry Serv., Inc., 17 P.2d 712 (Cal. 1932) (per curiam).

[39] Id. at 713.

[40] Id.

[41] Gold Mining & Water Co. v. Swinerton, 23 Cal. 2d 19, 23 (Cal. 1943).

[42] Id. at 26.

[43] Id. at 27.

[44] Id. at 29.

[45] Id. at 28.

[46] Id. at 43.

[47] Order Denying Defendant’s Motion to Dismiss on the Grounds of Forum Non Convenience and Granting in Part and Denying in Part Defendant’s Motion for Summary Judgment, Susteen Inc. v. Sourcenext Corp., SA CV 05-90 DOC ( C.D. Cal. December 20, 2005).

[48] Id.

[49] Id.

[50] Id.

[51] Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1711-12 (1996).

[52] Id. at 1713.

[53] Order Denying Defendant’s Motion to Dismiss on the Grounds of Forum Non Convenience and Granting in Part and Denying in Part Defendant’s Motion for Summary Judgment, Susteen Inc. v. Sourcenext Corp., SA CV 05-90 DOC ( C.D. Cal. December 20, 2005).; Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1709 (1996).

[54] Order Denying Defendant’s Motion to Dismiss on the Grounds of Forum Non Convenience and Granting in Part and Denying in Part Defendant’s Motion for Summary Judgment, Susteen Inc. v. Sourcenext Corp., SA CV 05-90 DOC ( C.D. Cal. December 20, 2005).; Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1710-1711 (1996).

[55] Id.

[56] Susteen Inc. v. Sourcenext Corp., No. 06-56040, 2008 U.S. App. LEXIS 3358 (9th Cir. Feb. 14, 2008). (unpublished)

[57] Id.

[58] Unpublished dispositions are not precedent except as provided by 9th Cir. R. 36-3 (i.e., when relevant under the doctrine of law of the case or rules of claim preclusion or issue preclusion).

[59] The courts in both Susteen and Postal both found that the defendant’s breach, sublicensing and failure to pay royalties respectively, was neither a “total breach” of the agreement nor the proximate cause of the plaintiff’s loss of future royalties.

[60] Susteen Inc. v. Sourcenext Corp., No. 06-56040, 2008 U.S. App. LEXIS 3358 (9th Cir. Feb. 14, 2008). (unpublished); Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1708 (1996).

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How To Get A US Patent

A U.S. patent is necessary to protect your rights if you have invented a unique product or come up with a new idea. A patent grants property rights to an inventor, and is issued by the U.S. Patent and Trademark Office. The purpose of filing a patent is to stop others from reproducing and selling your product to make a profit.

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People with a lot of experience writing patents usually go through the process on their own, however, for most first-timers hiring an attorney to write the claims and edit the application is highly recommended.

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Sex Offender Records And Background Checks

Do you find it a hassle to go all the way to the town hall to get public records that you need quickly and without trouble? I bet you do and you really wish there was an alternative. What if I told you that I could save you that annoying and tedious trip down to town hall and that I can make your research a lot easier? Well, guess what, there actually is a much easier way to get public records like background checks, criminal records, birth records, and marriage records. I know you have been told before that you can find absolutely anything on the internet and I bet you probably did not believe it at all because you do not think that it is possible. Well, you were wrong again then because you find a lot more things on the internet as long as you know where to look and the right keywords to use in order to do really effective research.

There are a lot of different tools and resources on the internet and if you just looked for them then you would be so much more aware about a lot of things. For example, there are sites out there on the internet that have all of this information compiled in an organized way so that you can definitely access it really easily. You do not even have to go down to the town hall in order to get all of the information you need because it is really all online for you to get. You can just use one of these sites in order to find out what you need to about the people in your neighborhood by doing things like criminal background checks and sex offender checks. The other thing that this can be used for is employers. If you are hiring a new employee then you need to make sure you know they are a trustworthy person that is really right for the position. Also, when you are trying to find people to help you like maids or baby sitters or anything else you need then you should check out what is going on in their lives and how they have led their lives in the past to make sure that they are the right people for you.

