Recently, the Federal Court of Appeals for the Ninth Circuit upheld an injunction issued for the benefit of members of the Kardashian family against their cosmetic products licensee.
The Kardashians had terminated the license agreement due to the licensee’s alleged failure to pay royalties, among other alleged breaches. The licensee continued to exploit the license and sell products bearing the Kardashian trademarks, asserting, among other things, that “the Kardashians’ termination of the license agreement was invalid because the Kardashians breached the license agreement first . . . .”
The district court found for the Kardashians, holding, unremarkably, that a licensee has but two options when faced with a breach of the license agreement by the licensor: “First, the licensee can consider the contract terminated and stop performance. Second, the licensee can instead continue making royalty payments under the license agreement, continue using the trademarks, and then sue for damages. Regardless, the licensee cannot both stop paying royalties but nevertheless continue using the trademark.”
Although the options presented to a licensee by the district court decision are seemingly reasonable, they can present real risk to the licensee. For example, if the licensee had made significant investments and engaged a large staff to support the licensed business, terminating the agreement and closing down the licensed business not only will put any number of people out of work without advance notice, but also may result in defaults under the licensee’s banking arrangements and the loss of its entire business, thus giving rise to consequential damages potentially far in excess of any award for actual damages to which the licensee may be found to be entitled. Under the district court decision, the licensee’s option in these circumstances would be to continue the licensed business and bring an action against the licensor for damages, with the attendant relationship issues potentially adversely affecting performance, while continuing to make royalty payments with no guaranty that the licensee’s damages can be recouped, even after years of expensive litigation.
There is another quite unremarkable statement in the decision, which, although not in any way undercutting the ruling, may give some guidance as to how a licensee may attempt to protect itself in circumstances like those that the Kardashian licensee alleged it was facing. The court wrote, “like all contracts, trademark license agreements are governed by general principals of contract law.”
Among the most wonderful aspects of our contract laws is that the parties can, in effect and with few limitations, create their own law as to their rights and obligations under almost any circumstances. Accordingly, a licensee familiar with the Kardashian case might look to create a contractual structure whereby it would not have to pay royalties in the event of a significant breach by the licensor or, more realistically, a contractual structure by which it would not have to chase the licensor, at great expense, to recoup royalty payments in order to continue to exploit a generally valuable license agreement.
It is not uncommon to see license agreements in which the licensor has included a right for the licensor to set off amounts due and owing to it by a licensee against any outstanding payment obligations it may have to the licensee. However, even if a licensor would be willing to make this provision bilateral, these provisions are objectively problematic because they cannot be reliably drafted to prevent with certainty a party from merely alleging that the other owes it money in order to trigger the clause (unless, of course, a claimant party is required first to obtain a final judgment as to the amount allegedly owed, which brings us back to the problems with option number two). A better and more objective protection would be to allow the licensee to put its payments of royalties into escrow, with an obligation to take some formal legal action in accordance with the license agreement’s arbitration or litigation provisions before, or reasonably soon after, it notifies the licensor that the escrow account has been established. Assuming that the licensee establishes in the proceeding that it is entitled to damages, the escrow fund, even if less than the damage award, will be available to be applied toward the satisfaction of the judgment. It also is possible that establishing an escrow account and making payments into the escrow account will help relieve at least some of the tensions arising from awkward efforts to work together while the parties are adversaries in court or in an arbitration and perhaps even salvage the relationship after the legal action has ended.
Credit: Jonathan R. Tillem
In the cosmopolitan city of Barcelona, several of us, including my colleague Alan Behr, gathered for a private fashion industry meeting at the exquisite Hotel El Palace. While sipping tea and sampling fine pastries, we heard brief presentations on important legal developments from around the world.
Owen Tse, a partner at Vivien Chan & Co. in Hong Kong, presented on the New Balance case before the Intermediate Court in the People’s Republic of China. The court ruled in favor of the Chinese company New Barlun, which New Balance had accused of selling infringing footwear. The court relied on the fact that New Barlun had filed the Chinese mark before New Balance had made an attempt. To add insult to injury, the court awarded the equivalent of US $15.8 million to New Barlun, which was subsequently reduced to the equivalent of approximately US $700,000 by the Appeals Court. Owen also reported an interesting fact—“Ivanka Trump” in Chinese was the subject of more than 300 trademark applications in the PRC since 2016.
In addition, the practice of using “shadow companies” to infringe the Chinese translation of well-known brand owner’s trademarks is on the rise in Hong Kong. Infringers promote themselves by claiming they have authorization or license from the shadow companies. Example: Pearl Bay vs. Peony Bay in English and Chinese.
