Video Interview: Discussing Nevada's Preliminary Injunction Against Uber on LXBN TV

Following up on my recent post on the subject, I had the opportunity to discuss Uber being hit with a temporary injunction in Nevada with Colin O'Keefe on LXBN.  In the interview, I explain the basics of what happens and what it means for the future of the ridesharing service in the Silver State. 

Uber Hit with Preliminary Injunction in Nevada

Uber is a ride-sharing company based in San Francisco that has been operating in major cities worldwide since its inception. Uber’s growing market presence has been met with much controversy. At the forefront of this resistance are livery companies along with the state and local regulatory bodies that govern them. While the opposition insists that Uber is a transportation company subject to all the same rules and regulations as a taxi or limousine company, Uber maintains that it is a “technology company that facilitates communication between a contracted driver and a person seeking a ride through a smartphone app.”

The State of Nevada is the first to respond favorably to Uber’s naysayers. On November 25, 2014, a district court judge in Washoe County issued a preliminary injunction requested by the Nevada Transportation Authority against Uber. Uber suspended all operations within the state of Nevada, referring to the injunction as a “temporary legal setback,” estimating that this would cost nearly 1,000 jobs. 

In general, there are four elements that must be met for a court to grant a preliminary injunction:  1) a likelihood of irreparable harm with no adequate remedy at law; 2) the balance of harm favors the movant; 3) the likelihood of success on the merits of the case; and 4) the public interest favors the granting of the injunction.

Notably, the Nevada Transportation Authority emphasized the public interest element in its request for the preliminary injunction, arguing that passenger safety was at risk since Uber was an unregulated transportation service. Uber does require its drivers to undergo a background check and hold up to $1 million in insurance. However, recent incidents—including the death of a 6-year old girl who was struck and killed by an Uber driver in San Francisco—have made public safety a potent question for Uber.

Despite the emphasis on public interest and safety concerns, Uber is still backed by many supporters. Shortly after the preliminary injunction was issued, Uber started an online petition in support of its continued service in Nevada. The petition has since gained over 18,000 signatures.

The preliminary injunction (or temporary restraining order) is a powerful tool in business litigation. A resourceful business litigation attorney will know how to effectively utilize a preliminary injunction or temporary restraining order to serve his or her client’s needs.

The Nevada Transportation Authority filed suit and sought its preliminary injunction against Uber just one month after Uber began operating in the state. Strategically intentional or not, the timing is favorable for the NTA’s case against Uber. The NTA’s position would much likely be weaker if Uber were allowed to continue expanding into the Nevada market, gaining an even more notable foothold than it currently holds (as evidenced by its online petition), as this case continues. Uber’s more established presence in other markets may be a large part of the reason why the legal battles in other states have not yet resulted in favorable outcomes for the livery companies/regulatory bodies. Among other things, the preliminary injunction will prevent Uber from bolstering its position as a safe and necessary market participant in Nevada, which may ultimately lead to a favorable outcome for the NTA in its suit. 

A Blip in the Transmission: Part 2

The second factor, whether there is a serious threat of irreparable harm, was, comparatively speaking, much more easily considered. While there is no assumption of harm for copyright claims in the 10th Circuit, the nature of a copyright claim does tend to make it easier for plaintiffs to prove this factor. Aereo argued that any financial damage they might have done to the plaintiffs were essentially insignificant, but the court found that appeal wanting, noting that one of the purposes of copyright is ensuring the exclusive control of the copyright material, so that the owner can ensure that the content’s value is not tainted or diluted by unauthorized use, such as the creation of inferior quality copies, or interference in potential business relationships based on the content. As a result, the court felt that this factor also weighed in favor of granting the injunction.

The third and fourth factors only merited truncated discussion. The court first examined the balance of harms and, although noting that Aereo did face a loss of business should the injunction be entered, in all likelihood, their entire business model was based on copyright infringement.  The loss of such a business was not grounds to prevent a preliminary injunction from being entered. The court then examined the public interest, noting that the public’s interest was in seeing the law of copyrights upheld. Our next post will deal with the scope of injunction, the bond, and Aereo’s attempt to transfer venue.

 

A Blip in the Transmission: Part 1

When technology changes the law often struggles to keep up. For decades, television was ruled by broadcast channels, free of charge to anyone with a television and, because of technological limitation, local affiliates were often tied to a major national network. While that has changed drastically in the intervening years, the copyright laws of America have not matched this technological evolution, creating various areas of uncertainty where old laws do not fit snugly against newer ideas.

Aereo is a company that has developed a way to allow people, for a fee, to watch broadcast television on their computers. For obvious reasons, this service has drawn the ire of television broadcasters, leading to a number of suits in various district courts throughout the country. Because the old copyright law regarding this particular issue was conceived of in the 1970s, when household computers, let alone using such a device to watch television, was more speculative than anything else, the circuits have split on whether or not current copyright law forbids Aereo from providing these broadcast streams to their customers, and the case is due before the Supreme Court in its next term to resolve the issue once and for all.

In the meantime, however, the case against Aereo in Utah, where it began providing its service in July 2013, has been stayed pending the outcome of the Supreme Court decision, but a district court still felt it necessary to rule on whether the plaintiff would be granted a preliminary injunction in the interim.

The crux of the Aereo cases, both here and in other circuits, has been the interpretation of the “Transmit Clause” that gives the copyright holder the exclusive right to publicly perform or transmit a performance. The question is whether or not Aereo’s service constitutes a public transmission, and thus violates that copyright act. Aereo’s argument, which has been successful in the Massachusetts, as well as the 2nd Circuit, is that its services merely allows its customers to view the transmission on a private basis, and so does not constitute a public performance. The opposing argument, made by broadcast networks around the country, is that Aereo’s service, technologically advanced though it may be, is, in practical terms, little more than a public retransmission of copyrighted broadcasts, and a clear violation of the Copyright Act, a view endorsed by courts in D.C. and California.

The Utah court ultimately agreed with the latter position. First, it noted that the “Transmit Clause” was enacted in 1976 as a result of the first cable systems’ habit of retransmitting local broadcast networks on their cable systems without paying for the right to do so, with the understanding that the revised language would force cable companies to receive a license to continue to retransmit these copyrighted works, and the position of Aereo is essentially analogous to those early cable companies.

The court then dismissed what had been a compelling argument for Aereo in other jurisdictions, a complex attack that relied on using prior decisions to create a distinction between public and private retransmission and to then argue that based on the specific mode of transmission used by Aereo, each retransmission created a unique copy to a single user, and should therefore be considered a private retransmission, not covered under the Copyright Act. The Utah court was unwilling to make this leap, instead relying on legislative history and its interpretation of the statute to reject this distinction, explaining that, technological technicalities aside, Aereo’s service did likely constitute a violation of the Copyright Act and, as a result, the plaintiffs in this case had a likelihood of success on the merits, clearing the first hurdle for a preliminary injunction.

Next week we will consider the second, third and fourth factors related to whether or not the plaintiff was granted a preliminary injunction.

For more information on the services we offer visit pattersonlawfirm.com or call us at 312.223.1699.

 

On the Farm

A preliminary injunction can be a powerful tool, but it is important to remember that it is only a piece of a larger puzzle.

In a recent Illinois Appellate Court decision, Moreland et al v. Scott et al., 2014 IL App. (5th) 130362-U, a preliminary injunction was vacated because of other defects in the case.

The case centered on the disposition of a plot of farmland in Christian County, located near the middle of Illinois. A man had leased the land to his brother and nephew for a three-year term, but had died shortly after executing the lease. His widow then sold the property to the plaintiffs, who, wanting to farm the land for themselves, began eviction proceedings against the defendants, attempting to clear them from the land. As part of the court proceedings, they received a preliminary injunction from the circuit court enjoining the defendants from further use of the land while the case was ongoing. The case then proceeded to trial, but, before the judge could render his verdict, the defendant filed an interlocutory appeal of the injunction and for dismissal of the case.

The appellate court ultimately ruled to vacate the injunction and dismiss the case without prejudice. Under the Forcible Entry and Detainer Act, which governs the process of evictions, it is required that any potential plaintiff give notice to the party in possession of the property before filing the suit in court in order for such an action to be maintained. The plaintiffs, in this case, had failed to issue proper notice before filing the lawsuit, and, as a result, the injunction was vacated and the action dismissed.

The important lesson here is that as important as a preliminary injunction can be to the outcome of the case, it cannot survive in a vacuum. An experienced commercial litigator will know that a preliminary injunction is just one of many tools that can be used to protect his or her client’s interests, but it is essential to understand how it fits into the larger picture of litigation.

The Patterson Law Firm handles a wide variety of emergency business litigation cases. To learn more about the services we offer visit pattersonlawfirm.com or call 312.223.1699.

 

 

Cooking with Gas

A recent court case out of Virginia showed how rigid, in certain respects, the rules governing the granting of a preliminary injunction can be. As part of a larger corporate strategy, petrochemical giant BP had sold many of its gas stations in Virginia to Southside, a company that owns and operates many gas stations throughout the region. As part of the deal, Southside agreed to continue to use BP branding at its stations. Another provision of the contract gave BP a right of first offer should Southside decide to rebrand or sell any of the gas stations, and a right of first refusal if Southside decided to divest itself of all of its gas station business, including a requirement forcing Southside to provide documentation of any proposed sale to BP so that they would have the opportunity to match it.

