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TheTMCA.com | Legal Developments in the World of Trademarks, Copyrights, Advertising and Beyond In the coming months, the U.S. Supreme Court is expected to issue a decision in Mission Product Holdings, Inc. v. Tempnology, LLC that may (yes, we said "may") resolve a circuit split as to whether trademark licensees can continue using trademarks after a licensor in bankruptcy rejects the license agreement under bankruptcy law. The TMCA has been following this case from the first decision by the U.S. Bankruptcy Court for the District of New Hampshire in 2015, through the decision by the Bankruptcy Appellate Panel for the First Circuit in 2016, the First Circuit's decision in early 2018, and the Supreme Court's grant of certiorari in late 2018. Along the way, we have explained that the Bankruptcy Code gives debtors the power to "reject" executory contracts (which relieves a debtor from its contractual obligations), and that federal courts have been divided for years regarding the effect of rejection of trademark license agreements. The blame for the circuit split can be placed largely on Congress. That is because the Bankruptcy Code—which Congress drafted—contains specific provisions for the post-rejection treatment of license agreements for "intellectual property," but those do not cover trademarks, although they cover patents, copyrights, trade secrets, and mask works, among other things. When Congress implemented those protections, it noted the deliberate omission of trademarks from the statute because the issue warranted "more extensive study," which we wrote about at length in our prior posts. The Supreme Court heard oral arguments in Mission on February 20, 2019. At oral argument the Justices focused primarily on the effect of a brand owner/licensor's breach of a trademark license agreement in bankruptcy, as a debtor, as opposed to the effects of breach outside of bankruptcy. In addition, the arguments also touched on general contract law, the "negative inference" of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985) (see our previous posts for more on this case), and relevant provisions of the Bankruptcy Code, specifically sections 365(g) and 365(n), which concern, respectively the effect of a debtors' rejection of a contract generally and rejection of an intellectual property license for intellectual property other than trademarks. So you don't have to listen to the entire oral argument, we have selected the most interesting questions and issues, which, in our opinion, provide some tea leaves for those of us following the case: Off the bat, Justice Alito asked Mission whether a debtor-licensor's cessation of quality control activities would imperil a trademark. Before Mission could answer, Justice Sotomayor asked Mission whether rejection of a trademark license revokes approval by the licensor that is a condition to the license. Mission responded that quality control obligations are imposed by trademark law, and not solely by contract, and rejection entitles a debtor-licensor to free itself only from contractual obligations. Mission added that, outside of bankruptcy, a licensor's breach of a license agreement (breach being the effect of rejection on the agreement mandated by the Bankruptcy Code) does not take away a licensee's right to use a trademark. Chief Justice Roberts asked Tempnology whether a licensee can continue using a trademark after rejection, so long as the licensee carries out quality control as the debtor-licensor did. Tempnology responded that ceasing quality control abandons a trademark, causing it to lose value and its status as a trademark (which didn't exactly answer Justice Roberts' question). Justice Breyer asked whether a person can use an abandoned mark, and Tempnology conceded one can. Several Justices pressed Tempnology for authority that a trademark licensor could unilaterally terminate a license agreement outside of bankruptcy by ceasing quality control. Tempnology relied on the general notions of trademark law, including a trademark's signification of its owner and an owner's duty to exercise control over the trademark, which did not appear to relieve the Justices concerns. Justice Sotomayor asked Tempnology, at two separate points, how the Court could limit its ruling to trademark agreements, e. rather than "any number of other contracts." Tempnology stated it was only asking the Court to adhere to precedent that the effect of rejection is that the contract is no longer enforceable, but she did not seem to be persuaded by that argument. Questions by Justices Gorsuch and Sotomayor as to whether the trademark issues are moot signaled a possibility that the Court may not reach a decision on the effect of rejection. The Justices' questions intimated that Mission may not have suffered damages, because Tempnology refused to supply Mission with goods that could bear the licensed mark prior to the rejection. Following the rejection, Mission did not use the trademark, but argued it was damaged because it was wrongly prevented by the bankruptcy court's decision from using the trademark following rejection, including on goods it could have ordered from suppliers other than Tempnology. Tempnology asserted the issues are moot because Tempnology took no action against Mission that prevented Mission