John Farmer's Column: 2010 Leading-Edge Law Group, PLC Attorneys Richmond Virginia

China has earned a reputation for flouting the intellectual property rights of non-Chinese companies. Surely you’ve heard of Chinese knock-offs of famous Western brands of consumer goods and software.

But here’s a twist: Some bad actors in China use Chinese intellectual property rights – trademarks specifically – to try to stick up Western companies for payoffs.

The problem arises when a non-Chinese company – let’s say a U.S. company – goes to China to have something manufactured for export and sale outside of China. Such outsourcing of the making of a company’s products is called “contract manufacturing.”

Many U.S. businesses, including some headquartered in the Richmond area, use Chinese contract manufacturers to have their products made at low cost. Some companies use “sourcing agents” to find appropriate Chinese manufacturers and to have quality control performed on the manufacturing.

Usually the Chinese contract manufacturer affixes a trademark to the manufactured goods in the manner specified by the U.S. customer. For example, if my company hired a Chinese contract manufacturer to make my company’s FLASHWAKE-brand swim fins, I’d want that trademark embossed on the fins exactly as I specify.

If I’m not careful with my trademark, legal troubles could arise in China. In one scenario, a bad actor in China could discern that I plan on having my product contract manufactured in China. That bad actor could obtain a Chinese trademark registration for FLASHWAKE and then use that trademark to block me from having my product contract manufactured in China. Or that bad actor might use its Chinese trademark registration to prevent me from exporting the branded swim fins to the U.S. In either case, that bad actor then could demand that I pay him to get out of the way.

In another scenario, the Chinese contract manufacturer that I hired might obtain a trademark registration in its own name for the FLASHWAKE trademark. No problem might arise as long as I continue to use that contract manufacturer’s services. But if I decide to switch to another Chinese contract manufacturer, the first contract manufacturer might assert its Chinese trademark registration to block me from switching. That first contract manufacturer might even use this leverage to try to raise its prices.

If these things happen, there are legal remedies available in the Chinese legal system, in theory at least. You might be able to get the illicit, blocking Chinese trademark registration cancelled. If you detect that trademark registration effort before it’s complete, you may be able to oppose it. Yet, in addition to being potentially expensive, these processes can be slow. If you’re in a hurry to get your product to market, you don’t have the time to wait on the Chinese legal system.

The key to avoiding such problems is to obtain your own Chinese trademark registration for the trademark that will be embossed on your goods. You should register your trademark both in English and in Chinese translations. This will require hiring a Chinese trademark agent. And, before you seek a Chinese trademark registration, you should have your Chinese trademark agent check to make certain your chosen trademark will not be problematic based upon trademarks that already are registered or applied-for in China.

You should do this as early as possible. Bad actors in China are on the lookout for stick-up opportunities. They may pounce as soon as they discern that a company may be headed for contract manufacturing in China.

You may wonder how someone in China who has no connection to a trademark can obtain a trademark registration for it. The reason lies in the difference between U.S. trademark law and the trademark law of most of the rest of the world. The U.S. has a first-to-use system, while most other countries have a first-to-register system.

In the U.S., trademark rights are created by use. The first party to use a trademark for certain goods gets the trademark. Trademark registration just strengthens your rights. To get a trademark registration in the U.S., generally you have to prove you are using your trademarkon the claimed goods.

Outside of the U.S., such as in China, generally you can obtain a trademark registration just by applying. No proof of usage of the trademark is necessary. Thus, it’s wise to apply for trademark registration in non-U.S. countries ASAP.

You can use a U.S. trademark registration application to buy six months before having to apply in foreign countries. There also are ways to submit an international trademark registration application to multiple foreign countries with one central filing.

That’s sophisticated stuff. The key takeaway is that, if you don’t take action to secure trademark registration before going to China, your cost-savings plans could backfire.

If I had a nickel for every time I’ve said this, I’d be retired already: You don’t create a trademark by registering it. Registration just strengthens the common-law rights you obtain by using a trademark on the goods or services you sell.

Yet, you can file a federal trademark registration application that reserves your right to a trademark before you begin using it. This is called an “intent-to-use” application, or “ITU” in trademark-speak.

