Supreme Court Abolishes Federal Circuit's Test for Willfulness
By Bita Rahebi and Esther Kim Chang
On June 13, 2016, in Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. ___ (2016), the Supreme Court unanimously abrogated the Federal Circuit's 2007 decision in In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007). That decision had established the standard for finding willful infringement, which is the predicate for awarding enhanced damages in patent infringement cases.
Seagate held that a plaintiff seeking enhanced damages must show that the infringement was willful under a two-pronged inquiry. Id. at 1371. First, the patent owner had to "show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent." Id. Objective recklessness would not be found if the accused infringer "raise[d] a substantial question as to the validity or noninfringement of the patent" during the infringement proceedings. Halo Elecs., 579 U.S. ___ (slip op., at 5). Second, if it could establish objective recklessness, the patent owner then had to show, again by clear and convincing evidence, that the risk of infringement "was either known or so obvious that it should have been known to the accused infringer." Seagate, 497 F.3d at 1371.
The Supreme Court concluded that the Federal Circuit's willfulness test was "unduly rigid" and "impermissibly encumber[ed] the statutory grant of discretion to district courts." Halo Elecs., 579 U.S. ___ (slip op., at 9). The problem with the prior test, according to the high court, was that it "require[d] a finding of objective recklessness in every case" before a court could award enhanced damages. Id. The Court reasoned that the language of the statute contained no such explicit limit or condition on when judges could make such awards. Id. at 8. Rather, 35 U.S.C. § 284 states only that a "court may increase the damages up to three times the amount found or assessed" and thus gives district courts discretion in awarding enhanced damages.
The Supreme Court also reasoned that the previous test allowed defendants to escape enhanced damages by pointing to a reasonable defense developed only during litigation. Under Seagate, the objective recklessness inquiry could be based on the "record developed in the infringement proceeding[s]." 497 F.3d at 1371. According to the Supreme Court, this allowed a person who willfully infringed a patent to escape enhanced damages as long as he could "muster a reasonable (even though unsuccessful) defense at the infringement trial" — "even if he did not act on the basis of the defense or was even aware of it." Halo Elecs., 579 U.S. ___ (slip op., at 10). The proper focus of the inquiry, the Court noted, should be on what the accused infringer knew at the time of the infringement, rather than on defenses later presented at trial. Id.
Accordingly, the Supreme Court concluded that, in certain cases, the subjective willfulness of a patent infringer could warrant enhanced damages — without regard to whether his or her infringement was objectively reckless. Id. This change allows an award of enhanced damages in certain cases involving deliberate infringement, even though an "independent showing of objective recklessness" may be unavailable or difficult to prove.
Although the decision whether to award enhanced damages is within the district court's discretion, the Supreme Court cabined that discretion by holding that enhanced damages should be limited "to egregious cases of misconduct beyond typical infringement" and should not be awarded in "garden-variety cases." Id. at 15.
AMENDED BURDEN OF PROOF
In addition to abandoning the prior test, the Supreme Court rejected the clear and convincing evidence standard required by Seagate. The Supreme Court held that enhanced damages need be proven by a preponderance of the evidence. Id. at 12.
AMENDED STANDARD OF APPELLATE REVIEW
The Supreme Court also addressed the standard for appellate review. Under Federal Circuit precedent, an award of enhanced damages was subject to trifurcated appellate review. Id. at 5. The first prong of the willfulness test, i.e., objective recklessness, was reviewed de novo. Id. at 5-6. The second prong, i.e., subjective knowledge, however, was reviewed for substantial evidence. Id. at 6. And the ultimate decision to award enhanced damages was reviewed for an abuse of discretion. Id.
The Supreme Court rejected the Federal Circuit's three-part framework for appellate review and held that enhanced damages awards should be reviewed on appeal for an abuse of discretion. Id. at 12-13.
CONCLUSION
The Supreme Court's decision in Halo allows for an award of enhanced damages in certain cases without establishing objective recklessness, amends the burden of proof for establishing willfulness from a clear and convincing evidence standard to a preponderance of the evidence standard, and makes clear that the district court's decision whether to award enhanced damages is reviewed for abuse of discretion.
