Archive for June, 2010

Dealing With a Licensor’s Bankruptcy

Monday, June 21st, 2010

In January, we explained how a licensee’s bankruptcy looks from a licensor’s point of view.

What about a licensor’s bankruptcy from a licensee’s point of view?

The landscape is quite similar, except that in the first scenario, the main concern of the licensor is usually whether it will be paid by the bankrupt licensee, while in the second scenario, the main concern of the licensee is usually whether it will continue to receive the benefit of the license from the bankrupt licensor.

Thanks to a revision of the Bankruptcy Code, the licensee can usually continue to receive most of the benefits of the license even against the wishes of the licensor, except if it is a trademark license.

A bankrupt licensor gets to make the same choices about an executory license agreement as does a bankrupt licensee– to assume it, to assume and assign (sell) it, or to reject it.

Assumption is usually good for the licensee because it retains the benefit of the license. The licensor will elect to assume if it thinks that the license is a revenue producer that is beneficial to its Chapter 11 reorganization efforts, or if it decides to sell the license to a third party as part of a Chapter 7 or Chapter 11 asset sale.

The licensor’s decision to reject is normally bad for the licensee, unless the licensor’s performance had become so erratic that the licensee wanted to end the relationship anyway.

However, the licensor’s decision to reject does not need to be the end of the story. The licensee can either: 1) accept the rejection and file a claim for damages caused by termination of the license (and probably receive no more than the proverbial ten cents on the dollar); or 2) elect to continue receiving the benefits of the license under Section 365(n) of the Bankruptcy Code, the so-called Intellectual Property Bankruptcy Act of 1988 that was enacted to prevent hardship to licensees when a license is a core part of their business.

If the licensee chooses to retain its rights under Section 365(n), then it can continue to use the licensed intellectual property as it existed on the filing date of the licensor’s bankruptcy for the remainder of the license term and any renewals, however it cannot force the licensor to provide new or affirmative performance. For example, a licensee of software can continue using the software as it existed on the bankruptcy filing date, but cannot compel the licensor to provide updates, maintenance, or indemnification against third party claims, even if required per the license terms.

The licensee’s election of Section 365(n) comes at a cost. It must continue to pay royalties per the original terms of the license with no offsets for the licensor’s non-performance of its affirmative obligations.

But as mentioned above, there is a big loophole in Section 365(n)’s protection of licensees. It only applies to licenses of “intellectual property” as defined in the Bankruptcy Code, which includes trade secrets, patents, copyrights, and mask works, but NOT trademarks. The reasons are somewhat murky, but it appears that since licensor quality control is an indispensable requirement for trademark licenses, Congress was concerned that trademark licenses were inherently incompatible with the “no affirmative obligations” concept of Section 365(n), so excepted them from that section’s shield. But the legislative history also hints that bankruptcy judges should have discretion to shield trademark licenses from rejection in the interests of justice. Also, where the trademark license is inseparable from associated copyright or patent licenses to a particular technology, the licensee might be able to retain its trademark license. But otherwise, the licensee of a rejected trademark license is probably out of luck.

A final note. A licensee that wants to terminate the license relationship cannot invoke the licensor’s bankruptcy, even if the license agreement stipulates that the licensor’s bankruptcy is a default that justifies termination. Bankruptcy law overrides such “ipso facto” provisions, and requires licensees to continue performing (including paying royalties) under the license agreement in the interim between the licensor’s filing for bankruptcy and its election to assume or reject, except if the licensee makes a motion and gets a court order terminating the license.

Fashion Licensing Corner: Legal Protection for Fashion Designs

Tuesday, June 15th, 2010

Fashion Pirate

This is truly the age of Fast Fashion.

Within days of an innovative new design appearing on a fashion runway in a global metropolis, that design is tweaked, manufactured in China, and loaded on the racks of Forever 21, H&M, Uniqlo, and other fast fashion retailers for under $50 in suburban malls around the world.

Can designers do anything to stop knockoffs? Under existing US intellectual property law, not much, but that could change.

Below is a thumbnail guide to US and European law protecting fashion designs.

The two most relevant forms of intellectual property protection for fashion designers are copyright and trademark law.