An ITU is a wonderful business tool because it allows you to get dibs on a trademark – a product or service name – before you launch it as your new brand. In fact, going through the ITU application process may detect some (but not all) of the objections others might raise to your new trademark.

You can apply for an ITU on the website of the U.S. Patent and Trademark Office – www.USPTO.gov. Yet, as with many legal things, in theory you can do this without a lawyer, but there are pitfalls.

One particular ITU pitfall has claimed many victims recently. At the time you apply, you must have a genuine intent to use your trademark on every good and service you claim in your application. (You can’t register a trademark for everything under the sun; you have to declare the goods and services you will brand with your trademark.)

Thus, you can’t use an ITU to reserve a trademark without having a plan to use it on goods or services that either you will sell or that will be sold by folks working with you, such as licensed manufacturers.

For example, you can’t use an ITU to reserve the trademark PULSEPUSH for swim fins for the sole purpose of selling your naked trademark rights to a swim fins manufacturer.

Often, applicants who have their ITU’s shot down over a violation of this genuine-intent rule are trying to run a trademark stick-up, so they get what they deserve. They’re trying to lock up desirable product names in hopes of selling those names.

But sometimes legitimate entrepreneurs sow fatal flaws into their ITU’s because they don’t document their plans to use the applied-for trademark on every good and service claimed in the ITU application. Anyone filing an ITU should create this documentation contemporaneously with the filing of the application.

The best way to document your branding intentions is to write a business plan that shows how you intend to utilize the trademark. You aren’t bound by that plan. You only need to be able to show that you had a plan.

If you can’t prepare a full business plan, at least write a memo (perhaps even an email) that outlines your plans for using the trademark. You could send the memo to someone who can verify the date of receipt, such as a business associate or your lawyer.

Your plan needs to show how you intend to use your trademark on every good and service covered by your ITU. Thus, don’t overreach in your ITU by claiming goods or services that aren’t in your marketing plan.

The U.S. Patent and Trademark Office has rules for what qualifies as use of a trademark for goods and for services. You eventually will have to prove usage of your trademark to get a trademark registration.

The rules are harder to satisfy for goods. For example, using a trademark only in advertising for goods and not on the goods themselves generally won’t suffice. The details of these trademark-usage rules are a complex topic for another day.

Overall, there’s no reason for falling into this ITU pitfall once you know about it. It’s easy to quickly put something in writing that will prove your good faith intent regarding future trademark usage. Doing so could save your future trademark registration from being cancelled someday after you have made a significant investment in it.

Is anyone in your company using Facebook, LinkedIn or Twitter to promote sales? Does anyone provide you with free products or services so you can blog or tweet about them? Does your company provide freebies to online opinion leaders? If so, note that the Federal Trade Commission recently issued guidelines concerning such marketing and testimonials.

These guidelines cover conduct in a wide range of social media, such as Facebook, Twitter, LinkedIn, YouTube, message boards, blogs, posting comments on others’ blogs, posting comments on online news stories, and posting online product or service reviews (such as on Amazon.com or TripAdvisor).

The FTC’s guidance essentially boils down to this: Be forthcoming and honest about your employment and promotional relationships and about your product experiences.

Bad things can happen to violators. The FTC could sue both the seller and the poster, as could a state attorney general. Such a suit might result from a complaint by a competitor or a consumer advocacy group. You might violate a state consumer protection law, which could result in a class-action lawsuit. And even if you don’t get sued by anyone, it’s bad PR to be deceptive.

The most important thing is to require your employees who use social media for sales activity to disclose that they are employees acting for your company. Never fake independence.

Give sellers sample language to put in posts, such as “I’m a customer service representative for XYZ company.”

Require that the marketing department vet any claims that will be made. Make certain the marketing department understands the FTC rules on endorsements and testimonials.

Have a written policy on using social media for sales activity, monitor compliance and corral violators. Ignoring sustained rogue behavior could cause legal trouble for your company.

All promotional relationships between sellers and their online agents should be disclosed. For example, if a company gives a free gizmo to a blogger and the blogger posts a review, the blog post should note that the manufacturer supplied the item free of charge.