The agreement was due to expire on October 2, 2013, and, as part of the legal formalities surrounding the process, sent a letter of non-renewal to Southside, who informed  BP that they would not be renewing the agreement, ending their relationship. It turned out, however, that, in the months leading up to the end of the contract, an affiliate of Sunoco, a competitor of BP, had reached an agreement with Southside’s holding company to purchase all of Southside’s stations, and had signed the contract in August 2013, two months before the end of the BP agreement, with a term ensuring that the deal would not close before October 4, 2013, after Southside’s agreement with BP would be terminated. On October 4, Sunoco announced it had acquired the Southside gas stations, and BP almost immediately filed a suit for breach of contract. As part of the suit, BP asked for a preliminary injunction preventing the rebranding of the Southside stations from BP to Sunoco.

As always, when deciding whether to grant a preliminary motion, a court will look at four factors: (1) likelihood of success on the merits; (2) likelihood of suffering irreparable harm; (balancing of the harms to each party; and (4)the interests of the public.

As to the first issue, the court was skeptical that BP would succeed on the merits of its claims. While there may have been something underhanded in how Southside conducted its business, the court thought it was not certain that they had actually breached the contract, as they had not, technically speaking, closed out the new contract before the expiration of the BP contract and, more to the point, noted that it was likely not uncommon in the industry to line up a new gas supplier before the termination of the contract with the previous supplier  to ensure a steady stream of gasoline for their stations.

BP fared no better in the analysis of the second prong, as the court noted that any injury would have been speculative, as the injury, by BP’s theory of the case, would have come from their inability to utilize their right of first refusal and purchase the stations for themselves. But as the court noted, given that BP had sold these stations to Southside in the first place, in order to get out of the gas station business, it does not seem likely that they would have re-entered that market, and it is hard to say they were harmed by not being able to exercise a contractual option they almost certainly would not have used.

Even more problematically, by the time BP had filed its suit, 33 of the 35 stations Southside had sold to Sunoco had already been rebranded, and the injunction, if granted, would merely save the final two BP-branded stations remaining, which, at that point, was not likely to prevent any real injury, as the cat was already out of the bag on that matter.

The third and fourth factors were, for all intents and purposes, ruled a wash by the court, as the harms to each party were roughly the same, and to the extent there was any public interest in how the gas stations were branded, it did not tip the scales in any meaningful way. 

As a result, the court denied the preliminary injunction motion, as, even if Southside had acted somewhat unethically, BP simply could not meet the burden for the preliminary injunction.

False Start: A Steelers Fan's Doomed Attempt to Use Litigation to Save His Team

Not every case involving a matter of emergency business litigation is one of dire importance.

On December 29th, 2013, the Kansas City Chiefs played the San Diego Chargers with the fate of two teams on the line. The Chargers would reach the postseason with a win, but if they had lost, the Pittsburgh Steelers, by virtue of a tiebreaker, would gain the final playoff spot in the AFC instead. The game was tied 24-24 with just a few seconds left on the clock when the Chiefs’ kicker missed a field goal wide right that would have won the game.  Instead, the game remained tied at the end of regulation, forcing an overtime period where the Chargers eventually scored the game-winning field goal, ending the Steelers’ season.

The problem was, though, that the Chargers had broken the rules when defending against the Chiefs’ field goal attempt at the end of regulation, as they violated formation rules by placing more than six players on one side of the field, in an attempt to block the field goal by bringing superior numbers to bear on one side of the Chiefs’ offensive line. The penalty for this rule violation is five yards and a replay of down, and so the Chiefs, by rule should have been granted another field goal attempt which, if made, would have ended the game in their favor. The plaintiff contends that the NFL’s ‘challenge system’, which allows coaches to challenge certain rulings, was “fraudulent and negligent” because, due to the vagaries of the rule, coaches cannot make any challenges within the final two minutes of regulation time, and so the Chiefs’ coach was unable to challenge this erroneous ruling.

The plaintiff also called attention to a ruling made in the overtime period, where a member of the Chargers appeared to fumble the ball to the Chiefs, but as his helmet had been stripped from his head before the fumble occurred, the officials enforced a rule that declared the play dead as the result of the ball carrier losing his helmet during the play. The plaintiff contended that this rule, enacted by the NFL Rules Committee only a few years ago, did not comport with the intent of the NFL “Forefathers”, and was, therefore, unconstitutional.

The plaintiff then provided a number of suggestions for solving this crisis, such as replaying the controversial field goal attempt, replaying the entire game, or simply declaring the Chiefs the victors of the game, thereby giving the Steelers the Chargers’ spot in the playoffs.

Unfortunately, this request for a TRO was doomed to failure from the start, as the first factor that a court examines in determining whether to grant such an order is whether there is a likelihood of success on the merits. In this case, there appear to be two major defects, either of them fatal on their own, that prevent a TRO from being issued almost immediately.

First, it is unclear what the cause of action in this case was. The plaintiff appeared to make two claims, first, that the challenge system, as implemented, is fraudulent and negligent because the rules in the last two minutes of the game are different from those in the remainder of the game. That hardly seems to flow logically. The second claim is that the rule regarding helmets is “improper and unconstitutional” because it was not the intent of the NFL “Forefathers”. Obviously, that claim is defective as well.

Second, even if a cause of action could be chiseled out of this complaint, the plaintiff almost assuredly lacks standing to pursue the claim, as the plaintiff has no legally protected interest in this case. Even if the NFL has misapplied its own rules, the plaintiff, as a private citizen, would have suffered no cognizable injury, and in this case, the plaintiff is suing under the argument that it is the NFL’s rulemaking process that is at fault, rather than the actual operation of the rules.

In either case, the court would quickly find that there was no likelihood of success on the merits and, as a result, that the TRO could not be issued, ending the Steelers’ final chance of continuing their 2013 NFL season.

 

 

Sriracha: Hot Sauce, Hot Problems

Emergency business litigation does not always arise out of the board room. Sometimes, it can just drift in, like a cloud.

Sriracha, a hot sauce made mostly of chili peppers and vinegar, was originally invented decades ago in Thailand, before being reformulated in America by immigrants in Los Angeles’ Chinatown. Over the past few years, however, its popularity in the United States has skyrocketed, to the point where a brand new factory dedicated to making the sauce recently opened in Irwindale, California.

And that is where the troubles began.

As one might expect from a rather large factory that processes massive quantities of chili peppers, garlic, and various other spices, controlling the spread of odors from the factory is essential, lest the town of Irwindale be flooded with the intense smell of pepper and garlic in perpetuity. To that end, the company that operates the plant, Huy Fong Foods, installed a carbon-based filtering system to try and remove the odor from the plant’s emissions. Local residents complained that the smell of chili peppers was still pervasive, and was so intense that it caused health problems, such as burning of the eyes and irritated throats. Responding to their constituents, the city of Irwindale asked Huy Fong Foods to install a more expensive filtration system, estimated to cost the company $600,000. Huy Fong refused, protesting that the residents had exaggerated the intensity of the odor, noting that their factory workers, who were exposed to the unfiltered fumes at much closer proximity, were able to do their work without complaint.

The city of Irwindale countered with a suit alleging that the factory was a public nuisance, and filed for a TRO and a preliminary injunction to shut down the factory while the issue is being litigated. On Thursday, a Los Angeles Superior Court judge ruled on the TRO, denying it, and keeping the factory open for the time being.

His reasoning illustrates the one critical difference between a TRO and a preliminary injunction--timing. The city of Irwindale had asked the judge, on very short notice and without the benefit of a full hearing, to shut down an entire factory for an indefinite period of time, which, as the court noted, was a rather extreme request to make on such short notice.  The judge was unwilling to allow such a radical remedy even if, in the case of a TRO, it would only last until the city’s request for a preliminary injunction could be heard later that month.

Instead, the factory will remain open at least until the court can conduct a full hearing on whether or not the emanations from the factory are noxious to the point where an injunction is necessary.

This case just shows how emergency business litigation can come when one least expects it. Knowing how to defend against such litigation can be the difference between a business keeping its doors open, or being shut down for good.

The Patterson Law Firm is experienced in handling cases that need to be dealt with on an emergency basis—Tom Patterson wrote the book on temporary restraining orders and preliminary injunctions. To learn more about the services we offer visit pattersonlawfirm.com or call 312.223.1699.

 

The Stream Runs Downhill: Part 2

Last week’s post focused on the court’s rejection of Aereo’s motion to change venues. But that was all the good news that the Hearst Group would receive that day, as the court next denied its request for a preliminary injunction. As is mandated in these cases, the court looked through the four-part test for granting preliminary injunctions, and found that there were insufficient grounds to enjoin Aereo’s activities while the litigation was ongoing.

First, the court examined the likelihood of success on the merits, noting that, in the 1st Circuit, at least, this factor is the most important. At this point, the technological advancements of the past few years run headlong into the decades-old body of copyright law. The court first concedes that the 1st Circuit has never ruled whether the use of a DVR-like device infringes on the right of the copyright holder, more specifically, whether Aereo’s interception and conversion of the broadcast into a digital and recordable form infringes on the copyright holder’s exclusive right to control the public transmission of its works.

Lacking any direct precedent of its own, the court turned to the 2nd circuit, which had previously ruled that a DVR, in effect, created a personal recording of the broadcast, and then transmitted that personal copy to the viewer, meaning that it did not publicly re-transmit the broadcast, and so did not infringe on any copyright. Aereo, as the court noted, had already successfully defended its service in the 2nd circuit, and had won because the court found that its service was sufficiently similar to the earlier DVR case and that, therefore, no infringement had taken place. More specifically, that court had noted that Aereo only allowed viewers to view those digital copies that Aereo had specifically prepared for them at their request, and that each copy was unique.