From Amsterdam, Herwin Roerdink of Vondst Advocaten gave a presentation regarding fashion brand owners and European Union data protection regulations. Herwin discussed the issue of smart products, such as socks that collect running data of their wearers and golf shirts that track swings, all in connection with EU privacy regulations. Specifically, a new EU privacy law, GDPR, EU 2016/679, which will become effective on May 25, 2018, imposes heavier regulation and more obligations on data controllers and data processors, whether or not the data is processed in the EU. GDPR also applies to the processing of data of those in the EU by non-EU entities that offer goods and services that monitor behavior in the EU. Non-EU fashion brand owners who target EU customers with monitoring products will therefore be subject to the regulation.
Herwin also explained the differences between the approach of the Dutch data protection authority and the United States Federal Trade Commission regarding the permissibility of WiFi tracking by retailers. Although the Dutch decision was based on Dutch implementation of the EU Privacy Directive, which focuses on whether the processing is necessary to achieve the desired purpose, the FTC decision was based on balancing the concern for customer harm and the legitimate interests of the retailer.
From London, Roland Mallinson of Taylor Wessing updated us on the implications of Brexit to fashion IP, on the assumption that the United Kingdom will not leave the EU before March 2019. Roland predicted that existing European Union Trade Mark (EUTM) registrations will likely continue to be recognized in the UK. He posited that parallel filing in the EU and UK is not imperative now, especially if you are not yet using your mark in the UK. He expressed confidence that there will be some arrangement by which current EUTM trademarks and those being filed now will result in protection in the UK, from the current priority date; however, because nothing is for certain, Roland recommended that strategically key brands continue to file UK applications in parallel with any new EUTM applications. For existing UK and EUTM registrations, it does not automatically follow that a new UK application should be filed now – even for strategically key brands.
The discussion also focused on the practical issue of transferring 900,000 EUTM registrations to the UK system, a process made more complex by the fact that a fair number of the registrations were not filed in English. Some issues, like parallel imports and European design rights, have political sensitivities.
Finally, I made a presentation regarding the important Star Athletica case, which was decided by the US Supreme Court in March 2017. We have previously reported on that development in our blogs on March 22, 2017 and May 5, 2017.
In short, we had a very enjoyable and productive meeting. And as anyone who attends the INTA annual meeting knows, half the pleasure for us was being able to sit down while we networked with friends and colleagues.
Credit: Monica P. McCabe
Thank you to Phillips Nizer law clerk Candace Arrington of our Corporate & Business Law and Intellectual Property Law Practices for providing assistance with the review and preparation of this blog post.
My partner Helene Freeman has offered her reflections on these pages about the recent Supreme Court opinion in Star Athletica, L. L. C. v. Varsity Brands, Inc., commonly known as the cheerleader uniform case. Our Fashion Practice held a seminar recently for the industry where Helene provided further thoughts based on her posts, and I provided some practical considerations based on the court’s ruling. Here is a brief summary.
The key point to remember is that the Supreme Court has greatly simplified how you look at cases of apparel and accessory copyrights and claimed infringement. Because the case involved fabric patterns, I will limit my discussion to them, but there are broader implications, from belt buckles to furniture. The bottom line is this: from now on, we will not examine the garment itself, just the surface design. It no longer matters that, if you take stripes, chevrons and other familiar cheerleader-uniform patterns off the uniform, all you have left is a tennis dress–that is, something with a different function from a cheerleader uniform. All we need do is look at the pattern on the fabric used to make the dress, as if it were unrolled from a bolt of cloth and laid flat. In fact, it does not even matter if a cutter snips pieces from the bolt into a recognizable shape of a dress. It’s the design of the fabric, and just that design, that matters from now on.
That possibly makes even more important the question that the Supreme Court sent back for consideration by the trial court: whether the design that was allegedly copied embodied enough original expression to warrant protection by copyright. The rule is that even modest creativity, when fixed in a creative work, is protectable by copyright. (All you haiku writers, take heart.) Using neckties from several makers and nations as an example, I showed our conference attendees that original variations to familiar patterns (such as bees and starbursts) could be protectable. Even if what results is a “thin” copyright, it is still enforceable.
That leads to a follow-on reflection: There being no central database of protected designs, and with fabric designs now being viewed as if standing alone, as some kind of sartorial Ding an sich (a “thing in itself” in Kantian philosophy), if you have a pattern that looks like it might be original, and if you intend to spend time and money using it to make clothing (or other products), now, more than ever, it is important that you seek copyright registration–and that you discuss your options with counsel. Because the cut of the cloth and claimed usefulness (as in, “Those look like the kind of stripes I would find on a cheerleader uniform.”) are now irrelevant for copyright purposes, you will have to undertake your analysis in a field of potential risk beyond that formed by the goods you are making. Using cheerleader uniforms as an example once more: stripes and chevrons on those uniforms, if upheld as protectable by copyright, could, in theory, be infringed upon not merely by designs on competing uniforms but also by fabric designs on anything that is nonfunctional (such as a purely decorative wall hanging) or functional (such as neckties, carpets and sofas).