It would be best for anyone who regularly posts reviews (such as on a blog or Facebook) to post a permanent disclosure on how he handles promotional relationships. Place a link on your blog called “Promotional Relationships Statement” that leads to a page that describes how you handle this issue. Put such a disclosure on your “info” page in Facebook.

Any value given to the reviewer should be disclosed by the reviewer. If the value is more than minimal, the disclosure should occur in the body of the post even if the reviewer also uses a blanket disclosure. For example, say “Acme Corp. sent me a free Thingamajig. Here’s how it worked for me . . . .” To be safe, the seller should supply such stock disclosure language to the reviewer.

If the value is small and typically given to that kind of reviewer, such as a free theater ticket to a theater critic, disclosure only in a general promotional policy notice should suffice.

As with the employment situation, the seller should have a written policy that it follows consistently and enforces regarding online promotional relationships.

The seller should watch for reviewers with which it has promotional relationships who make unsubstantiated or overblown claims about the seller’s products or services (such as “this herbal remedy cures the common cold”). The FTC no longer permits “results not typical” disclaimers for amazing claims, so claims should be well grounded.

The FTC says sellers can be held liable for violations by their online promotional partners, so sellers can’t turn a blind eye to online promotional partners who don’t follow the rules.

How do you make all such disclosures when you have only 140 characters for a tweet? Driven by the Word of Mouth Marketing Association, a consensus is emerging that you should use a hashtag that tips Twitter cognoscenti to your relationship with the seller, such as #spon to label sponsored tweets, #paid for paid tweets and #samp when you received a free sample.

Is it time for you to start worrying about someone infringing upon your English-language trademark in Spanish? In other words, should you now worry about someone copying the distinctive name of your business, product or service in Spanish for selling to the Hispanic community?

For example, if you make and sell STURGEON brand swim goggles, should you be on the lookout for someone selling ESTURIÓN brand swim goggles?

Based upon U.S. demographics, it’s inevitable that many U.S. English-language trademarks will get mimicked in Spanish. According to the U.S. Census Bureau, as of 2007, 35 million American residents age five and older speak Spanish at home, which is 78% of all Hispanics residing in the U.S. The Census Bureau also reports that more than one out of every two new people added to the U.S. population between July 1, 2007, and July 1, 2008, was Hispanic.

Given those numbers, it may be lucrative (albeit usually illegal) to free-ride off a valuable English-language trademark in seeking sales in the Hispanic community.

This raises two questions: How close does the Spanish translation have to be to constitute a trademark infringement? And how can you watch for Spanish-language infringements?

To be too close, the Spanish-language translation must be a direct and literal translation. And if the Spanish-language translation introduces a new meaning, it may be hard to attack successfully.

If your English-language trademark is descriptive or nearly descriptive of what you sell, you’ll have a hard time stopping someone from branding the same thing with the same name in Spanish. If you brand your jeans under the name RUGGED PANTS, you may have a hard time stopping the use of the name PANTALONES RESISTENTE for jeans.

The legal rules on closeness of translation are subjective and contain several factors, so you may need legal help to discern what’s too close. A court once held that using the name EL SOL for clothing was too close to the existing brand SUN for shoes. On the other hand, the same court once held that using TIA MARIA (“Aunt Mary” in Spanish) for the name of a Mexican restaurant was not too similar to the brand AUNT MARY’S used for canned vegetables.

You must start with having a solid English-language trademark, preferably one you have federally registered. That’s a subject for another day.

Next you need to get good English-Spanish translations of your trademark, so you’ll know what to look for. You might come up with more than one translation worth watching.

Various online services such as Google offer translation tools. Yet, it’s best to get translations from a Spanish speaker who is familiar with the dialects of the relevant Spanish-speaking communities.

The best way to watch for any infringement of a trademark, whether in English or another language, is to hire a trademark watching firm. It can watch both in English and in translations you provide. Such services cost roughly $1200 a year. You may need legal assistance in assessing whether the hits produced by the service are too close to your trademark.

You can run a Google search in Spanish. You also can set up a Google Alert to notify you of any new use on the Web of a particular word or phrase, whether in Spanish or English.