In that decision, however, there had been a dissent, which argued that, due to advances in technology, it no longer made sense to determine whether a transmission was private by the nature of the copy, but instead whether or not the viewer saw what was, essentially, a public broadcast to begin with. They also noted that some district courts have appeared amenable to determining the nature of a broadcast by how it was originally transmitted rather than how it was ultimately received.

The court, however, found that attempting to use Hearst’s proffered interpretation would force an untenable construction of the Copyright Act, and so reverted to the 2nd Circuit’s ruling on the matter, finding that Hearst was not likely to prevail on its claim that Aereo had infringed on Hearst’s copyright through unauthorized retransmission.

The court next examined whether it was likely Hearst would prevail on a claim that Aereo had infringed on its copyright through unauthorized reproduction of Hearst’s broadcasts. The question here came down to a question of whether or not this type of copyright infringement could occur without volitional conduct by Aereo. As Aereo’s system automatically responds to user commands, Aereo itself lacks any sort of volitional conduct. According to Aereo’s argument, such a requirement is necessary in an infringement case, as otherwise innocent technology providers could be held liable for the wrongful acts of those using their products, such as a copy machine owner being held liable when a third party uses that machine to copy copyrighted material.

From its ruling, it is clear the court felt at least slightly uncomfortable with this aspect of the case, noting that the 1st Circuit has not yet ruled that volitional conduct is a necessary element, but other circuits have. The court ultimately decided that it was likely that some sort of volitional conduct element would be necessary in an infringement claim, but punted the issue, explaining that later discovery may change the contours of that particular claim, and it was a closer call than the unauthorized retransmission claim. That said, the court found that the likelihood of success on the merits was not high enough on this claim either to justify a preliminary injunction.

The court then quickly disposed of the final two claims made by Hearst on technical grounds. First, it claimed that, because Aereo was streaming the works rather than authorizing them for download, it is considered to be ‘performing’ rather than ‘distributing’ for the purposes of copyright law, and so cannot be found to have violated Hearst’s exclusive right to distribute its copyright works. Second, it ruled that although Aereo does convert its broadcasts into a different formats in order to allow it to be streamed, that act does not create a derivate work under the meaning of the Copyright Act, and so Hearst was also unlikely to prevail on a claim charging Aereo with infringing on Hearst’s exclusive right to create derivative works from its copyrighted material. In all, the court found that Hearst was unlikely to prevail on any of its claims on the merits, a crippling blow in its quest to gain a preliminary injunction.

 

The Preliminary Injunction with Regard to Emerging Legal Issues Surrounding the Internet

A recent case out of the Federal District Court in Minnesota shows how important the proper use of a preliminary injunction can be to protect a business from harm.

In the case of Nadia Wood v. Sergey Kasputin et al, what began as a dispute over an automobile sale quickly spun out of control as Ms. Nadia Wood, the lawyer for car buyers, set up a website designed to collect information, mainly customer complaints, for use in a lawsuit against the car dealership.  In response, the owner of the dealership set up his own website, Nadiawood.net, using the same logo and typeface as the site Wood had used for her law firm’s website, and implicitly accused Wood of being a blackmailer and of running a racket.

Wood immediately filed suit in Federal court, accusing Kasputin of violating her copyright as well as violations of federal anti-cybersquatting laws. As part of that action, she filed for a preliminary injunction in order to have Nadiawood.net shut down pending the litigation.

In determining whether or not the injunction should be granted, the court used the usual four-part test to determine whether or not the injunction should be granted.

First, it looked at whether there was a likelihood of success on the merits. As part of Wood’s claim was that Kasputin had infringed on her copyright, the court was forced to examine the likelihood of Wood prevailing on the two elements of copyright infringement. That is, whether or not Wood had a valid copyright, and whether or not Kasputin had copied that protected material.

The court found Wood would likely be able to show that the copyright was valid. The logo and wordmark appeared to be original, and she had already filed registration paperwork with the Copyright Office. Next, the court examined whether Wood would be able to show that Kasputin likely copied that copyrighted material.  As Wood could not show that Kasputin had directly copied her logo and wordmark, the court instead investigated the likelihood that Kasputin had indirectly copied her work. In this case, that analysis was rather simple, as the logo used by Kasputin was identical to the copyrighted logo registered by Wood. The court thus found that Wood was likely to prevail on her copyright claim, meeting the first element of the four-part test.

The second question was whether Wood would suffer an irreparable harm for which there was no adequate remedy in law should the preliminary injunction not be granted. In this case, this element was rather easily met. The website in question, though it had been scrubbed since the filing of the lawsuit, had previously accused Wood of various unsavory activities that posed a serious threat to her reputation. As the court noted, harm to intangible assets such as reputation and goodwill can be nearly impossible to quantify in terms of dollars, making it virtually impossible to compensate Wood with money damages. As a result, the court concluded that this element was met as well.

The next element was to balance the harms. On Wood’s side, there was the harm to her reputation. Reading the order, it appears that Kasputin did not make an argument in his own defense on this point. Granted, given that it was a case of copyright infringement, and he had copied Wood’s copyrighted logo, there would likely have been no harm he could allege that would have prevented the injunction outright, but he likely did miss an opportunity to claim that an injunction that would entirely block the website he set up would harm him by infringing on his ability to freely express himself. As Kasputin did raise this argument, however, the court instead concluded that he would suffer no serious harm, and so concluded that this element had been met as well. The court’s opinion did not differentiate between the harm caused by infringing the copyright and the harm caused by the criticism of Wood.

The final element was one of public interest. Whether or not Kasputin could have raised some sort of defense here, namely that an overbroad injunction might have a chilling effect on free speech, or anything else, it seems clear that no such argument was ever proffered, and the court simply concluded that because Wood had shown that she likely had a valid copyright claim, the public interest supported the injunction. In the guise of an infringement action, a prior restraint of speech was accomplished by Wood.

As a result, the court ruled that not only would Kasputin be enjoined from using the copied copyrights, but also that the website addresses he had set up would be automatically redirected to Wood’s site. In addition, the court, because it is in a jurisdiction where the bond requirement is mandatory, was forced to issue a bond, but decided that, in light of the circumstances, to require only a nominal amount, in this case, $1000.

This case is a good example of both how a preliminary injunction can be useful in the context of copyright violations, and also how important it can be for a party to defend itself against preliminary injunctions. While some manner of preliminary injunction would have been given no matter what Kasputin had argued, the record makes it clear that Kasputin did himself no favors by neglecting to vigorously argue about the harm an overbroad injunction might do to him.  

 

Garon Foods v. Montieth

The recent Garon Foods v. Montieth case shows how a preliminary injunction can be useful in protecting trade secrets. In this case, the plaintiff is a company whose primary source of business is the distribution of peppers from suppliers to cheese manufacturers for the creation of Pepper Jack cheese. The defendant had worked for the plaintiff for roughly two years before resigning in February 2013, and going to work as an independent contractor attempting to connect the supplier of the peppers directly with the cheese-makers, and therefore bypassing the plaintiff.

In March 2013, the plaintiff filed suit against the defendant, alleging that the defendant had breached her contract with the plaintiff, which had included a non-disclosure clause, as well as violation of the Illinois Trade Secrets Act (ITSA).  It also filed for a preliminary injunction to prevent the defendant from continuing to solicit cheese-makers while the litigation was ongoing.

The meat of the court’s ruling was primarily in dealing with the first element of the four-part test for the granting of a preliminary injunction, that is, whether or not there is a likelihood of success on the merits of the case. The court found that there was a likelihood of success on the merits of claims dealing with how the defendant used the information she had to solicit the plaintiff’s customers. What is interesting about this case is exactly what the court found to be a breach of the non-disclosure agreement.  The court rejected a number of the plaintiff’s arguments, finding it unlikely that the plaintiff would be able to show that the plaintiff had materially breached the contract by emailing confidential information to herself, taking paper documents from the plaintiff’s offices, or even that the defendant had been soliciting customers based on a proprietary list developed by the plaintiff. The court did find, however, the claims regarding the defendant leaking the identity of her new employer as the supplier of peppers to the plaintiff, and the defendant using her memory to recall the past purchases of cheese-makers did constitute likely breaches of the contract, as well as violations under ITSA.

Because of the particular nature of the business of the plaintiff, the court next ruled that without an injunction, there was a possibility of a irreparable harm to the company, as she can draw on the confidential information contained in her memory in order to tempt customers away from the plaintiff, which may, if defendant solicits enough customers, do enough harm to the plaintiff that money damages will not be able to compensate them entirely for their losses.

By entering this injunction, though, the court also recognized that the defendant would suffer significant harm, as the defendant’s ability to earn a living in her chosen career would be severely compromised if she were totally barred from soliciting cheese-makers on behalf of the supplier. To that end, the court decided to limit the score of the injunction, generally only enjoining the defendant from soliciting those cheese-makers she had personally serviced while working for the plaintiff, as well as identifying the supplier as the party responsible for supplying pepper to the plaintiff to potential customers, or any other sensitive information she might have learned while working for plaintiff.

One interesting note is that the amount of bond is not mentioned. While Illinois courts do not require a bond for the issuing of a preliminary injunction, in a case such as this one, where the court openly acknowledged that the injunction would limit the ability of the defendant to make a living, a bond could, and perhaps should, have been issued to reimburse the defendant if the plaintiff’s claims proved fruitless.