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Introduction To Copyright

In the United States, copyright law protects creators from having their works stolen or used without their permission. In the event that a work registered with the U.S. Copyright Office is stolen or infringed upon, the creator can pursue legal action. To ensure that your work is fully protected, you must have at least a basic understanding of copyright and how it applies to you and your work.

Copyright is the protection afforded to all creators of published and unpublished work, including the authors of artistic, dramatic, literary, and musical works. In addition, when you register your work with the U.S. Copyright Office, your copyright is protected both in the United States and in those countries that have a copyright protection agreement with the U.S.

Copyright allows you total control over your work: With exclusive copyright, you can reproduce your work; distribute and sell your creation; publicly perform the work; and publicly display your work.

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Transferring all copyrights is a common practice today, but the transfer is only valid if there is a written agreement that is signed by the original author or a legal representative acting on his behalf. However, if you’re giving another individual nonexclusive rights to a work, you do not need a written agreement for it to be valid.

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Learn more about How to Copyright materials, where to get Copyright forms and how to use the Copyright Sign.

Trademark Dilution: Part II

* This article is Part II of a two part series. Prior Use by Plaintiff Timing is an important factor in the anti-dilution context. This is so because it would be unfair to hold someone liable for the use of a non-infringing, non-diluting mark while another mark gains fame in the marketplace. Hence, a plaintiff in an anti-dilution case must prove that its mark became famous prior to the constructive use date by any potential defendant of the challenged mark. To put it another way, the plaintiff must prove that the defendant first used its mark after the plaintiff’s mark became “famous and distinctive.” AM General Corp. v. DaimlerChrysler Corp., 311 F.3d 796 (7th Cir. 2002), related reference, 246 F. Supp. 2d 1030 (N.D. Ind. 2003); Nissan Motor Co. v. Nissan Computer Corp., 378 F.3d 1002, 1013 (9th Cir. 2004), cert. denied, 125 S. Ct. 1825, 161 L. Ed. 2d 723 (U.S. 2005) (the first commercial use of the diluting mark is what “fixes the time by which famousness is to be measured.”) As one famous commentator explained, “this requires evidence and proof of the timing of two events: when the plaintiff’s mark achieved that elevated status called “fame” and when the defendant made its first use of its mark.” 4 McCarthy on Trademarks and Unfair Competition § 24:96 (4th ed.). Likely Dilution by Blurring or Tarnishment The last, and according to some, the most complex element in an anti-dilution case is determining when the associations of two marks have been “blurred,” or when a mark’s reputation has been “tarnished.” Indeed, the Ninth Circuit has said, in these and other respects, the FTDA poses “formidable problems of interpretation.” Tahne Int’l, Inc. v. Trek Bicycle Corp., 305 F.3d 894, 905 (9th Cir. 2002). Dilution by “Blurring” Blurring occurs when the “unique and distinctive link” between the plaintiff’s mark and its goods or services is muddied and so its value is depressed. Unlike infringement, with dilution the public isn’t confused about the source of a product, but rather two products will spring to mind when one mark is encountered. Mattel, Inc. v. MCA Records, Inc., 296 F.3d 894, 903 (9th Cir. 2002); Playboy Enterprises, Inc. v. Welles, 279 F.3d 796 (9th Cir. 2002). The theory of dilution by blurring “thus protects the benefits that flow from a sharp and distinct connection between one mark and one product.” Horphag Research Ltd. v. Garcia, 475 F.3d 1029, 1037 (9th Cir. 2007) (citations omitted). The Lanham Act provides that whether two marks have been blurred depends on a balancing of six factors: 1. similarity of the marks 2. the extent to which others use the mark, 3. actual association between the marks 4. predatory intent 5. distinctiveness of the senior mark 6. recognition of the senior mark 15 U.S.C. § 1125(c)(2)(B); and, e.g., Mead Data Cent., Inc. v. Toyota Motor Sales, U.S.A., Inc., 875 F.2d 1026 (2d Cir. 1989). According to one prominent commentator and several cases, though, the first and fifth factors are the heart of the determination of dilution. See 3 McCarthy § 24:94.1; and, e.g., Hershey Foods Corp. v. Mars, Inc., 998 F. Supp. 500, 520 (M.D. Pa. 1998) (stating that “whether the products are similar or not adds nothing to the analysis” because “dilution can apply to competitors”) The first requirement, that there be similarity between the two marks is, in practice, a foundational requirement for dilution. Indeed, mere similarity is not enough to support a dilution claim – the marks must be “identical or close thereto.” Thane Int’l, Inc. v. Trek Bicycle Corp., 305 F.3d 894, 905 (9th Cir. 2002); and see Mead Data Central, Inc. v. Toyota Motor Sales, U.S.A., Inc., 875 F.2d 1026, 1029 (2d Cir. 1989); Nabisco, Inc. v. PF Brands, Inc., 191 F.3d 208, 227-228, (2d Cir. 1999)(“We hold … that the marks must be ‘very’ or ‘substantially’ similar and that, absent such similarity, there can be no viable claim of dilution.'”). The fifth factor, distinctiveness of the senior mark, is redundant of that addressed in the foundational “fame” inquiry. Few courts deal at any length with the remaining four factors. They are deemed less important to the inquiry and their