You can watch for new trademark registration application filings for the Spanish translation on the website of the United States Patent and Trademark Office – www.USPTO.gov.

You can ask colleagues who speak Spanish and who are plugged into the Hispanic community to keep a lookout.

It’s just a matter of time before English-to-Spanish trademark infringement becomes a frequent event in the U.S. As with any potential trademark infringement situation, it’s best to keep your eyes peeled and to jump on any infringement before the infringer becomes so entrenched that it won’t stop without an expensive legal fight.

Appeals Court Decision Casts Doubt on eBay’s Advertising of Brand-Name Items

eBay tries to lure shoppers to its website by advertising that you can buy certain popular brand-name items there. A recent decision by a federal appellate court could cause eBay to stop or restrict such brand-touting advertising.

The top page of eBay’s website lists “Hot Brands” for sale there, such as Topps Cards and Apple iPod. This page also touts “free shipping on top picks,” and lists those items by brand name, such as Gymboree baby clothing and Michael Kors handbags.

eBay also has advertised through search engine sponsored-link ads that certain brands are sold on its website. Here, an advertiser such as eBay pays the search engine to display its “sponsored link” advertisement whenever someone searches for a particular term or phrase.

For example, at one point eBay was paying for this ad to display on Yahoo! whenever one searched for “Tiffany”: “Tiffany on eBay. Find Tiffany items at low prices.”

Many brand owners loathe such advertising and would like to stop eBay from selling anything carrying their brands. Such brand owners claim many items for sale on eBay are fakes.

Also, the sale of genuine merchandise on eBay puts price pressure on brand owners. It’s hard to charge a premium price when the same item can be bought slightly used or new on eBay for much less.

One premium goods merchant has sued eBay to attack after-market sales on eBay – Tiffany, the high-end jeweler.

In 2008, Tiffany lost a trial court case against eBay. Tiffany claimed that a large portion of purported Tiffany items on eBay were fakes and that, as a result, eBay was liable for trademark infringement and false advertising.

eBay won on all counts. The court essentially held that eBay was making tremendous efforts to purge fakes and that was good enough to shield eBay from liability.

Tiffany appealed. eBay won again on appeal in the trademark infringement claims. But the appellate court said eBay might be held liable for false advertising and sent the case back to the trial court for more consideration.

Specifically, the appellate court said eBay might be liable for its own advertising that touted sales of Tiffany items, as opposed to the individual listings for Tiffany items posted on eBay by sellers.

The court was concerned that eBay’s ads could create the misleading impression that all purportedly Tiffany items listed on eBay are authentic. The court suggested that eBay could include a disclaimer in its advertising, although it didn’t specify what might suffice.

Where does eBay go from here? In this case, it might be able to prove in the trial court that eBay’s advertising of Tiffany jewelry sales does not mislead consumers into believing that all the items for sale are genuine.

But eBay must be worried about having to bat 1.000 in these kinds of cases. If any brand owner whose brand has been advertised by eBay can show that consumers are misled into believing all the goods on eBay bearing its brand are genuine (when in fact some are fakes), eBay could lose. One loss could start an avalanche of attacks by brand owners.

What will eBay do? Does it stop all advertising that mentions the brands sold on its website? Does it limit its advertising to products that would be hard to counterfeit, such as sophisticated electronic devices?

Does it continue advertising brands but put in a vanilla disclaimer, such as “Use caution in selecting sellers to increase the probability of buying genuine goods”? Would such a disclaimer suffice legally if used? We don’t know.

eBay must make a money versus-risk-decision. Valued brands attract sales and command a price premium, so eBay naturally wants to advertise brands. But bad actors and ignorant actors will sell fakes on eBay, and eBay needs to avoid false-advertising liability for those fakes.

A recent federal case in Ohio demonstrates why you should be careful when getting a website developed. If your website developer uses someone else’s copyrighted material without permission, such as a picture, you could be held liable for copyright infringement.

The Ohio situation was a routine website development. A company hired a web developer to create a website. A picture was placed on the site that was someone else’s copyright property, and it was used without permission. Corbis, which was the licensing agency representing the picture’s owner, sued both the web developer and the company that commissioned the website, claiming copyright infringement. Corbis won against both parties.