 

A Tale of Two Cracker Barrels

There are many species of commercial litigation where a preliminary injunction may prove helpful, or even necessary, and trademark protection is one of the most important. The recent litigation between Kraft and Cracker Barrel Old Country Store is a good example of this kind of dispute.

This trademark dispute has a long and complicated history. Suffice to say that, as of the present, Kraft owns the trademark rights to the Cracker Barrel line of products, mostly meat and cheeses, sold in grocery stores throughout the country. At the same time, however, there is also a national chain of restaurants that label themselves as “Cracker Barrel Old Country Store” (CBOCS), which also holds a trademark on the name. The two companies had, in the past, acknowledged that Kraft had the superior trademark, but they were not direct competitors.

Recently, however, CBOCS licensed its brand to John Morrell for a line of meat products to be sold in grocery stores throughout the country. Kraft filed a suit for trademark infringement, as well as a preliminary injunction to stop CBOCS from bringing its own products to grocery stores.  The court granted the injunction, and it is instructive to examine why.

The first element that the court examined was whether or not the suit was likely to succeed on its merits. The exact standard for what chance of success a claim might have varies from circuit to circuit. As this case was filed in the U.S. District Court for Northern Illinois, the Seventh Circuit’s standard, that the claim need only have a “better than negligible” chance was used. Kraft was easily able to clear this barrier. Both parties had, in the past, acknowledged that Kraft had the superior trademark over the “Cracker Barrel” name. In addition, the court noted that the particular packaging used by CBOCS on its licensed line and the relative similarity of the Kraft and CBOCS products created a significant likelihood for confusion between the two lines, a necessary part of any trademark infringement case.

The court next turned to whether there was an adequate remedy at law, and whether irreparable harm would be done if CBOC were allowed to sell its meat products in grocery stores. In trademark cases, it is established precedent, at least in the Seventh Circuit that there is a presumption that this element will be met if a trademark if infringed upon. Kraft also argued that should CBOCS be allowed to use the Cracker Barrel brand in its meat line, then Kraft’s Cracker Barrel brand would become diluted, and the reputation of the brand will fall outside of Kraft’s control. The damages, in such a scenario, would be difficult to ascertain. The court generally agreed with this rationale, and found that Kraft had met this element as well.

The court then looked at the final two elements, both of which it disposed of relatively quickly. First, it balanced the harms, and concluded that because this new line of products was essentially an ancillary business for CBOCS, and because the products had been withdrawn from circulation as a result of the litigation, that there was little harm done to CBOCS in comparison to the potential harm that Kraft might suffer absent an injunction. Next, the court looked at the public interest in this case, and simply concluded that the public interest was preventing confusion in the marketplace, supporting Kraft’s argument for a preliminary injunction.

As the granting of a preliminary injunction is an equitable remedy, however, the court was also forced to consider a pair of defenses raised by CBOCS. First, CBOCS argued that Kraft had shown acquiescence by allowing CBOCS to use the Cracker Barrel name for decades to sell food in its own restaurants and stores, and to sell it through other channels, such as catalogues and the internet as well. The court did not find this argument persuasive, as Kraft was not selling its own Cracker Barrel products in any of those locations, and thus had no fears of confusion in those locations, unlike the grocery store market, which was Kraft’s primary point of sale for its Cracker Barrel products.

CBOCS next argued that laches applies, as CBOCS had first broached the idea of selling its own Cracker Barrel products in grocery stores in 2006, and that Kraft and CBOCS had discussed the issues regarding CBOCS bringing their own Cracker Barrel products to grocery stores at that time, and that, if Kraft had any objections to the plan, it should have made them in 2006, rather than waiting until CBOCS had already planned and begun distribution of its line. The court was not persuaded by this argument either. It found that while the two parties had exchanged some correspondence in 2006, the discussions were more preliminary than decisive, and Kraft had been concerned about trademark infringement at the time, and had requested that CBOCS give them notice before undertaking any venture into grocery retail.

As a final matter, the bond requirement was upheld in this case, and Kraft was required to post a $5 million bond before the injunction would be entered. Even though Kraft had made many compelling arguments, including showing that CBOCS was not poised to lose much more than opportunity costs should the injunction be granted, the court still took the bond requirement from the Federal Rules of Civil Procedure very seriously, and required a substantial bond from the movant, as is not unusual in cases of this type.

In conclusion, the Cracker Barrel case shows how a preliminary injunction intersects with other forms of commercial litigation, and what effect the laws of trademark have on showing the elements of a preliminary injunction.

               

 

Part 4: Fiduciary Breach

The final argument that HRS proffered in an attempt to get the preliminary injunction overturned was that ORT’s claim that McChesney had breached his fiduciary duty lacked merit, and thus could not support a preliminary injunction.

This analysis turned on a pair of questions, both springing from ORT’s 2010 reorganization. First, there was the question of whether or not ORT was a member-managed or manager-managed LLC at the time of the alleged breach, because while the members of a member-managed LLC must act in good faith and deal fairly with their company, members of a manager-managed LLC only owe such duties if they are the manager of the corporation. As it appeared as though McChesney was not the manager of the LLC, whether he had an obligation to act in good faith would depend on what type of LLC ORT was at the moment of the alleged breach.

Given the facts of the case, it was not yet clear whether ORT was manager or member-managed at the time of the alleged breach. The court, however, ruled that it was ultimately immaterial: because it was still a question to be resolved, the circuit court properly used its discretion to preserve the status quo by a preliminary injunction while this question of corporate form was untangled.

HRS and McChesney next argued that McChesney was not a member of ORT at the time of the alleged breach, and therefore could not have committed a breach of fiduciary duty, as such duty was no longer owed.

Once again, there was a dispute over those facts. McChesney claimed that the other members of ORT had forced him out of the company, and that he no longer held any shares. ORT’s records, though not entirely clear on McChesney’s status themselves, nonetheless indicated that McChesney was still a member during the time of the alleged breach. The court ruled that what facts they did have indicated the presence of fair question that would have to be resolved through the litigation, and that was enough to justify a preliminary injunction.

Finally, McChesney argued that even if he had owed a fiduciary duty to ORT, he had not breached that duty. The court was unreceptive to such reasoning, noting briefly that given what McChesney was accused of doing -- intentionally attempting to scuttle the land deal because he did not care for it personally -- raised enough of a question to allow the court to issue a preliminary injunction.

Because ORT had raised a number of questions that were, on their face, sufficient to create some likelihood of success on the merits of these claims, the appellate court upheld the circuit court’s granting of a preliminary injunction to prevent HRS from foreclosing on the 8-acre parcel of land.

Part 3: Specific Performance

The question of whether or not ORT was likely to succeed on the merits of its claims against HRS and McChesney, the fourth and final element necessary for the granting of a preliminary injunction, proved to be the most difficult question for the court.

Was ORT likely to prevail on is claim of specific performance of the land contract? HRS, unsurprisingly, argued that ORT was not likely to succeed on the merits, and therefore the preliminary injunction should not have been granted by the circuit, and should be vacated by the appellate court.

Its first argument was that the mortgage taken by Agri-Source was superior to the right of ORT to purchase the land, and therefore ORT would not be able to exercise its right of specific performance because doing so would destroy the rights of a superior note-holder in the property. The Appellate Court was decidedly cool to this line of reasoning. In terms of establishing this element for a preliminary injunction, it is not necessary to show that a party would actually prevail on a claim, just that it had raised a fair question regarding its claim that it might be able to succeed.

The court then explained that, as an equitable remedy, specific performance is designed to enable courts to reach just and equitable outcomes, and issues such as breaches of fiduciary duty, and the doctrines of merger and unclean hands could affect such a ruling. Based on the facts in evidence,  McChesney’s attempts to hinder the deal to serve his own interests raised enough questions such that it was proper for the circuit court to issue the injunction, and thereby preserve the status quo until the process of litigation had shed more light on the matter.

The final HRs arguments will be discussed in the next part.

Part 2: Rights, Harms and Remedies

In its ruling on HRS’s appeal, the Third District Appellate Court first established that their standard of review was whether or not the circuit had abused its discretion in granting the preliminary injunction. As long as aprima facie case for a preliminary injunction had been properly laid out by the moving party, then the circuit court was within its discretion to grant the injunction.

Both sides conceded that ORT had made a contract with Agri-Sources for the acquisition of the 8-acre parcel, so the Court quickly concluded that there was an ascertainable right.

The second factor was whether or not ORT would suffer an irreparable harm absent the injunction. ORT’s argument to the circuit court had been that the particular parcel of land being fought over was essential to the continued sustainability of its business, because its proximity to both the Mississippi River and a railroad spur. Simultaneously, the court also discussed the third element, that there was no adequate remedy at law.

HRS argued that while the parcel of land was well-suited to be used by ORT’s fertilizer business, an award of money damages, should ORT prevail in its claims, would be adequate in this case to compensate ORT for any damages they might have occurred.

The Appellate court quickly swept aside those arguments. First, it noted, this was an action involving a piece of real property, and money damages, a legal remedy, are not adequate in those cases. Because each piece of real property is unique and distinct from all others, simply giving an owner money damages instead of the property itself is not an adequate remedy. A contract for a piece of real property is not a contract for land, it is a contract for a very specific piece of land and, as a result, there is no way to substitute for the uniqueness of that particular parcel.