That brings us again to our favorite money-saving advice: discuss these issues with knowledgeable counsel before you invest your time and money. In the law, that ounce of prevention is worth at least a ton of cure.
Credit: Alan Behr
The Supreme Court decision in Star Athletica L. L. C. v. Varsity Brands, Inc., No. 15-866 was announced today and the fashion industry can breathe a huge sigh of relief. In fact, the industry, especially accessory businesses, would be justified in popping open the Champagne. Not only did the Court uphold the Sixth Circuit’s judgment that the designs of the cheerleading uniforms were separable, it greatly simplified and expanded the two- and three-dimensional features of useful articles that can qualify for copyright protection.
The opinion holds that the design of a useful article is eligible for copyright protection if the feature can be perceived as a copyrightable two or three-dimensional pictorial, graphic or sculptural design separate from the useful article, on its own or in some other tangible medium, if it can be “imagined” separately from the useful article. Physical separability is not required. The analysis of separability under the statute is a purely conceptual undertaking. Conceptual separability does not require that the remaining part of the useful article, apart from the two and three dimensional design, be either fully functional or even equally useful. The focus of the separability analysis under the copyright statute is on the extracted two- and three-dimensional design and, according to the Court, one need not “imagine a fully functioning useful article without the artistic features.” Nor does it matter, the Court holds, that the artistic feature plays a role in the function of the useful article.
All of the other glosses on conceptual separability that the various appeals courts had previously articulated are swept away. It does not matter that the artistic feature of the design would be marketable separately, so long as it can be imagined as existing. It doesn’t matter that it was conceived originally for the useful purpose to which it was put.
Left for another day is whether the specific designs at issue are copyrightable. That will be the task of the trial court on remand. However, Justice Ginsberg notes in a footnote that the requisite creativity for copyright is extremely low.
Credit: Helene M. Freeman
One of the hot topics du jour in the fashion press is the copyright battle in the Supreme Court involving cheerleader uniforms. It poses the question of when a two-dimensional design that is part of a useful article is copyrightable—in this case, designs consisting of color blocks, chevrons, and lines in uniforms for cheerleaders. The Copyright Act provides that a “useful article” is not copyrightable, but it allows for copyright in the “pictorial, graphic and sculptural” features of useful objects as long as those features are “separable” from and can exist independently of the object itself.
Under the statutory definition, you can secure a copyright for a fabric or lace design, but you cannot secure a copyright in a dress made with the fabric or lace. An artist who draws a dress can secure a copyright in the drawing and can prevent someone from using it on greeting cards or wastebaskets, but the artist cannot use the copyright to prevent anyone from actually making the dress depicted in the drawing.
Although the concept of separability is easy to state in the abstract, at times it has been hard to apply in practice. Cheerleader uniforms present a particularly difficult problem. The designs here are not printed on the fabrics used in the uniforms. They are part of the garment’s construction. The placement of the design features—color piping around the neckline and arm holes, lines down the sides in color blocks, chevrons in the center, lines marking the boundaries between blocks of color—results from the contours of the garments. The placement also serves the functional purposes of hiding seams that are sewn on the outside (instead of the inside) of the garments to prevent chafing, strengthening parts of the garments so that they hold their shape, and creating optical illusions that lengthen the torso and slim the waist. The designs also help make the garments recognizable as uniforms and not street clothing.
The challenger, Star Athletica, focuses on those functional considerations and argues that the designs are inherent in the useful objects and do not exist independently. It argues that, if the designs have any function, they are not separable from the uniforms.
The United States and Varsity Brands, the copyright owner, argue that, because the graphic designs can be applied to products other than dresses, they are separable, can exist independently and are therefore copyrightable. The government further argues that the Copyright Office cannot be in the business of determining how any particular two-dimensional design functions in any given context when called upon to determine whether it can indeed exist independently. Under that argument, any two-dimensional design could potentially be deemed independent and separable from the three-dimensional objects to which it is applied.
In a great irony, the case was argued before the Supreme Court on Halloween. Halloween costumes frequently have been the subject of litigation under the particular provisions of the Copyright Act at issue in the case. (In case you are wondering, under current precedent, costumes are generally not copyrightable, but masks generally are.)