absence will not preclude a dilution claim. See Mead Data Cent., Inc. v. Toyota Motor Sales, U.S.A., Inc., 875 F.2d 1026, 1028 (2d Cir. 1989) (absence of “bad faith” not fatal). This is because, the courts say, these factors go more to the fame of the mark, which has already been decided, or to the similarity of the product or likelihood that profits will be diverted to a competitor, while dilution is expressly concerned with the impact of a mark on dissimilar and non-competing products. E.g., Federal Exp. Corp. v. Federal Espresso, Inc., 201 F.3d 168, 175 (2d Cir. 2000) (citations omitted). Dilution by “Tarnishment” Tarnishment comes into play when the reputation and value of the mark may be diminished because use of a similar mark may cause the public to associate the lack of quality in defendant’s good with the quality of plaintiff’s unrelated goods. In other words, a famous mark is tarnished when it is associated with an offensive or inferior good, or is portrayed in a degrading context. Playboy Enters. v. Netscape Communs. Corp., 354 F.3d 1020, 1033 (9th Cir. 2004). A court evaluating a tarnishment claim will ask whether the defendant’s use of a similar mark created an association in the minds of consumers that is inconsistent with the pre-existing reputation of the plaintiff’s mark. Starbucks Corp. v. Lundberg, 2005 U.S. Dist. LEXIS 32660 (D. OR. 2005). So, for example, the Starbucks mark was deemed to be diluted and tarnished by another company’s use of the identifier “Sambucks.” Consumer studies showed that the name “Sambucks” immediately brought “Starbucks” to mind. This association tarnished Starbucks because there was no evidence that the Sambucks store and products had developed the same premium reputation that the Starbucks brand enjoys. Starbucks, 2005 U.S. Dist. LEXIS 32660, *20; and see Playboy, 354 F.3d at 1033. Likewise, posters that bore the phrase “Enjoy Cocaine” using a font and color scheme identical to those used by the Coca-Cola Company were found to dilute the Coca-Cola trademark, because the posters offensively associated the plaintiff’s product with an illegal drug. Coca-Cola Co. v Gemini Rising, Inc., 346 F Supp. 1183 (E.D.N.Y. 1972). Remedies for Dilution An injunction is the standard remedy available to a plaintiff whose mark has been diluted. 15 U.S.C. § 1125(c)(1); 16 U.S.C. § 1116. And, if the defendant “willfully intended to harm the reputation of the famous mark,” and if the allegedly diluting mark was first used after the FTDA was enacted, the plaintiff may also be able to obtain money damages. 15 U.S.C. §§ 1125(c), 1117(a) and 1118. The factors that weight into the availability of these remedies are discussed in [Related Article]. Federal vs. State Law The federal dilution statutes were enacted in 1996 as part of the Lanham Act. This was the first time federal law recognized the doctrine. Until that time, protection against dilution was available only under state law. 4 McCarthy on Trademarks and Unfair Competition § 24:83 (4th ed.) To date, 27 states have enacted anti-dilution statutes (Alabama, Arkansas, California, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Iowa, Louisiana, Maine, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, and Washington) (“the anti-dilution states”). “Dilution of a Trademark,” 38 Am. Jur. Proof of Facts 3d 1 (Supp. 2007); e.g., Cal. Bus. & Prof. Code 14330 (West); Ill. Rev. Stat. ch. 140, §22; N.Y. Gen. Bus. L. § 368-d (McKinney); Tenn.Code Ann. 47-25-513(a). Some of those that have not adopted anti-dilution statutes recognize the doctrine under their common laws. Others have explicitly rejected the doctrine of dilution altogether. “Dilution of a Trademark,” 38 Am. Jur. Proof of Facts 3d 1 (Supp. 2007). For the most part, because the law of anti-dilution seeks to protect the same interests at both the state and the federal levels, the anti-dilution states’ statutory elements for the cause of action resemble those of the Lanham Act. Compare Avery Dennison Corp. v. Sumpton, 189 F.3d 868, 874 (9th Cir. 1999) (noting that the dilution requirements under California law are substantially similar to the federal requirements) with California Bus & Prof. Code 14330 et seq.; and compare Tenn.Code Ann. 47-25-513(a) with AutoZone, Inc. v. Tandy Corp., 373 F.3d 786, 801 (6th Cir. 2004) (“There are no Tennessee cases that analyze this statute, and in the past we have interchangeably analyzed the Tennessee and federal antidilution statutes.”) Those similarities transcend the statutory language. Anti-dilution cases in state court are subject to just as much scrutiny as in federal court. See, Gulf Coast Bank v. GCB & Trust Co., 652 So. 2d 1306, 1312 (La. Sup. Ct. 1995); Cushman v. Multon Hollow Land Dev. Inc., 782 S.W.2d 150, 162-3 (Mo. Ct. App. 1990); Skil Corp. v. Barnet, 337 Mass. 485 (1958); Little India Stores, Inc. v. Singh, 101 A.D. 2d 727 (S.Ct. NY 1984). Toho Co., Ltd. v. Sears, Roebuck & Co., 645 F.2d 788 (9th Cir. 1981) (“Bagzilla,” for garbage bags, deemed not to lessen the Godzilla mark under state law). The concern is that dilution will swallow up all competition in the name of protection against trademark infringement. Coffee Dan’s, Inc. v. Coffee Don’s Charcoal Broiler, 305 F. Supp. 1210, 1217 (N.D. Cal. 1969). CONCLUSION The dilution doctrine provides a separate and distinct cause of action for holders of well-known trademarks, and has slowly begun to expand the protection afforded to their investment from free-riders who might eat away at the goodwill they’ve developed. But it is not simply a fall-back for a mark holder unable to prove an infringement case. The requirements for establishing dilution are strict, and it is available only for those marks that are truly famous or well-known.