HRS also challenged the assertion that ORT would be irreparably harmed if the preliminary injunction were not granted. This argument was substantially stronger than its challenge to the adequacy of the remedy at law, as it would turn on the facts presented by ORT, rather than well-established precedent, but the court once again rejected HRS’s main contentions. In moving for the preliminary injunction, ORT had shown that without the parcel of land, it would likely lose most of their business and, in fact, the process of litigation had already scared off one of its business partners, bringing before the court the cancelled contract that had represented over 10% of its business. The court also recognized that even if money damages were later given to ORT after the fact, it would not be able to repair the damage to ORT’s good will among the community nor its competitive position in the fertilizer market. As a result, the Appellate Court ruled that both the second and third elements for the issuing of a preliminary injunction had been met. The last issue - likelihood of success on the merits – will be considered in the next part.

Interesting Discussion of Preliminary Injunction Mechanics and Elements

The 3rd District Illinois Appellate Court recently published a decision in the Happy R Securities, LLC v. Agri-Sources, LLC that was full of interesting discussions on the mechanics and elements of preliminary injunctions.

The origin of this case is rather tortuous. In 2007, Kurt McChesney and Mage Farms, LLC, a company he owned with his mother, formed another corporation: Agri-Sources, LLC. The purpose of this company was the selling of agricultural products from a 20-acre parcel in Gladstone, and it later purchased the parcel outright from another one of McChesney’s holding companies.

Around the same time, McChesney also created Oquawka River Terminal, LLC, a fertilizer company, based on an 8-acre section of the parcel. He himself owned 25%, while his business partners, Rousonelos, Butler, Job and Ryan, held the remaining 75%. ORT began to make a series of leases that allowed it to expand its business, including the use of a nearby dock on the Mississippi River, as well as a railroad spur and two buildings on the parcel. These leases were essential to the continued business of ORT, because its proximity to both the river and a railroad. Without them, ORT claimed, would be hard-pressed to carry on.

Business was good enough, though, for ORT to contemplate expansion, and it asked for a small business loan for that purpose. ORT claimed to have reorganized itself as a manager-managed LLC in order to comply with FSBI’s demand that Jobe not be a party to the loan.

ORT then agreed to purchase their 8-acre parcel outright from Agri-Sources. Because there were a number of liens and judgments on the property, the process protracted.  But ORT deposited 10% of the purchase price with a title company. In response, McChesney had his attorney send ORT a letter that he, in his capacity of part-owner of ORT, objected to the closing.

In 2011, FSBI filed a foreclosure action against the parcel. McChesney, as it turned out, owed over $3 million dollars to FSBI, and the bank had grown weary of attempting to clear the liens on the property, choosing to go for the more dramatic remedy instead.

At this point, there was a dispute between the ORT owners over McChesney’s status with the company. McChesney claimed that the other owners had ejected him from the company, and that he no longer owned any share of ORT. The others claimed that McChesney maintained an 18% share he had at the time, and therefore owed his fiduciary duties to the company.

Believing himself to no longer be part of ORT, McChesney negotiated with the bank an agreement whereby the mortgage rights to the parcel would be assigned to Happy R Securities (HRS), a new corporation he had created for this purpose; the foreclosure proceedings against his former partners in ORT continued.

After counter-suing McChesney and HRS for specific performance of the delivery of the 8-acre parcel, as well as alleging that McChesney had breached his fiduciary duty, ORT then filed for a preliminary injunction to stop the foreclosure of the parcel.

The circuit court found that:

  1. ORT had a clearly ascertainable right to complete the transaction to acquire the 8 acre parcel of land.
  2. ORT had no adequate remedy at law, as this was a case involving real property, and therefore money damages would not be adequate.
  3. ORT would suffer irreparable harm without the injunction.
  4. ORT’s continued existence depended on owning that specific piece of land, because of its proximity to the railroad and river.
  5. ORT  was likely to succeed on its claims for specific performance and breach of fiduciary duty.

Because ORT had established all of these elements, the circuit court issued the injunction. HRS then appealed. Our next part will consider this appeal.

 

Part Two: Ramifications of the Federal Circuit's opinion: Going beyond Apple

At least in the electronics industry context, Apple demonstrates that the federal circuit might be stricter in requiring incredibly strong similarities between the primary reference and claimed design, while finding seemingly minor differences to be sufficient in precluding a reference from being a primary one. Part of the reason for this strict reading of the obviousness standard could be that the court perceives such “minor” differences as being indicative of the argument that the primary reference and design patent share the same design concept (instead of sharing basically the same visual appearance). Under this argument, the similarities between the primary reference and the design patent arise from the fact that they have the same design concept, but the differences prove that the similarities are limited to those inherent to any device sharing that same concept. Sharing the same concept is NOT the equivalent of sharing basically the same visual appearance, and the obviousness standard demands that the primary reference do the latter. This interpretation arises from a portion of the federal circuit’s opinion, in which the court declared, “the district court’s error was to view the various designs from too high a level of abstraction. Rather than looking to the ‘general concept’ of a tablet, the district court should have focused on the distinctive ‘visual appearances’ of the reference and claimed design.” 

 
Extrapolating from this quote, it appears that the federal circuit believes the similarities between the Fidler tablet and the D’889 tablet to be a consequence of the fact that both are tablet devices (tablet devices being a design concept). But the differences, deemed substantial ones by the federal circuit and minor ones by some industry bloggers, limit the Fidler table to only sharing the same design concept, not sharing basically the same visual concept.
 
If the district court had been viewing the designs in this matter from too high of a level of abstraction (thinking of the designs common to the product category in general, as opposed to designs of the two specific devices), then the federal circuit is viewing the designs from a very low (and very specific) level of abstraction. What does this mean? What does this signify for the electronics industry? Defendants who are seeking to defeat a preliminary injunction motion on grounds of anticipation/obviousness of a design patent face an uphill battle. It seems as though they will need a primary reference with virtually minimal differences from the design patent at issue. Similarities between the two will need to be more than the similarities that ANY device in the category would have. In general, it seems as though defeating an injunction on grounds of obviousness of a design patent will be very difficult to accomplish.  Defendants should strive to defeat the motion by presenting strong evidence of non-infringement, no likelihood of irreparable harm, balance of harms supports defendant and public interest favors not granting an injunction.
 
Please see the previous post: Part One: Ramifications of the Federal Circuit’s Opinion: Going Beyond Apple for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.
 
**SOURCES**
Apple, Inc. v. Samsung Elec. Co., Ltd., U.S. Court of Federal Appeals, May 14, 2012
Ryan Alley, “Apple v. Samsung- Design Prosecution Lessons,” Intellectual Property Law: Building Assets from Ideas, 2012-05-21, http://alleylegal.com/2012/05/apple-v-samsung-design-prosecution-lessons/
Sarah Burstein, “Apple v. Samsung,” PatentlyO: The Nation’s Leading Patent Blog, 2012-05-18, http://www.patentlyo.com/patent/2012/05/guest-post-by-sarah-burstein-apple-v-samsung.html
Rebecca Tushnet, “Brand Dilution as a Design Patent Theory of Harm,” Rebecca Tushnet’s 43(B)log, 2912-05-16, http://tushnet.blogspot.com/2012/05/brand-dilution-as-design-patent-theory.html

Part One: Ramifications of the Federal Circuit's Opinion: Going Beyond Apple

According to Ryan Alley’s blog, the federal circuit’s strict interpretation of the non-obvious standard has important ramifications for the electronics industry (and most likely, for the holders of design patents more generally). This blog focuses on the impact of the federal circuit’s opinion on the primary reference standard.

Alley specifically draws the point that the designs of issue in Apple are most certainly applicable in other electronics design cases (i.e. where the products involve screens, surfaces, bezels, frames, tablet shapes, etc.). The federal circuit’s holding indicates that courts will examine the appearance of electronic devices closely; perhaps allowing even seemingly minor differences between the appearance of the prior art references and the appearance of the claimed electronic device design to bar prior art from serving as a primary reference. Of course, to the federal circuit the differences between the Fidler tablet and the design patent were far from being minor. In fact, the federal circuit identified the differences as being “substantial differences”. Yet, it appears that many patent litigation bloggers find this to be puzzling, as the design differences seems “somewhat minor” to them. One blogger goes even further, writing, “I personally think these [referring to the Fidler tablet and D’889] create almost identical visual impressions.”
 
At a glance, based on online pictures, the Fidler tablet and the claimed design of the D’889 patent do in fact seem very alike in appearance. Enough so that it is perturbing that the Fidler tablet doesn’t satisfy the “basically the same visual appearance” requirement. Certainly, according to Blog Authoress Sarah Burstein, the federal circuit decision to reject the Fidler tablet as a primary reference was unexpected. Under the obviousness standards from a few years ago, Fidler would have been categorized as a primary reference.  Burstein expresses some reluctance to declare this decision (as well as another) to reflect a current trend that tightens the obviousness standards. However, Alley expresses no such hesitation in expressing his viewpoint that the Apple decision imposes a narrow (strict) obviousness standard (at least in the context of design patents that cover electronics). As he concisely terms it, “[t]his is a tough set of hoops for any…defendant to successfully jump through.” 
 
Please see the previous post: The Ramifications of the Federal Circuit’s Decision on the Secondary References Standard for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.
 