The developer and hiring company blamed each other for supplying the copyrighted photo, but their disagreement made no difference. Regardless of who supplied the picture, each party played a sufficient role in the development to be liable.

How can you avoid this fate? Above all, realize that your company can be held liable if your web developer commits copyright infringement by using unlicensed material. Pointing the finger at the developer probably will not exonerate you.

Also, many web developers are freelancers or small businesses, so your company may be a more attractive target financially.

Several companies specialize in selling licenses to use copyrighted pictures. The biggest licensing agencies are Corbis and Getty Images. Both run substantial enforcement programs in which they use search technology (such as Picscout.com) to identify unlicensed users.

If you get caught with an unlicensed image on your site, you probably won’t be able to make the problem go away by taking down the image and pleading ignorance. Such ignorance isn’t a defense to a copyright infringement claim (although it could hold down your monetary damages exposure).

To settle the issue, expect to pay more than you would have paid for a license to use the photo. You might have technical defenses that would shoo away the licensing agency, but paying an attorney to find and raise those defenses might cost more than just paying a settlement fee.

On top of the settlement fee, you will have to pay a license fee if you want to continue using the photo on your website.

Of course, it’s better to prevent the problem from arising. Consider these tips:

Overall, maintain a probing attitude toward what’s included in your website. Doing so may save you from unanticipated hassles and legal expenses.

By John Farmer

What can be patented? The Supreme Court has wrestled with this question at least four times over the last half century, most recently just a few weeks ago in Bilski v. Kappos. Each of these decisions left uncertainty. It’s time for Congress to finally make the tough calls on what may be patented.

A patent is the exclusive right, for a limited time, to make, use, sell and import an invention, such as Thomas Edison’s light bulb. The Constitution gives Congress the power to determine what kind of inventions can be patented.

In 1952, Congress amended the patent law to permit patenting a “process,” which it defined as a “process, art or method.” Side note to legislators – what good is a definition that makes the defined term a freestanding part of the definition?

So what kind of process can be patented? Could someone get a patent on a method for swinging on a swing side to side? Yes, it’s been patented – U.S. patent number 6,368,227. The federal patent office later reexamined and revoked this patent after ridicule.

The big controversy today is whether you can get a patent on what’s called a “business method.” Often these inventions are ideas for analyzing or processing data, with the processing performed by a computer.

Indeed, the recent Supreme Court case concerned a patent application for taking a standard process for hedging risk and applying it to the energy market. The Supreme Court affirmed that this is not within the realm of what can be patented (“patentable subject matter” in lawyer-speak).

The Court restated an old chestnut regarding patentable subject matter – that you can’t get a patent on laws of nature, physical phenomena or abstract ideas. It held that the risk-hedging technology was just an abstract idea.

So what constitutes a mere abstract idea? The Supreme Court didn’t say. The federal appellate court that hears patent cases had tried to filter out abstract ideas from patentable subject matter by holding that, to be a patentable process, the process must be “tied to a particular machine or apparatus” or “transform a particular article into a different state or thing.”

Patent geeks sometimes call this the MORT test – the machine-or-transformation test. Yet, it isn’t clear what passes the test. Can you get a patent on a novel calculation you could perform mentally if a computer instead performs the calculation?

Worse yet, in the recent case, the Supreme Court said the MORT test is an important test for filtering out processes ineligible for patenting but not the sole test. It held that, even if an invention fails the test, it might be patentable if it’s not just an abstract idea. The Court provided no practical guidance on this exception.

Four justices wanted to hold that “business methods” are not patentable at all, although it’s not clear what constitutes a business method. Would this make software broadly unpatentable? Yet, five justices held that a business-methods exclusion cannot be fairly read into the patent statutes.

Congress has been considering potential patent reform for several years. Unfortunately, Congress seems incapable of acting on an intellectual property issue unless there is a consensus of all interested parties.

There is no consensus on business processes. Powerful interests oppose each other.

For example, should tax strategy be patentable subject matter? The American Institute of Certified Public Accountants would like such patents banned.

On the other hand, the American Intellectual Property Law Association (largely a trade association of patent attorneys) believes tax strategy should be patentable if it meets general patentability criteria.