Current US Copyright Law

US copyright law protects “original expressions,” such as text or graphics, but not functional elements. Fashion accessories such as belt buckles or jewelry are considered decorative non-functional items that are eligible for copyright protection, while the shape and silhouette of apparel are considered to be “utilitarian” and therefore not eligible for copyright protection. Accordingly, copyright normally protects only the completely decorative elements of apparel, such as graphic images or patterns (including stitching) on fabric. Even then it is often easy to design around any potential copyright infringement claim. The standard of copyright infringement is substantial similarity between the original and the knockoff, specifically whether the knockoff has the same aesthetic appeal as the original to an ordinary observer. But if the knockoff has a distinguishable variation from the original, and is not merely a slavish copy, it will not infringe the original.

Proposed Amendment to US Copyright Law

The above state of affairs would change under the proposed Design Piracy Prohibition Act (HR Bill No. 2196), which would grant copyright protection for a term of three years to most varieties of apparel, handbag, and eyeglass frame designs (defined to include “the appearance as a whole” of an article of apparel) registered with the Register of Copyrights, and impose liability on designs that copy them, except if the accused design: 1) is original and not closely and substantially similar in overall visual appearance to a protected design; 2) merely reflects a trend; or 3) is the result of independent creation. The penalty for copying would be the greater of $250,000 in the aggregate or $5 per copy, and secondary liability could be imposed on parties that benefit from the infringements, including sellers and distributors.

The arguments for and against the bill echo the usual open source versus closed source IP arguments. Supporters of the bill, including many high-end fashion designers, argue that the ability of designers to profit from their designs is the greatest driver of fashion innovation, while opponents argue that the free exchange of ideas has always been the greatest driver of fashion innovation, and in any case, it is unlikely that a purchaser of a $100 Diane von Furstenberg knockoff would pay 10 times that amount for an original if the bill were enacted.

The debate may be moot. Similar bills have been introduced in the previous two sessions of Congress without passage, and no companion bill to HR 2196 has been introduced in the Senate during this session of Congress, so it has slight prospect for enactment in the near future. Update, 8/11/10: Senator Charles Schumer has introduced a fashion design copyright bill in the Senate (Senate Bill No. 3728), that he hopes to have enacted during the current session of Congress.

European Copyright Law

The European Community has already enacted an even higher level of IP protection for designers under the Community Design System than that proposed by the Design Piracy Prohibition Act. The Community Design System gives exclusive rights to the creator of a design (including but not limited to fashion designs) for three years in the case of unregistered designs and five years in the case of registered designs (renewable every five years to a maximum of 25 years). Some individual EC countries such as France have even more stringent laws. However, while they may disagree about the reasons, many analysts agree that the Community Design System has done little to deter knockoffs. In fact, three of the world’s biggest “fast fashion” retailers — H&M, Topshop, and Zara — are all headquartered in Europe.

US Trademark Law

While the purpose of copyright law is to protect original creations, the purpose of trademark law is to prevent consumer confusion as to the source or quality of goods and services. Thus, trademark law primarily protects the integrity of a designer’s name. Trademark law can also protect a design element of apparel, but not a single season design innovation, rather a design element that has become associated with a particular designer over time such that it is the designer’s “trademark.” Think for example of the Burberry beige, black, and red tartan pattern, or the Louis Vuitton gold “LV” initials and geometric shapes against a dark brown background. But in the case of Wal-Mart Stores v. Samarra Bros. Inc., the US Supreme Court ruled that there is a higher evidentiary hurdle to establish trademark protection for an apparel design element compared to a word or a packaging design trademarks. Conversely, it is comparatively easy to secure trademark protection for the words or logo on a fashion label. Which explains why many famous fashion designers often use their “label” as a prominent design feature of their fashions. They are fully aware that copyright law is unlikely to prevent knockoffs of the cut or silhouette of their designs, but that trademark law is likely to punish pirates of their names. The standard of trademark infringement is whether the challenged trademark (label, packaging, design element) is likely to confuse consumers that the product or service was produced by or originated with the owner of the accusing trademark.

Takeaway: unless copyright law changes, it will be difficult for fashion designers to knock out knockoffs, but trademark law gives them plenty of ammunition to sink label pirates.

License Drafting Rule No. 1: Don’t Say 専用使用権 Unless You Mean It

Thursday, June 3rd, 2010

Just like Alberto-Culver, we don't know what 専用使用権 means, but our hair looks great!

日本語訳はこちらへ>>>

We have said it before, because it is true. Seemingly small differences in contract wording lead to major differences in real-world consequences.