**SOURCES**
Apple, Inc. v. Samsung Elec. Co., Ltd., U.S. Court of Federal Appeals, May 14, 2012
Ryan Alley, “Apple v. Samsung- Design Prosecution Lessons,” Intellectual Property Law: Building Assets from Ideas, 2012-05-21, http://alleylegal.com/2012/05/apple-v-samsung-design-prosecution-lessons/
Sarah Burstein, “Apple v. Samsung,” PatentlyO: The Nation’s Leading Patent Blog, 2012-05-18, http://www.patentlyo.com/patent/2012/05/guest-post-by-sarah-burstein-apple-v-samsung.html
Rebecca Tushnet, “Brand Dilution as a Design Patent Theory of Harm,” Rebecca Tushnet’s 43(B)log, 2912-05-16, http://tushnet.blogspot.com/2012/05/brand-dilution-as-design-patent-theory.html

The Ramifications of the Federal Circuit's Decision on the Secondary References Standard

The primary reference can be modified with secondary references to create a combination that has the same overall visual appearance as the appearance of the design patent. Or where there are only minor differences between the two, a gap between the primary reference and the design patent can be bridged with secondary references. The references must be “so related to the primary reference that the appearance of certain ornamental features in one would suggest the application of those features to the other” for the references to constitute secondary references that can modify the appearance of the primary reference.

Even if the Fidler had been categorized as a primary reference, the Federal Circuit said obviousness would fail because the two references could not be combined since they were so different from each other in appearance that “[they did] not qualify as a comparison reference under” the secondary reference standard. According to Alley, the Federal Circuit’s decision “has effectively instituted a strict TSM test, requiring that the prior art features not only call out for combination, but do so in a manner demonstrated by the visual closeness of the references.” This is another difficult standard for a defendant to meet. Even if the defendant is able to find a primary reference, he still may not fulfill the secondary reference standard if he needs a secondary reference to modify the primary reference. Such a strict standard for secondary references reinforces the difficulty for defendants in challenging the validity of a design patent on obviousness grounds.
 
Please see the previous post: Part Two: The Ramifications of the Federal Circuit’s Decision on the Primary Reference Requirement for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.
 
**Sources**
Ryan Alley, “Apple v. Samsung- Design Prosecution Lessons,” Intellectual Property Law: Building Assets from Ideas, 2012-05-21, http://alleylegal.com/2012/05/apple-v-samsung-design-prosecution-lessons/

Part Two: The Ramifications of the Federal Circuit's Decision on the Primary Reference Requirement

Popular Blogger Sarah Burstein proposed that the federal circuit tighten the requirements of defining “basically the same overall visual appearance” with its decision on the non-obviousness of the D’889 patent. Apparently, a few years ago the “basically the same” standard indicated that about a 75 to 80% similarity between the appearances of primary reference and the designed patent was required for a prior art reference to qualify as a primary reference. Burstein declared that such a percentage definition would have permitted the Fidler tablet to constitute a primary reference. Although the federal circuit does not clarify a new percentage requirement (i.e. the primary reference must share an 85% similarity in appearance with the design patent), its decision indicates a tightening of the requirement to necessitate the showing of a higher degree of similarity. 

Burstein hesitated in drawing any conclusions about future trends of the federal circuit by stating, “this strict reading of the ‘basically the same’ requirement may make it more difficult to prove obviousness in future design patent cases. And while it’s too early to declare a trend, it is worth noting that the Federal Circuit affirmed a rather strict reading of this requirement last year.”
 
Another Blogger Ryan Alley criticized that “basically the same overall visual appearance” standard for primary references was permitting the patent holder “to eliminate whole swaths of prior art based on rather abstract optics alone.”  He argued that the federal circuit had disqualified the Fidler tablet from being a primary reference due to some minor differences.  
Essentially, his critique of the federal circuit (and in fact the general standard for obviousness in design patents) is that the test for primary references is too narrow and strict. When defendants object to an injunction based on patent obviousness, patent holders can defeat the objection through differences in “design minutiae” between the primary reference and design patent.
 
Please see the previous post: Part One: The Ramifications of the Federal Circuit’s Decision on the Primary Reference Requirement for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.
 
**Sources**
Ryan Alley, “Apple v. Samsung- Design Prosecution Lessons,” Intellectual Property Law: Building Assets from Ideas, 2012-05-21, http://alleylegal.com/2012/05/apple-v-samsung-design-prosecution-lessons/
Sarah Burstein, “Apple v. Samsung,” PatentlyO: The Nation’s Leading Patent Blog, 2012-05-18, http://www.patentlyo.com/patent/2012/05/guest-post-by-sarah-burstein-apple-v-samsung.html

Part One: The Ramifications of the Federal Circuit's Decision on the Primary Reference Requirement

To categorize a prior art reference as a primary reference, one reference must single-handedly have design characteristics that are basically the same as the design characteristics of the design patent. However, note of caution: the terms “design characteristics” from the primary reference test have been defined to mean “overall visual appearance.” This definition means that the test for a primary reference necessitates having one reference that has basically the same overall visual appearance as the claimed design. What does this “basically the same overall visual appearance” standard require, especially when compared to the “same overall visual appearance” standard for the general obviousness inquiry for design patents?

The “basically the same overall visual appearance” requirement for primary references is incredibly important to the obviousness analysis for design patents. Primary references act as a per-se threshold requirement for obviousness. In order to conduct the obviousness inquiry, the challenger of the patent must present a primary reference. Whereas, without a primary reference, the challenge to patent validity based on obviousness automatically fails. Thus if the federal circuit is tightening (making it more difficult to prove), the requirements for finding a prior art reference to be a primary one are stricter and more obvious challenges are barred from being presented. Tightening the requirements for primary references makes it easier for the patentee to argue likely success on the merits in the sense that it will be harder for the defendant to argue invalidity due to obviousness.

Please see the previous post: Ramifications of Federal Circuit Opinion: Proving Irreparable Harm re Design Patent Infringement through Design Dilution? for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

**Sources**

Ryan Alley, “Apple v. Samsung- Design Prosecution Lessons,” Intellectual Property Law: Building Assets from Ideas, 2012-05-21, http://alleylegal.com/2012/05/apple-v-samsung-design-prosecution-lessons/

Sarah Burstein, “Apple v. Samsung,” PatentlyO: The Nation’s Leading Patent Blog, 2012-05-18, http://www.patentlyo.com/patent/2012/05/guest-post-by-sarah-burstein-apple-v-samsung.html

Ramifications of Federal Circuit Opinion: Proving Irreparable Harm re Design Patent Infringement through Design Dilution?

Did the federal circuit create a new common law theory to prove irreparable harm resulting from infringement of a design patent? Recall that Apple’s original motion for a preliminary injunction against Samsung devices for infringing its design patents presented two new kinds of arguments in its irreparable harm section: design dilution and brand dilution. Dilution is a cause of action in trademark law—whereby the owner of a famous trademark can bring an infringement suit against a defendant on grounds of trademark dilution.  Trademark dilution occurs where defendant’s use either impairs the distinctiveness of the owner’s mark (dilution by blurring) or tarnishes the owner’s reputation or corporate goodwill (dilution by tarnishment). Dilution is a doctrine under trademark law. Can a dilution argument extend to patent design protection?

 
Tucked into Apple’s arguments about likely irreparable harm, Apple also brought forth the novel arguments of design dilution and brand dilution. Apple argued that Samsung’s infringing designs caused design and brand dilution; the design and brand dilution in turn caused Apple to lose consumer goodwill. Under the design theory, Samsung’s infringing products were so substantially similar to Apple’s that the introduction of Samsung’s product to the marketplace impaired the distinctiveness of the design of Apple’s products. Apple called this, “eroding” the design distinctiveness of its products or otherwise phrased design dilution, declaring, “Samsung’s sale of products…threatens to erode the value of the designs and attenuate the hard-won link in the public’s mind between the designs and Apple” (Apple’s Motion for Preliminary Injunction at 26). Apple’s brand dilution argument was tied to the fact that its brand was inextricably tied to product design. When Samsung sold its infringing products, it also harmed and weakened the value of the Apple brand itself.
 
The district court rejected Apple’s arguments about design and brand dilution. According to the court’s opinion, it rejected the design dilution idea because Apple had not presented sufficient evidence to explain how design dilution (“erosion of ‘design distinctiveness’”) had actually caused irreparable harm to Apple (for example, Apple had not provided enough proof to show that design dilution harmed its reputation). The district court hesitated in addressing the issue of applicability of the brand dilution theory of harm. The court explained its hesitation as “[i]t is not entirely clearly that irreparable harm in the form of brand dilution should apply to Apple’s claim for design patent infringement. Apple has offered no argument that trademark doctrines are applicable to design patent infringement cases” (Court Order Denying Apple’s Motion for Preliminary Injunction at 30). Nonetheless, it was not necessary for the district court to reach a conclusion on the applicability of the brand dilution doctrine; even if brand dilution was an actionable harm to demonstrate irreparable harm in design patent cases. The court found that Apple had failed to provide sufficient evidence that Samsung’s alleged infringement would actually cause brand dilution.
 