from using the trademark. Given that the Court granted cert for this case, we would be surprised if the Court declined to resolve this Circuit split and instead ruled on mootness grounds. Throughout the argument, the Justices and the litigants searched for property law scenarios analogous to the rejection of a trademark license agreement by a debtor—an apartment lease, a McDonald's franchise, a photocopier lease, and an igloo lease. As to the igloo, Justice Breyer likened a licensor's quality control obligations to a promise to air condition an igloo, stating, ". . . you break your promise to air condition, no more igloo." (The amicus curiae arguing in support of Mission who received this analogy disagreed, responding that a licensee can continue using a trademark because abandonment is the only consequence of ceasing quality control and that takes some time.) These discussions—and the general struggle to find a suitable analogy—highlighted the unique nature of trademark rights as property and the Bankruptcy Code's treatment of various contract rights respecting property. The oral argument provided a glimpse of the Court's unenviable task of filling in the blanks of the Bankruptcy Code that Congress left to the Courts. While the Court is clearly concerned with reaching a result that makes sense under notions of trademark, property, contract and bankruptcy law, we are eager to see how it resolves their conflicts. Once the Court reaches a decision, you should expect to hear from us again.
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IP Breakdown | A Legal Blog by Aaron | Sanders, PLLC Who, What, Why AND Where One of the peculiar features of the U.S. legal system is that, while certain fields are governed exclusively by federal law—i.e., law that applies everywhere in the U.S.—others are governed exclusively by state law. That means, obviously, that there are fifty sets of laws governing a given subject, including some of the heavy-hitters, like contract law. And it get's worse. Sometimes federal law coexists with state law. Sometimes federal law tries to push aside state law but doesn't quite succeed. And sometimes state laws try to push up through federal law, with mixed success. Oh, and sometimes federal courts can hear state cases, but the two court systems use different procedures! You can see why law students spend a significant fraction of their time on various aspects of this "federalism." quotidian But I'm here to talk about a relatively simple aspect of having 50 different sets of laws for the same thing. What happens when the people involved are from different states, and the states' laws are significantly different? The Right to Work Where You Want This issues comes up in two different ways in the fairly recent case, General Electric Co. v. Uptake Technologies, Inc.. The basic facts reveal a very common type of dispute. Some of the defendants used to work for General Electric or its subsidiaries ("GE") on some technology involving "connect[ing] heavy industrial equipment to cloud-based software and analytics," and yadda yadda yadda. Over time, they were recruited by Uptake Technologies (also a defendant), which was working on similar technology. When they were initially hired by GE, they promised not maintain certain information confidential, and they promised not to solicit other GE employees if they left. But (GE alleges) those that were recruited first by Uptake helped Uptake recruit the others, which would violate the anti-solicitation provision. But wait! Several of these individual defendants are residents of California. And California law won't enforce non-solicitation provisions! California believes that letting workers take their knowledge and talent wherever they want is most encourage that knowledge and talent to be applied most effectively. Something about free markets. But wait again! GE is headquartered in New York City, or maybe Boston, Massachusetts, or maybe even Fairfield, Connecticut, depending on the date and how you look at it. And in each of those states, non-solicitation provisions are OK, so long as they're "reasonable." How do you tell which law applies to a contract when the contracting parties are in different states? It turns out that's a really, really hard question! And there can only be one law governing a contract (normally). The general rule is the governing law is the law of the "state of contracting," which was developed back before fax machines, when the parties probably met face-to-face to negotiate and execute the contract. But it has almost no application today, when negotiations are carried out by phone or email and the contract can be signed in different states. Fortunately, we don't have to guess. The contracts each had a provision specifying that New York law applied. So, end of story. Sorry to get you excited. Except that's not the end of the story. When you choose the governing law in a contract, a court can override that in favor of another state's law under the right circumstances. But, wait—where does that rule come from? It has to come from somewhere. There's no federal law governing what to do when two state laws conflict, as you might very reasonably expect. No, the source of the law governing conflicts of laws is…state law. New York's? California's? No—it would be the law of the state where the lawsuit was