This rule especially applies when the contractual wording is in a foreign language, as Alberto-Culver, the makers of Alberto VO5 hair care products, discovered when they lost an appeal of a breach of trademark license case which turned on a Japanese legal phrase that Alberto-Culver did not completely understand and was not otherwise defined at the time of drafting the license agreement.

With licensing increasingly utilized as a tool of expansion into international markets, the case is a good lesson in what NOT to do.

In 1980, for lump-sum royalty payments of $10 million, Alberto-Culver gave Sunstar a 99 year exclusive license to manufacture and sell hair care products in Japan under the VO5 trademarks, after which Sunstar would own the registrations. The license agreement had appendices showing which VO5 logos and marks Sunstar could use. The agreement said that Sunstar’s license would have the status of a “senyoushiyouken” (専用使用権), which translates literally from Japanese as “exclusive use right.” But the license did not include an English definition of “senyoushiyouken.” Under the Japanese Trademark Act, the “senyoushiyouken” is exclusive even against the trademark owner, and the holder has other rights nearly equal to the owner, including the right to sue infringers in its own name.

Sunstar clashed repeatedly with Alberto-Culver over its ability to modernize the VO5 logos for the Japanese market. Against Alberto-Culver’s wishes, Sunstar went ahead with updated logos once in 1989, which led to a negotiated settlement with payment of an additional $10 million by Sunstar. When it happened a second time 10 years later, Sunstar refused to negotiate, arguing that under Japanese law, a licensee with “senyoushiyouken” status is legally entitled to use a registered trademark with minor format changes. For example, Article 50.1 of the Japanese Trademark Act, which deals with rescission of unused registered trademarks, recognizes that holders of “senyoushiyouken” are authorized to use:

“登録商標(書体のみに変更を加えた同一の文字からなる商標、平仮名、片仮名及びローマ字の文字の表示を相互に変更するものであって同一の称呼及び観念を生ずる商標、外観において同視される図形からなる商標その他の当該登録商標と社会通念上同一と認められる商標を含む…)。”

“…a registered trademark (including a trademark deemed identical from common sense perspective with the registered trademark, including a trademark consisting of characters identical with the registered trademark but in different fonts, a trademark that is written in different characters, hiragana characters, katakana characters, or Latin alphabetic characters, from the registered trademark but identical with the registered trademark in terms of pronunciation and concept, and a trademark consisting of figures that are considered identical in terms of appearance as those of the registered trademark…).”

This set up an interesting legal hall of mirrors for the lawsuit. Alberto-Culver argued that the only reason that the word “senyoushiyouken” was used in the contract was that in 1980 the negotiating parties wanted to give Sunstar language it could use to register the license with the Japanese trademark office. (Many foreign governments require trademark licenses to be registered to be effective.) Since the agreement provided that it was to be interpreted under Illinois law, the Japanese meaning of “senyoushiyouken” and any rights granted by it were irrelevant, said Alberto-Culver. Rather, the agreement should be interpreted as an exclusive license under Illinois law, which would require the licensee to attain prior consent to even minor format changes per explicit provisions in the license agreement.

Alberto-Culver won at trial, but that decision was forcefully overturned on appeal by the Seventh Circuit Court of Appeals in Sunstar, Inc. v. Alberto-Culver Co. (decision available here by entering case number 07-3288), where Judge Richard Posner wrote that when sophisticated parties use technical terms in a contract, they must be presumed to use and understand them in the technical sense. In so doing, the court followed a common rule of contract interpretation that whenever possible, courts should interpret contracts as a reasonable third party would by looking only at the words within the four corners of the contract, and without researching the history of the negotiations or other extrinsic evidence of the parties’ subjective intent. In other words, Alberto-Culver would be presumed to understand and consent to the meaning of any Japanese legal terms included in the license agreement, and therefore Sunstar was not in breach for using modernized VO5 marks.

Takeaway: in any license or other agreement regarding the disposition of valuable intellectual property rights, avoid vague letter agreements or memorandums of understanding, especially those that contain undefined technical words and other shorthand terminology. The contract should include a definitions section with detailed definitions for any technical terminology or terms of art. It will take a little bit longer to negotiate the contract, but 注意一秒、けが一生. [Translation: “An ounce of prevention is worth a pound of cure.”]

Sunstar VO5 commercials featuring 1989 version of updated logo, with song advising, “Don’t cry about split ends,” because the conditioner’s UHM Silicon will fix them.

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