In its opinion pursuant to Apple’s appeal, the federal circuit addressed both design and brand dilution in a fairly nonchalant manner, which is somewhat strange since these theories are so novel to design patent infringement cases. The federal court held that categorical rules precluding these two theories from being used to demonstrate irreparable harm would be “improper.”  The appellate court was explicit in its statement that a categorical rule regarding design dilution would be improper, declaring:
“wholesale rejection of design dilution as a theory of irreparable harm…would have been improper.” federal circuit Opinion at 19.  On the other hand, the federal circuit is ambiguous about the possible application of brand dilution to prove irreparable harm in design patent infringement cases, but it does imply that a categorical rule against brand dilution would also be impermissible: “the district court’s opinion thus makes clear that it did not categorically reject… ‘brand dilution’ theories, but instead rejected those theories for lack of evidence at this stage” (implying that a categorical rejection of brand dilution theories would possibly have been reversed by the federal circuit). Id. at 19-20. It appears that bloggers view the federal circuit opinion as rejecting a categorical rule against brand dilution as a theory to show irreparable harm.
 
What does this mean? The federal circuit provided no guidelines other than prohibiting district courts from implementing categorical rules against the theories of brand and design dilution. Blogger Sarah Burstein also exclaims over the lack of discussion in the opinion about this theory, writing: “The other especially striking portion…is the federal circuit’s unquestioning acceptance of Apple’s ‘design dilution’ theory of irreparable harm. This sort of express equation of the harm caused by design patent infringement with the harm caused by trademark dilution is unprecedented in design patent case law…and Apple’s theory deserves more attention.” 
 
Samsung has filed a petition at the federal circuit for an en-banc rehearing of its earlier decision. Perhaps the en-banc panel will provide further guidance or explanation on this topic (of course, it could also reverse this and find that categorical rules against dilution based theories are perfectly proper).
 
The federal circuit’s decision on these two theories seems utterly baffling, especially without any further guidance or explanations. Burstein notes that while these theories had been mentioned in academic literature, they are completely novel concepts to design patent law. The federal circuit holding seems to collapse trademark (trade dress) law and patent design law, finding an actionable harm infringing under trade dress functions as an actionable harm under patent design law. Under my current understanding of the law, I do not believe that there is any authority to support such an extension of dilution harms, especially given that federal trademark dilution based infringement is currently governed by statute. The Trademark Dilution Revision Act of 2006 could easily have been written to include a short text applying dilution based theories to design patents, especially given the overlap between the subject matter covered by trade dress forms of trademarks and the subject matter of design patents.
 
As of right now, it appears as though holders of design patents (probably those whose designs are particularly distinctive and well known to the public) should try to assert design dilution and brand dilution as theories to support a finding of likely irreparable harm. The patentees should be careful to ensure they provide sufficient evidentiary support to demonstrate how the defendants’ infringing conduct leads to such dilution and how the dilution causes irreparable harm.
 
Please see the previous post: After the federal circuit Opinion: What Happens Now
for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.
 
**SOURCES**
Apple, Inc. v. Samsung Elec. Co., United States District Court Northern District of California, Apple’s Motion for a Preliminary Injuction, 2011-07-01, Docket No. 86.
Apple, Inc. v. Samsung Elec. Co., United States District Court Northern District of California, Court Order Denying Motion for Preliminary Injunction, 2011-12-02, Docket No. 450.
Apple, Inc. v. Samsung Elec. Co., United States Court of Appeals for the federal circuit, Opinion on Apple’s Appeal re Court Order Denying Motion for Preliminary Injunction, 2012-05-14.
Sarah Burstein, “Apple v. Samsung,” PatentlyO: The Nation’s Leading Patent Blog, 2012-05-18, http://www.patentlyo.com/patent/2012/05/guest-post-by-sarah-burstein-apple-v-samsung.html.
Rebecca Tushnet, “Brand Dilution as a Design Patent Theory of Harm,” Rebecca Tushnet’s 43(B)log, 2912-05-16, http://tushnet.blogspot.com/2012/05/brand-dilution-as-design-patent-theory.html.

After the Federal Circuit Opinion: What Happens Now

Here’s a quick recap of what our previous blogs have discussed. Back in July of 2011, Apple filed a motion for preliminary injunction against four of Samsung’s products: Galaxy S 4G, Infuse 4G, Droid Charge and Galaxy Tab 10.1. For various reasons, the district court denied Apple’s request against all four of the devices. Apple appealed this decision to the Federal Circuit. In May of 2012, the federal circuit issued its opinion whereby the appellate court affirmed the denial against three of the devices but remanded for further proceedings on the last. The federal circuit found that the district court had improperly found the D’889 patent to likely be invalid. The federal circuit decided that the D’889 was likely to be found valid, which in connection with the prior district court decision of likely infringement, meant that Apple had successfully established likelihood of success on the merits. The federal circuit upheld the lower court decision of Apple’s likely irreparable harm in the absence of an injunction against continued D’889 infringement. This decision meant that Apple had proven two of the four preliminary injunction prongs. The Federal Circuit remanded the case to the district court so the district court could reach findings on the final two prongs of the preliminary injunction analysis (balance of hardships, public interest).

 
After the federal circuit issued this opinion, Samsung petitioned the federal circuit for an en-banc rehearing. This petition was denied. Following this, the district court reached its findings, concluding that the final two factors of the preliminary injunction analysis also weighed in favor of Apple. And, as such, on June 26, 2012, the district court (of the Northern District of California) GRANTED Apple’s motion for a preliminary injunction against Samsung’s Galaxy 10.1 on the basis of alleged D’889 infringement. Samsung has already appealed this decision to the Federal Circuit. However, for now the injunction against the Galaxy Tab 10.1 has gone into effect (and will remain unless the federal circuit decides to reverse the district court’s granting of a preliminary injunction here).
 
Readers should keep in mind that Samsung has other options in addition to its rights to seek an appeal. This same matter is being litigated in Germany, where a German court had earlier granted an injunction against the same Galaxy 10.1. In response, Samsung simply made a few alterations to the design of the tablet and started selling this new version of the tablet instead (apparently making a few alterations sufficed in getting around design patent infringement).
 
Our next few blog posts will discuss the potential ramifications of the federal circuit’s May 2012 opinion. This opinion potentially has important effects on the obviousness inquiry for design patents and the irreparable harm prong of preliminary analysis. Our blogs will explore these issues.
 
Please see the previous post: Apple Argument and District Court Decision re Irreparable Harm from D’889 Infringement for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Apple's Argument and District Court Decision re Irreparable Harm From D'889 Infringement

As our previous blogs have mentioned, Apple’s original motion for a preliminary injunction just contained a very general section on irreparable harm outlining arguments of loss of consumer goodwill and loss of market share. Please see the previous D’677 blogs for a detailed analysis of Apple’s irreparable harm argument since the arguments there are the same ones for the D’889. What is different, however, is that time the district court did find irreparable harm. The district court had previously rejected the irreparable harm argument as to the infringement of the other three patents (D’677, D’087 and the ‘381). But, as the argument applied to D’889, the district court held that the infringement of D’889 would cause irreparable harm.

 
According to the district court opinion, Apple’s argument for irreparable harm was stronger here. The court identified a few main reasons for finding irreparable harm for the D’889 while not finding it for the other patents (despite the fact that Apple had advanced the same arguments for all four).  For one, the number of competitors manufacturing tablet devices is substantially lower than the number of companies manufacturing smartphones. According to the court, “because there appear to be fewer players in the tablet market, and the market is growing, it is arguably more likely that market share lost by Apple will be lost to Samsung” (Id. at 49). Another reason involved the court’s interpretation of the evidence as being far clearer on the nexus between product design and consumers’ purchasing decisions. Samsung had conducted some consumer surveys, but the court interpreted the results of that survey to provide support for “apple’s argument that consumers are likely to be induced to purchase the Galaxy 10.1, instead of the Apple iPad, because the overall designs of the products are substantially the same” (Id). Thus, here, Apple was able to establish a causal nexus between infringement of its designs and loss of market share (albeit through a Samsung consumer survey).
 
For these reasons, the district court found that Apple had shown the likelihood of irreparable harm as a result of Samsung’s infringement of D’889. However, because the court had also found that Apple was unlikely to prevail against a validity challenge to the D’889, the court denied Apple’s request for a preliminary injunction against the Galaxy Tab 10.1 as based on the D’889 patent.
 
On appeal, the federal circuit affirmed the lower court’s finding of irreparable harm. The federal circuit also had several interesting things to say on proving irreparable harm that will be discussed in our later blogs.
  
Please see the previous post: Federal Circuit’s Appellate Opinion re D’889 Validity for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Federal Circuit's Appellate Opinion re D'889 Validity

When the federal circuit issued its decision, it took the opposite stance from the district court concerning the D’889 validity issue, holding that the district court had erred in its obviousness analysis. The federal circuit found that the district court had erroneously categorized the Fidler tablet as a primary reference. When the federal circuit engaged in a side-by-side visual comparison of the Fidler tablet and D’889, it reached the opposite conclusion that the district court had found. The district court had found that the Fidler tablet had basically the same overall appearance with only some minor differences. The federal circuit disagreed and found that the two had substantial differences, and that these substantial differences, in turn, prevented the court from viewing the Fidler tablet as having basically the same visual appearance as D’889. The appellate court referred to differences the devices’ respective frames and the D’889’s glass surface. These differences led both devices to create different visual impressions than the other.
 
Furthermore, the federal circuit was of the opinion that the district court had been comparing Fidler and the D’889 on too abstract of a level. As in, “Fidler does not qualify as a primary reference simply by disclosing a rectangular tablet with four evenly rounded corners and a flat back”(Federal Circuit Opinion at 31). It seems that the federal circuit finds that such similarities arise from the nature of the product (a tablet device) and should not count as similarities that give both devices the same appearance. Without the Fidler tablet as a primary reference, courts could not reach a finding of obviousness, since the obviousness standard for design patents requires that the prior art include one primary reference.
 