filed, which in this case is… Illinois! So, we're applying Illinois law to figure out whether to apply New York or California law. Illinois law says that it'll go with the chosen law (New York) unless it would be contrary to the "fundamental policy" of the law of another state with an interest in the case (California). Obviously, "fundamental policy" has to be more than just the existence of law that would lead to a contrary result. It's 100% the case that California greatly values employees' right to change jobs frictionlessly. Anyone who has conducted business in California knows this is a key—dare I say, fundamental—feature of California business. Dozen of reported court decisions back this up. And, yet, the court here found that, at least as applied to non-solicitation decisions, this was not a fundamental policy of California. That was because there is a stray mid-level appellate decision from 1985 kind of, sort of suggesting that maybe sometimes a non-solicitation provision might be OK under the right circumstances. The court recognized that this old decision has been well and truly overruled and generally regarded as a mistake. But its existence put enough doubt in the court's mind about California's commitment to employees' freedom of mobility that it's not quite fundamental enough to override the parties' choice of New York law, under Illinois law. Got that? This is an unusual case. Normally, it's a mug's game to try to guess which state's law will benefit you more in case of a breach of the contract. Usually, you don't know until it's been breached, and it's not worth paying your lawyer to guess at every possible breach and compare laws. Besides, even though there are 50 state laws, there's a lot of overlap, since most of them arise from the same legal foundations. Fate and the Law: Inevitable Disclosures We're not done yet. While the individual defendants were focused on attacking the New York choice-of-law provision, they were also attacking GE's claims for misappropriation of trade secrets. Now, at this stage, all we have is the complaint, and trade secret claims awkward to plead. On the one hand, a defendant has a right to know what it's accused of doing, and that includes knowing what alleged trade secrets it allegedly misappropriated (and how). On the other hand, complaints are public documents, and exposing a trade secret to the public is the equivalent of exposing a vampire to sunlight. Courts are slowly reaching a consensus that all the plaintiff needs to do in the complaint is describe generally the trade secrets at issue, with enough detail that the defendant has a pretty good idea what they are but not enough detail that the public can figure them out. This works on the theory that, if the defendant really did misappropriate the trade secrets, it'll recognize the trade secrets with enough hints. GE had another problem pleading its trade secrets claim. Sure, you don't have to detail the trade secrets, but you do need to say which defendants misappropriated which trade secrets. It's not a test, but GE can probably take reasonable guesses about which defendants have done what. GE argued it didn't have to get that specific because, under the doctrine of "inevitable disclosure," it doesn't matter whether a given defendant has yet to misappropriate a trade secret, only that such misappropriation will eventually happen. Thus, all of the individual defendants have effectively misappropriated all of the trade secrets, because they're alleged to all be on the verge of doing so. Inevitable disclosure is one of the most divisive concepts in intellectual property law. It's almost the exact opposite of California's right employee mobility. Taken to an extreme, once you've been exposed to a certain level of your employer's trade secrets, you can never work for a competitor in the same capacity. It was briefly in vogue in the 1990's, but courts have generally shied away from it since then, and many courts have been downright hostile to it. But guess where it the 1990's vogue for inevitable disclosure started? Illinois. The court ruled that Illinois law applied to GE's trade secrets claim. But not because the court happened to be in Illinois. But because Uptake is based in Illinois. Which is also probably why the lawsuit was brought in Illinois, but jurisdiction (judicial power over a defendant) is different from choice of law (which law applies to a given legal question). Defendants can rarely avoid application of their own state's laws! What about those choice-of-law provisions? Wouldn't New York law apply? Maybe! It would depend on the language of those provisions. Typically, choice-of-law provisions are drafted to apply only to the contract, e.g., "New York law shall govern the construction and enforcement of this contract." But rarely, it's broader, e.g., "New York law shall govern this contract and the parties' relationship for all matter related to the subject matter of this contract." In this case, the choice-of-law provision was of the more typical, narrow type. So, to conclude, Illinois law provides that New York law governs the contact claims, despite California's deep fundamental policy, and that Illinois law governs the trade secret claims, despite the New York choice-of-law provision. Thanks for reading!
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