Mr. Taillieu is a partner of Zuber & Taillieu LLP. He earned his J.D. with highest honors from George Washington University School of Law, where he graduated #1 in the day class and was Managing Editor of the Law Review.

Trademark Dilution: Part I

* This article is for non-lawyers, or attorneys practicing in areas of law other than trademark law, seeking to familiarize themselves with the basics of trademark dilution. This article is Part I of a two part series. Introduction Trademark law has evolved to give what is, in essence, a quasi-property right in a “word, name, symbol or device” that identifies and distinguishes one person’s goods (or services) from those of another. 15 U.S.C. § 1127. The justification for this is twofold. First, to protect the public from confusion or deception about who is the source of a given product or, in the case of a service mark, a given service. Second, to protect a business’s investment in the goodwill in the mark. Enforcement of such “right” typically takes one of two forms: “Infringement” or “dilution.” Laws barring trademark “infringement” seek to protect the first interest. They focus on whether consumers are likely to be confused by the public use of two similar marks. Conversely, laws governing “dilution” seek to protect the second interest. In so doing, dilution jurisprudence focuses on whether the owner’s investment in a mark has been lessened or diminished when someone a third party uses a similar identifier. Put another way, it protects from a “free riding on the investment” the trademark holder has made. I.P. Lund Trading ApS v. Kohler Co., 163 F.3d 27, 50 (1st Cir. 1998). Trademark Dilution is a Cause of Action in its Own Right Trademark dilution is not a mere fallback position for an unsuccessful someone who was not able to prove infringement plaintiff. 4 McCarthy on Trademarks and Unfair Competition § 24:70 (4th ed.) (citing 15 U.S.C. § 1127, and Playboy Enterprises, Inc. v. Netscape Communications Corp., 55 F. Supp. 2d 1070 (C.D. Cal. 1999)). Rather, it is a distinct wrong and, therefore, a distinct cause of action. The First Circuit explained this distinction rather eloquently in I.P. Lund Trading ApS v. Kohler Co.: [I]f a cocoa maker began using the “Rolls Royce” mark to identify its hot chocolate, no consumer confusion would be likely to result. Few would assume that the car company had expanded into the cocoa making business. However, the cocoa maker would be capitalizing on the investment the car company had made in its mark. Consumers readily associate the mark with highly priced automobiles of a certain quality. By identifying the cocoa with the Rolls Royce mark, the producer would be capitalizing on consumers’ association of the mark with high quality items. Moreover, by labeling a different product “Rolls Royce,” the cocoa company would be reducing the ability of the mark to identify the mark holder’s product. If someone said, “I’m going to get a Rolls Royce,” others could no longer be sure the person was planning on buying an expensive automobile. The person might just be planning on buying a cup of cocoa. Thus, the use of the mark to identify the hot chocolate, although not causing consumer confusion, would cause harm by diluting the mark. I.P. Lund., 163 F.3d at 50. The concept of dilution can be further subdivided in two categories: “Blurring” and “tarnishment.” Blurring is best described above in the I.P. Lund Trading ApS v. Kohler Co. decision-to wit, it occurs when the “unique and distinctive link” between the plaintiff’s mark and its goods or services is muddied and so its value is depressed. Tarnishment, occurs when a famous mark is associated with an offensive or inferior good, or is portrayed in a degrading context, thus lessening the value of the