Brexit and Your European Trademarks
By Amanda Phillips, Joyce Liou, and Jennifer Lee Taylor
The United Kingdom has voted by a narrow majority to leave the European Union ("Brexit"). But the process of Brexit will take time, and the implications for our clients' businesses will also unfold over time. Our MoFo Brexit Task Force is coordinating across all of our offices and working with clients on their key concerns and issues, now and in the coming weeks and months. We will also be providing MoFo Brexit Briefings on a range of key issues. We are here to support you in any and every way that we can.
The European Union Trademark ("EUTM") is possibly the most widely used vehicle worldwide to protect trademark rights. A single application filed in the European Union Intellectual Property Office ("EUIPO") in Alicante, Spain provides protection in the 28 member countries of the European Union ("EU"). In view of the UK Brexit vote on June 23, 2016, you might be wondering what this means for trademarks that you have protected via an EUTM. First and foremost, you should know that, as of now, your trademark rights are secure. Last week's vote was only the first step in a multi-stage process which would culminate with the United Kingdom withdrawing as an EU member state. Your EUTM will protect your trademark rights in the United Kingdom until the United Kingdom formally exits the EU.
As for the long term, EU trademark practitioners currently think that it is highly likely that the final terms of the United Kingdom's exit from the EU will include some mechanism to address the protection of EUTMs in the United Kingdom. The simplest solution would be for the United Kingdom Trademark Office to register as United Kingdom national registrations any marks that were previously registered as EUTMs, while preserving their priority dates. But this could create conflicts within the United Kingdom trademark registry and may not be feasible. Further, the costs, procedures, and timeline for such a transition have not been worked out, and the scope of such an administrative undertaking would be enormous.
Because of these uncertainties, and in order to minimize any risks associated with this changeover, anyone who owns EUTMs and views the United Kingdom as an important market may want to consider filing for United Kingdom trademark registrations now, rather than waiting to see what happens when the United Kingdom formally exits the EU. And for new trademarks, we recommend filing in both the EU and the United Kingdom if the United Kingdom will be an important market for you. This increases costs only slightly and clearly secures a priority date for the United Kingdom.
We encourage you to reach out to us with any questions on your filing strategies.
Show Me the Money— Kirtsaeng and Supreme Court Guidance on Attorneys ' Fees Awa rds in Copyright Cases
By Michael Jacobs, Eric Acker, and Dean Atyia
WHAT'S NEW
In June, the Supreme Court provided substantial guidance in an unsettled area of law by holding that, in deciding whether to award attorneys' fees under the Copyright Act's fee-shifting provision, 17 U.S.C. § 505, a court should give substantial weight to the objective reasonableness of the losing party's position, while still taking into account all other circumstances relevant to granting fees. Kirtsaeng v. John Wiley & Sons, Inc., No. 15-375 (U.S. Jun. 16, 2016).
BACKGROUND
This story begins with an enterprising college student buying foreign textbooks on the cheap to sell in the United States for a profit. Petitioner Supap Kirtsaeng came to the United States from Thailand to study math at Cornell University. Respondent John Wiley & Sons ("Wiley"), an academic publishing company, sells textbooks to students in U.S. and foreign markets. Kirtsaeng noticed an arbitrage opportunity: Wiley's textbooks sold in Thailand were virtually identical to their American counterparts, but much cheaper. Kirtsaeng asked family and friends to buy the foreign editions so that he could sell them to his fellow students for a profit.
Wiley discovered what Kirtsaeng was doing and sued him for copyright infringement, claiming that his activities violated Wiley's exclusive right to distribute its copyrighted textbooks. Kirtsaeng invoked the first-sale doctrine as a defense. Under that doctrine, the lawful owner of a book or other copyrighted work is able to resell or otherwise dispose of the work as he sees fit. In short, Kirtsaeng argued that if he bought the book lawfully, he could sell it to whomever he wished.
But at the time Kirtsaeng raised the defense, lower courts were conflicted as to whether the first-sale doctrine applied to foreign-made books, and the Supreme Court ultimately divided four to four the first time it addressed the issue in Costco Wholesale Corp. v. Omega, S.A., 562 U.S. 40 (2010). To settle the continuing conflict, the Court granted Kirtsaeng's petition for certiorari on the issue and established that the first-sale doctrine allows the resale of foreign-made books, just as it does domestic ones. Kirtsaeng thus prevailed in defending against Wiley's infringement claim.