Businesses need clear rules on what is patentable subject matter. Increasing uncertainly arising from the Supreme Court’s decision will cause even more litigation. Businesses don’t know if many existing patents are invalid. They don’t know whether they can obtain patents to protect their investments in some areas of innovation. They don’t know what aspects of business are free of patent concerns.

Due to the wording of the federal patent statutes, courts cannot provide the needed clarity. Congress must act.

Watch Out for Famous Trademarks – Big Companies Are Bringing and Winning More Trademark Dilution Cases

Sometimes you can make a marketing splash by mimicking a famous trademark in a way that doesn’t confuse consumers but still calls to mind the famous trademark. For example, a small New England coffee maker tried that with CHARBUCKS coffee. It claimed to be making fun of Starbuck’s purported over-roasting of its beans.

Owners of famous marks hate this mimicry and recently have won big cases against the mimics. Because of these victories, it would be best for folks picking new trademarks to be more leery and careful about this branding strategy.

This concerns what trademark lawyers call “trademark dilution,” which is a special protection given to famous marks.

Dilution differs from ordinary trademark infringement. It’s trademark infringement to employ a new trademark that’s confusingly similar to another trademark for the same or similar goods or services. For example, if I have used the trademark AQUAMATIC to brand swim goggles, you probably can’t use AQUAMANIC to brand a new line of swim goggles. Consumers would be confused.

Yet, under federal law, some trademarks are deemed to be so famous that you can’t brand even totally unrelated goods or services with an imitation of that mark, even if consumers would not think your goods or services come from the famous brand maker. Thus, forget about launching PORSCHE paper towels.

Federal law doesn’t prohibit mimicry of a famous mark in all cases. A parody sometimes passes legal muster. For example, a few years ago a court allowed continued use of the trademark CHEWY VUITON for inexpensive dog toys that parodied the hyper-expensive handbags of Louis Vuitton.

For the owner of a famous mark to win a dilution case, it has to show that the mimicry would harm its famous mark by either blurring the mark or tarnishing it.

You blur a famous mark by causing it to lose some distinctive power. If you could make a FERRARI piano, the FERRARI brand for cars might have less market appeal.

You tarnish a famous mark by associating it with lower quality or tawdry stuff. SONY would not like its image tarnished by someone making SONY fetish wear.

A 2007 amendment to federal law made it easier for owners of famous marks to stop trademark dilution before it causes significant harm. These owners have taken this opportunity to attack.

The VISA credit card service recently successfully stopped the use of EVISA for an online “multilingual education and information business.” The STARBUCKS coffee makers won an important (but not final) victory against CHARBUCKS. The National Pork Board successfully stopped federal trademark registration of THE OTHER RED MEAT for salmon. VICTORIA’S SECRET finally defeated adult novelty store VICTOR’S LITTLE SECRET.

Trademark dilution litigation is the sport of trademark kings. It’s really expensive to build a famous mark – to build a household word – such as McDONALD’S. And if you do, it’s really expensive to maintain dilution litigation.

The American Intellectual Property Law Association keeps statistics on what it costs to litigate trademark cases. While AIPLA does not break out trademark dilution cases from ordinary infringement cases, it separately reports on trademark cases where over $25 million is at stake. Presumably dilution cases are in that category.

AIPLA found that, in 2009, the median cost just to get a big trademark case through discovery is $750,000 per side. The median cost to take the case through trial is $1,400,000 per side.

First, it gives owners of famous marks the power to push away nearly all mimics, provided the famous mark owner is willing to pay a fortune in litigation costs. In theory, some parody products should be able to survive, but how can they afford the legal battle? This recent evolution in dilution law makes it harder to knock out dilution claims early in litigation.

Second, businesses creating new product or service names or taglines need to be even more careful to steer clear of famous marks. That or they need to be prepared to spend a mint defending their provocative new brands.

Third, if you just must launch a product that tweaks a famous brand, you’ll have to walk afine line as to what will be a permissible parody. That means paying for finely tuned legal advice.

Thus, if you’re thinking of starting a service that tricks out cars and calling that service MCSHADIES, you might want to reconsider that branding.

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