senior mark. In short, the nature of dilution is to eat away at the value of another’s trademark. And, in precluding the otherwise competitive acts that might dilute a mark, the anti-dilution statute gives the mark-holder a much broader property right than a mere claim for infringement does. E.g., The Toro Co. v. Torohead, Inc., 2001 WL 1734485 (Trademark Tr. & App. Bd.), 61 U.S.P.Q.2d 1164. (It is a “bedrock principle of trademark law” that multiple uses of a term as a mark can co-exist when used for non-related goods. Dilution upsets this balance and enables the owner of a famous mark to prohibit the use or registration of the same or substantially similar mark even on unrelated goods.) Dilution Cases Are Subject to a High Degree of Scrutiny Dilution is thus deemed to be an “extraordinary remedy.” Advantage Rent-A-Car Inc. v. Enterprise Rent-A-Car Co., 238 F.3d 378, 381 (5th Cir. 2001). As the Fourth Circuit explained: [W]e simply cannot believe that, as a general proposition, Congress could have intended, without making its intention to do so perfectly clear, to create property rights in gross, unlimited in time (via injunction), even in ‘famous’ trademarks. Ringling Bros.-Barnum & Bailey Combined Shows v. Utah Division of Travel Development, 170 F.3d 449, 459 (4th Cir. 1999). See also Nabisco, 191 F.3d at 224 n.6 (quotation marks omitted) (“We agree that the dilution statutes do not prohibit all use of a distinctive mark that the owners prefer not be made …. [W]e agree with the Fourth Circuit that the dilution statutes do not create a ‘property right in gross”‘); I.P. Lund, 163 F.3d at 47 (“[T]he standard for fame and distinctiveness required to obtain anti-dilution protection is more rigorous than that required to seek infringement protection”). Thus, a plaintiff in a dilution case is likely to face an uphill battle. 4 McCarthy on Trademarks and Unfair Competition § 24:89.50 (4th ed.); e.g., The Toro Co. v. Torohead, Inc., 2001 WL 1734485 (Trademark Tr. & App. Bd.), 61 U.S.P.Q.2d 1164 (stating that unlike in trademark infringement cases, doubts are not resolved in favor of the party claiming dilution). This article explains the elements and scope of a federal cause of action for dilution for a mark. Infringement is discussed in [Related Article]. Elements of a Federal Dilution Claim Section 43(c) of the federal Lanham Act lays out the requirements for pleading and proving a federal dilution claim. 15 U.S.C. § 1125(c). This section, which comes from legislation called of the Federal Trademark Dilution Act (FTDA), says states that the holder of a “famous mark” may stop another from using “in commerce” an identifier that “is likely to cause dilution by blurring or dilution by tarnishment.” That definition sets up a neat four-part test courts can follow to determine if a mark has been, or is likely to be, diluted. To prove dilution, then, a mark holder must establish all of the following: (1) the mark is distinctive and famous; (2) the defendant is using its own mark in commerce (3) the defendant’s use begin after the plaintiff’s (4) the defendant’s use is “likely” to cause dilution by blurring or tarnishment 15 U.S.C. § 1125(c). A Distinctive and Famous Mark The Lanham Act lays out four non-exclusive areas of proof that can weigh into whether a mark is sufficiently famous to warrant protection from the diluting use of a similar mark. These are: (1) the duration and extent of advertising or publicity of the mark; (2) the amount and breadth of sales of the item; (3) the extent to which it is actually recognized by the public and (4) whether the mark was registered. 