TO THE VICTOR GOES THE SPOILS?
Returning victorious to the district court, Kirtsaeng invoked section 505 to seek more than $2 million in attorneys' fees from Wiley. The district court denied his motion, and the Second Circuit affirmed. The Supreme Court granted certiorari because lower federal courts had followed a variety of different approaches when determining whether to award attorneys' fees. Section 505 states that a district court "may . . . award a reasonable attorney's fee to the prevailing party." It authorizes attorney fee-shifting, but without specifying standards that courts should adopt, or guideposts they should use, in determining when such awards are appropriate. The Court explained that the statutory language "connotes discretion" and lacks any "precise rule or formula" for awarding fees. Kirtsaeng, No. 15-375 at 4 (quoting Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994)).
Yet the Court had previously recognized that there are limits on a court's discretion. A district court may not award attorneys' fees as a matter of course but must instead make a case-by-case determination. Id. A court also may not treat prevailing plaintiffs and prevailing defendants differently; litigants should be encouraged to litigate to the same extent whether they are plaintiffs or defendants. Id. Additionally, several nonexclusive factors should inform a court's decision: "frivolousness, motivation, objective unreasonableness[,] and the need in particular circumstances to advance considerations of compensation and deterrence." Id. But the Court recognized that there was "a need for some additional guidance" for lower courts.
The Supreme Court agreed with Wiley that, in deciding whether to award fees, a district court should give "substantial weight to the objective (un)reasonableness of a losing party's litigating position." Id. at 6. In so ruling, the Court rejected Kirtsaeng's argument that district courts should give special consideration to whether a lawsuit resolved an important and close legal issue and thus meaningfully clarified copyright law.
The Court reasoned that the objective-reasonableness approach advances the Copyright Act's goals because it both encourages parties with strong legal positions to stand on their rights and deters ones from weak legal positions from proceeding with litigation. According to the Court, when a litigant is clearly correct, the likelihood that he or she will recover fees gives him or her an incentive to litigate all the way, even if the damages at stake are small.
The Court also explained that the objectivereasonableness approach is more administrable than the "important and close legal issue" approach supported by Kirtsaeng because it would be difficult for a court to know at the end of a case whether a newly decided issue will have critical, broad legal significance.
The Court made clear, however, that objective reasonableness, while an important factor, is not always controlling. In any given case, even when a party's position is objectively reasonable, a court may still award attorneys' fees based on other relevant factors, and it may deny fees even though the losing party made unreasonable arguments. "Although objective reasonableness carries significant weight, courts must view all the circumstances of a case on their own terms, in light of the Copyright Act's essential goals."
WILEY SEEMS REASONABLE
Lower courts had concluded that Wiley's position on the first sale doctrine was objectively reasonable, especially considering that several courts of appeals and four Justices of the Supreme Court had agreed that the firstsale doctrine did not apply to foreign-made works. The Court nevertheless remanded the case so the district court could again review Kirstaeng's fee application— giving substantial weight to the reasonableness of Wiley's litigating position, but also taking into account all relevant factors.
THE CRUMBLING OF COLLABORATIVE COPYRIGHT AUTHORSHIP UNDER 16 CASA DUSE AND GARCIA
By Paul Goldstein and Joyce Liou
When is an author not an author? In 16 Casa Duse, LLC v. Merkin, the Second Circuit Court of Appeals held that a film director's contributions, which the parties conceded did not qualify as a work for hire or a joint work, also failed to qualify as an independently copyrightable work of authorship.1 While the court noted that the director "exercised a significant degree of control" over many of his film's creative decisions respecting "camera work, lighting, blocking, and actors' wardrobe, makeup, and dialogue delivery," these contributions did not constitute "a 'work of authorship' amenable to copyright protection" because "non-freestanding contributions to works of authorship are not ordinarily themselves works of authorship."2
The legal problem at the heart of 16 Casa Duse is that the Copyright Act nowhere sanctions the denial of protection to copyrightable expression on the ground that it is "non-freestanding." The practical problem created by the decision is that it throws into doubt the copyright status of the countless expressive contributions to collaborative works—computer code is a notable example—that for one reason or another fall outside the work for hire and joint work rubrics. The questionable status of these contributions can be partially, but never completely, repaired through the careful structuring of copyright assignments and licenses.