Reading the oral argument before the Supreme Court and the briefs, I was struck by the fact that the case is not unlike the famous figure ground optical illusion in which you can simultaneously see either a goblet or the profile of two faces. Star Athletica sees the goblet. If the lines define the goblet, it is the design of a useful object, and Varsity Brands cannot prevent Star from making the goblet. But Varsity Brands and the government see the profile pictures, which are separable, and it would be irrelevant whether they also define a goblet from the perspective of another viewer.
Stanford Law School Professor Mark Lemley, as the lead author of a brief submitted by a number of law professors in support of Star Athletica, attempts to separate the figure from the ground. He argues that copyright could protect the designs, but not the coordination and arrangement (i.e. placement) of the elements of the designs that result from the shape or construction of the garments. In effect, this proposed test would exclude from the protection of copyright those elements of the designs dictated by the needs of making the useful article truly useful.
There are other relevant questions that none of the lower courts in the case considered and which none of the briefs submitted to the Supreme Court addressed: What are the two-dimensional designs that are protected and are those designs copyrightable under more general principles of copyright law? Are they original or are they in the public domain? Is there a merger of the general idea with its expression so that there is nothing that is copyrightable? Are the decorative aspects what copyright law refers to as “scènes à faire” (stock representations implicit in the subject matter, in this case cheerleader uniforms)? Both the trial court and the appellate court expressly said they were not addressing whether the two-dimensional designs were copyrightable and were reserving that question. And the Supreme Court, in accepting the case, refused to consider this question, because it was not ruled on below.
Justice Elena Kagan inquired at argument: What is your design; can someone just add another stripe to avoid infringement? Varsity Brands’ counsel did not address the first part of the question and, in response to the second part, said that merely adding something to a copyrightable design “usually” does not avoid infringement. The response did little to address the Court’s expressed concern for the anti-competitive effect on the market for cheerleader uniforms and markets for other products for which the design has a functional purpose, such as camouflage fabric for military use. Indeed, it is worth noting that Star Athletica made a point of informing the Court that Varsity Brands controls 80% of the U.S. market for cheerleader uniforms.
That may help explain why all of the Supreme Court Justices who asked questions were troubled by the idea of handing Varsity Brands a monopoly over cheerleader uniform designs through the use of its copyright registrations. How they might avoid that result is an open question. Star Athletica offered one alternative that might have a major impact on the fashion industry, particularly on the accessories market, where protection of three-dimensional designs is an on-going concern: Any aspect of the design that is functional in part is not conceptually separable. (Say goodbye to the Kieselstein-Cord belt buckle decision, a ground-breaking case won by this firm and which a number of briefs argued was wrongly decided.) Another alternative, endorsed by the American Intellectual Property Association, is to vacate the decision and instruct the court below to determine first the validity of the copyright in the designs under more general copyright law concepts that would factor into the analysis the use of routine design features in uniforms. Either way, one suspects that Star Athletica’s use of its copyrights to prevent competition in the cheerleader uniform market may be short lived.
Credit: Helene M. Freeman
Registering copyrightable designs as “unpublished” collections can be an efficient and cost effective way to register multiple two dimensional print patterns in a single registration. But to derive the benefits of registration, you need to be able to identify the designs included. Standard Fabrics International, Inc. (“Standard Fabrics”) learned that lesson the hard way, when it sued Louise Paris, Ltd. and its retail customer for copyright infringement of one of the fabric designs it claimed was part of its “Spring Summer, Collection 1”.
To succeed in a suit for copyright infringement, you must prove that the design in issue was registered with the Copyright Office. To register, you must submit a copy of the design with an application for registration.
Standard Fabrics’ registration identified its work only as “Spring Summer, Collection 1”. Nothing in the title referred specifically to the particular design number that was the subject of the suit. Therefore, Standard Fabrics was required to prove that the design was actually included in the collection registered. Because Standard Fabrics could not prove the design infringed was part of the collection registered, it was denied judgment on its infringement claim.
The problem Standard Fabrics faced can be avoided. In an application to register a collection of designs, be sure to set forth the design number for each design covered by the application. Each individual design in the collection can be uploaded separately on the Copyright Office’s electronic website and appropriate records of the upload can be printed and maintained.
The Copyright Office generally maintains deposit copies of unpublished works. It will provide copies of these for use by the lawyers for parties to litigation, but it requires a written application in its proscribed form and time to search for, reproduce and certify its records. The fee charged for this service can be hundreds of dollars, as the Copyright Office will charge for its time as well as imposing copying and certification fees.
But beware, the Copyright Office does not undertake to retain deposit copies of published works. Full term retention must be arranged for a fee.
Credit: Helene M. Freeman