15 U.S.C. § 1125(c)(A). These factors are looked at on a “totality of the circumstances” basis, to help a court decide if the mark is “widely recognized by the general consuming public of the United States as a designation of source of the goods or services of the mark’s owner.” Times Mirror Magazine, Inc. v. Las Vegas Sports News, LLC, 212 F.3d 157 (3rd Cir. 2000) The Lanham Act was amended in October 2006 and these factors are revised substantially from the list of eight included in the previous version of the law. Amending 15 U.S.C.A. § 1125(c). Pub.L. 109-312, § 2, 120 Stat. 1730 (Oct. 6, 2006). It is unclear as yet whether the new formulation will change what marks might be considered sufficiently “famous” to be diluted. Under the earlier version, most courts disposed of the “fame” question summarily. E.g., Amica Online, Inc. v. IMS, 24 F. Supp. 2d 548 (E.D.Va. 1998). So it is possible that the “I know it when I see it” nature of this inquiry might be unaffected. Under the earlier formulation of the law, however, and as examples to illustrate how the factors historically were applied, the following marks are some examples of those that have been considered to be sufficiently famous and distinctive to warrant protection: AOL, Barbie, Budweiser, Ford, Nike, NASDAQ, and Velveeta. America Online, Inc. v. IMS, 24 F. Supp. 2d 548, 48 U.S.P.Q.2d 1857 (E.D. Va. 1998); Mattel Inc. v. Jcom Inc., 48 U.S.P.Q.2d 1467 (S.D.N.Y. 1998); Anheuser-Busch, Inc. v. Andy’s Sportswear, Inc., 40 U.S.P.Q.2d 1542 (N.D. Cal. 1996); Ford Motor Co. v. Lloyd Design Corp., 184 F. Supp. 2d 665, 62 U.S.P.Q.2d 1109 (E.D. Mich. 2002); Nike Inc. v. Variety Wholesalers, Inc., 274 F. Supp. 2d 1352, 1372 (S.D. Ga. 2003), aff’d, 107 Fed. Appx. 183 (11th Cir. 2004); Kraft Foods Holdings, Inc. v. Helm, 205 F. Supp. 2d 942, 63 U.S.P.Q.2d 1353 (N.D. Ill. 2002). The following marks were deemed not sufficiently famous and distinctive to justify protection: Avery Dennison, for office supplies; Fun Ship, for a cruise line; Weather Guard, for vehicle tool boxes for contractors; We’ll Take Good Care of You, as a slogan for a chain of retail pharmacies. Avery Dennison Corp. v. Sumpton, 189 F.3d 868, 51 U.S.P.Q.2d 1801, 1806 (9th Cir. 1999); Carnival Corp. v. SeaEscape Casino Cruises, Inc., 74 F. Supp. 2d 1261, 52 U.S.P.Q.2d 1920 (S.D. Fla. 1999); Knaack Mfg. Co. v. Rally Accessories, Inc., 955 F. Supp. 991, 42 U.S.P.Q.2d 1649 (N.D. Ill. 1997); Genovese Drug Stores, Inc. v. TGC Stores, Inc., 939 F. Supp. 340 (D.N.J. 1996). Use in Commerce “Use,” very simply put, means commercial use. Mattel, Inc. v. MCA Records, Inc., 296 F.3d 894, 903 (9th Cir. 2002) (the inquiry is basic, thought the requirement seems “ungainly.”) In other words, the defendant must have employed the famous and distinctive mark – or one nearly identical to it – to sell goods other than those produced or authorized by the mark’s owner. Panavision Int’l, LP v. Toeppen, 141 F.3d 1316, 1324-25 (9th Cir. 1988); Mattel, Inc., 296 F.3d at 903 (dilution found where MCA created and sold to consumers in the marketplace commercial products – the Barbie Girl single and the Aquarium album – that bear Mattel’s “Barbie” mark). A non-commercial use of another’s mark, on the other hand, is specifically exempt from the Lanham Act. This ensures that references to marks that would otherwise fall within the penumbra of First Amendment protections are not inadvertently, and unconstitutionally, also brought within the ambit of the statute. Mattel, Inc., 296 F.3d at 903. As such, the following activities are specifically authorized by statute: 1. Advertising that invites the consumer to compare goods or services; 2. Speech that “parodies, criticizes or comments upon” the famous mark owner, or the goods or services identified; 3. In news reporting or commentary; 4. In any other non-commercial fashion. 15 U.S.C. § 1125(c)(3). Part II of this series will issue in two weeks.