Ordinarily in the U.S., films fall into the work for hire category, with the director's contributions assimilated to those of the actors, screenwriter, composer, and other participants. Because the film in 16 Casa Duse failed to qualify under either of the Act's two branches of work for hire—as "(1) a work prepared by an employee within the scope of his or her employment," or as "(2) a work specially ordered or commissioned" for one of nine statutorily specified uses (of which a motion picture is one) "if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire"—the court was unable to assimilate the director's rights to an employer's.3
A collaborative work that fails to qualify as a work for hire will often nonetheless qualify as a joint work, defined by the Act as "a work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole."4 The film in 16 Casa Duse would presumably have met this test, and the director would have been a joint owner, but for an unusual twist that the Second Circuit had in Childress v. Taylor earlier added to the statutory definition: for a joint work to exist there must also be an "intent of both participants in the venture to regard themselves as joint authors."5 Such intent was missing in 16 Casa Duse.
The Childress gloss aimed to resolve a practical problem created by the statutory definition of joint work. Read literally, the statutory definition would give book editors and other secondary contributors to a work's expression the (presumably unintended) status of joint owners. But, in removing this possibility by adding a requirement that they intend legally to be joint authors, Childress created a greater practical problem than the one it resolved. If the editor's contribution of expression does not make her a joint owner (or an employee), she must by default be an independent owner of the portion of the work that she contributed, with the power—that she would not have as a joint owner or employee—to prevent the work's exploitation. This was the corner into which Childress painted the 16 Casa Duse court, and the court escaped the corner by holding that the contribution was not a copyrightable work.
The Ninth Circuit followed Childress in Aalmuhammed v. Lee, holding that a consultant who had contributed copyrightable expression to a feature film, presumably intending that it become an inseparable part of the film, was nonetheless not a joint owner because there was no evidence of the Childress-required intent to be a co-author.6 To the Childress requirement, the Ninth Circuit then added one of its own: that the putative co-author have "superintendence" of the work or be its "inventive or master mind"—elements more traditionally associated with works for hire than with joint works.7 Subsequently, in Garcia v. Google, Inc., a Ninth Circuit en banc panel held that an actress could not claim copyright ownership of her performance in a film.8 The court observed that the animating concern in Aalmuhammed had been that defining ownership differently would "fragment copyright protection" for a unitary work "into many little pieces."9
Garcia v. Google and 16 Casa Duse, and the circuit precedent on which they respectively rely, establish categorical rules of law. But, just as the motive behind these decisions is a practical concern over fragmenting ownership into "many little pieces," so too does a practical solution exist for bridging the lacunae in ownership created by these rules. A producer of a film or other collaborative work, concerned that its product will legally qualify neither as a joint work nor as a work for hire, may nonetheless roughly emulate these legal categories by securing assignments of copyright ownership from all of the product's contributors and then allocating rights and liabilities among them so that the resulting network of rights and liabilities resembles those that respectively attach to joint works and works for hire. (A contributor should readily agree to such an arrangement if the alternative, as in 16 Casa Duse and Garcia, is to deprive him or her of any economic stake in the creative product.) The approximation will never be perfect—unlike a true work for hire, for example, the contractual arrangement will be subject to a statutory termination of transfer—but the approximation will often suffice to achieve the business goals of all the parties to the collaborative production.
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Footnotes
1 16 Casa Duse, LLC v. Merkin, 791 F.3d 247, 255-56 (2d Cir. 2015).
2 Id. at 256, 257, 260.
3 Id. at 256.
4 See 17 U.S.C. § 101.
5 See Childress v. Taylor, 945 F.2d 500, 507 (2d Cir. 1991).
6 See Aalmuhammed v. Lee, 202 F.3d 1227, 1232, 1235 (9th Cir. 2000).
7 Id. at 1235.
8 Garcia v. Google, Inc., 786 F.3d 733, 740 (9th Cir. 2015).
9 Id. at 742.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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