Mr. Taillieu is a partner of Zuber & Taillieu LLP. He earned his J.D. with highest honors from George Washington University School of Law, where he graduated #1 in the day class and was Managing Editor of the Law Review.

Protecting Your Trade Secrets

Trade secrets means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

However, in order to protect your trade secret, you must first know what information qualify as trade secrets. Trade secrets generally fall into two categories:

1. Technical information; and
2. Business information.

Trade secrets which are under the category of technical information may include: (1) Plans, designs and patterns, such as those for specialized equipment; (2) Processes and formulas; (3) Methods and techniques for manufacturing; (4) Engineering notebooks; and even (5) Negative information which means designs that did not work.

On the other hand, trade secrets which are under the category of business information may include the following: (1) Financial information prior to public release; (2) Cost and pricing information; (3) Manufacturing information; (4) Internal market analyses or forecasts; (5) Customer lists; and even (6) Personnel information of the corporation and it’s employees.

Please remember that the above are just sample information that may be considered as trade secrets. The actual test is if your information has all the four elements to be considered as a trade secret.

Being a valuable intellectual asset, the owner of a trade secret is duty bound to use reasonable measures to protect the secrecy of the trade secret. Generally, an owner of the trade secret must execute a confidentiality agreement involving its employees, contractors, vendors and other personnel. The confidentiality agreement will assure the owner that the named parties have knowledge of the existence of the secret information and is duty bound not to disclosure it.

Putting of warning signs and labels on confidential documents and any machines containing confidential information is another way of protecting your trade secrets.

If, on the other hand, it is not possible for a non-disclosure or confidentiality agreement to be executed to protect your trade secret, it is enough that you should state unequivocally that certain information, in the course of your business relationship is confidential and should not be disclosed. Otherwise, you are determined to pursue claims for damages as a result of disclosure of your trade secret.

Remember, over expensive or unreasonable means in protecting your trade secret is not mandated for your information to be considered and treated as trade secret under California law. It is enough that you use reasonable measure, by means of ordinary diligence to protect your trade secret.

Atty Gabriel Cosh is a legal advocate and a practitioner of law for over 10 years now. He is also an expert in the field of social legislation and personal injury cases.

For more information about Violation of trade secrets, please log on to http://www.mesrianilaw.com/Violation-Of-Trade-Secret.html or visit our site at http://www.mesrianilaw.com

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