Even if the federal circuit presumed that the Fidler tablet was a primary reference, the federal circuit concluded that it would still be unable to find obviousness because the secondary reference “could not bridge the gap between Fidler at the D’889 design.” The district court had relied on a secondary reference that when used in conjunction with the Fidler tablet led to a conclusion of obviousness. For one, the federal circuit’s view was that the district court’s secondary reference did not actually qualify as one. Recall that secondary references are always combined with primary ones. However, in order to combine a primary reference with a secondary reference, the secondary reference must be so similar to the primary reference “that the appearance of certain ornamental features in one [design] would suggest the application of those features to the other” (Id. at 30). According to the appellate court, the secondary reference here was “so different in visual appearance from the Fidler reference that it d[id] not qualify as a comparison reference under that standard” (Id). The reason here was that the secondary reference had a gray frame that surrounded its glass screen. This led the secondary reference to seem too different from the Fidler tablet for it to properly qualify as a secondary reference. As will be discussed in a later blog, the federal circuit took a very strict view of secondary references.
 
After soundly rejecting Samsung’s Fidler and secondary reference obviousness argument, the federal circuit found that Samsung had not raised substantial questions about obviousness or the invalidity of the patent at issue, which left Apple with having demonstrated likelihood of success on the merits after all.
 
The next blog will begin our discussion on the irreparable harm prong for the D’889 analysis.
Please see the previous post: Apple’s Argument and the District Court’s Finding re D’889 Validity for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Apple's Argument and the District Court's Finding re D'889 Validity

 As mentioned in a previous post, Apple grouped the three design patents together and discussed their likely validity very briefly. However, at the same time, Apple could have expanded on this topic through declarations and replies, after it had received Samsung’s opposition brief. Regardless, the information we have available is from the original motion that contained a very sparse section, arguing the likely validity of all three design patents. Apple referred to the PTO prosecution for the D’889 patent where the patent was granted despite prior art references. Additionally, Apple’s argument did include news reports and reviews to further support the novelty of the iPad (embodying the D’889).

 
Samsung had argued that the D’889 patent was obvious, and the district court found this argument to be convincing. Samsung brought forth a 1994 Fidler tablet as a primary reference. The court agreed with Samsung that the Fidler tablet was a primary reference. Here, Apple protested. Apple pointed to several differences between the D’889 and the Fidler tablet—the court termed these minor ones and Apple disagreed. Apple referenced the flat glass surface in its D’889 patent that was not in the Fidler tablet. To Apple, the fact that the Fidler tablet did not have a flat glass surface prevented it from acting as a primary reference. The district court rejected this argument. From my reading of the opinion, it seems as though the court was very focused on the fact that the glass surface was just one element of the design patent; without more elemental differences, it could not disqualify Fidler as a primary reference. This seems strange, since the focus of the primary reference inquiry is on the overall visual appearance of the reference, as opposed to a comparison of individual elements. 
 
Nonetheless, to the district court, “[e]ssentially, it seems as though Apple is arguing for the primary reference to be ‘substantially the same’ as the patent in suit. Apple’s argument that one design element may be sufficient to defeat obviousness risks collapsing the obviousness inquiry into the anticipation inquiry” (Court Order Denying Motion for Preliminary Injunction at 41).
 
The district court also found Samsung’s expert report on the obviousness topic to be persuasive. Samsung’s expert argued that he would have found the D’889 tablet design to be obvious in light of the combination of the Fidler reference and secondary references. To the court, this conclusion was convincing, and it found that a person of ordinary skill in the art would have found the D’889 patent to be obvious in light of the Fidler tablet and secondary references. As a result, the district court declared that Samsung had raised substantial questions about the D’889 patent’s invalidity. It is unclear why the district court found this particular expert’s report to be so convincing.
 
With regard to Apple’s evidence consisting of news reports and reviews (secondary considerations), the court dismissed these arguments. For one, the court simply found that Samsung’s prior art references presented a stronger case than evidence of secondary considerations. Another reason involved Apple’s failure to show a connection between the design in D’889 and Apple’s commercial success in the iPad. Essentially, for patent holders, a lesson is that secondary considerations can be strong evidence that shows non-obviousness, but the patent holder must demonstrate how the patent subject matter is connected to the secondary consideration. Practitioners should also be sure to have very strong arguments that are predicated on the prior art references. Secondary considerations may not always be sufficient in demonstrating novelty when the opponent presents a strong case based on prior art. All the Graham factors are meant to be equal. However, it seems as though courts are reluctant to base an obviousness inquiry on secondary considerations.
 
Given that the district court found that Samsung had substantial questions about the invalidity of the D’889 patent, the court denied Apple’s request for an injunction against the Samsung Tab 10.1 on the basis of the Samsung tablet’s infringement of D’889.
 
The next blog will discuss the Federal Circuit’s appellate opinion on this validity topic. Please see the previous post: Apple’s Argument and the District Court Decision re D’889 Infringement for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Apple's Argument and the District Court Decision re D'889 Infringement

As with its other infringement arguments, Apple relied on visual images—side-by-side comparisons—to demonstrate the substantial similarities between the D’889 design and the Galaxy Tab 10.1. design. Due to these substantial similarities in appearance, Apple argued that Samsung’s tablet infringed on the D’889 patent. It focused on the D’889’s “mimimalist computer tablet design” (Apple Motion for Preliminary Injunction at 13-14).

 
Moreover, Apple provided side-by-side visual comparisons of the D’889 and Galaxy Tab 10.1 designs against two of the prior art references. Apple argued that its D’889 design departed significantly from the prior art and that Samsung’s tablet followed the changes Apple made from the prior art.
 
Apple’s visual, side-by-side image comparisons were useful in demonstrating its argument. The district court found that Apple would be likely to succeed in proving infringement at trial. The court used these side-by-side comparisons to reach this finding. Per the court’s opinion, despite some minor differences, the Samsung accused tablet was “virtually indistinguishable  from” the D’889 and Apple iPad (embodying the D’889 patent) (Court Order Denying Motion for Preliminary Injunction at 47).
 
The federal circuit did not explicitly discuss the lower court’s D’889 infringement finding. However, it is clear that the court affirmed it since it remanded for findings on balance of hardship and public interest after overturning the lower court’s decision on likely invalidity.
 
Please see the previous post: Transition Between ‘381 and D’889 for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Transition Between '381 and D'889

In the original motion, Apple sought an injunction against Samsung’s Galaxy Tab 10.1 based on the device’s alleged infringement of the D’889 patent. The district court eventually denied this request, finding that the patent would likely be found invalid at trial. However, on appeal, the federal circuit overturned the invalidity finding and remanded the case back to the lower court for further findings. Samsung petitioned for the federal circuit for a rehearing en-banc on this issue, but the federal circuit denied this petition and issued a mandate to the lower court. This mandate required the district court to reach findings on the last two prongs of the preliminary injunction analysis: balance of hardships and public interest.

 
On June 26, 2012, based on the Federal Circuit’s mandate, the district court ultimately granted Apple a preliminary injunction against the Samsung Galaxy 10.1 tablet. Samsung appealed this decision.
 
Please note that our blog entries focus on the first of Apple’s preliminary injunction motions against four particular Samsung devices. Later, Apple followed up with additional preliminary injunction motions against different Samsung devices. We have not touched on any other preliminary injunction motions other than the first.
 
The next few blogs will focus on the D’889 patent. We will discuss Apple’s argument, the district court’s holding and the federal circuit’s appellate opinion. We will also expand on the potential ramifications of the federal circuit’s opinion that may go beyond the case at hand.
 
Please see the previous post: Apple’s Argument and District Court’s Decision re Irreparable Harm from Infringement of ‘381 Patent for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Apple's Argument and District Court's Decision re Irreparable Harm from Infringement of '381 Patent

 Apple’s fatal flaw was that its original motion for a preliminary injunction did not include a specific subsection on the irreparable harm from Samsung’s infringement of the ‘381 patent. As mentioned earlier, there were several declarations, exhibits and replies, so it is certainly possible that those documents expanded on the irreparable harm argument in connection to the ‘381 infringement. However, insofar as the original motion is concerned, Apple did not discuss anything about irreparable harm that was specific to the ‘381 infringement. Apple did not explain how the ‘381 infringement would cause either loss of consumer goodwill or lost market share. 

 
This precise failure doomed Apple’s request for an injunction based on ‘381 infringement. In the district court’s view, “Apple ha[d] failed to establish a relationship between any alleged loss of market share, customers or goodwill and the infringement of the ‘381 patent.” Court Order Denying Motion for Preliminary Injunction at 63. Additionally, the court focused on the nature of the patented technology in connection to the whole product. Was the technology patented in ‘381 essential to carrying out the accused products’ functions? Or was the ‘381 technology a determinative factor in consumers’ purchasing histories? Apple had not proven either. The court stated, “the fact that the ‘381 patent is but one patent utilized in the accused products and does not appear to be either necessary….or a core technology of the product, weighs against a finding of irreparable harm” (Id. at 64). 
 
Furthermore, Apple’s prior licensing of the ‘381 technology also weighed against Apple’s request. The prior licensing indicated that monetary damages could be an adequate remedy to compensate for the infringement.
 
All these factors combined lead the court to its finding against irreparable harm from ‘381 infringement. On the basis of no irreparable harm, the district court denied an injunction against the four accused devices as based on the ‘381 infringement.
 
On appeal, the Federal Circuit affirmed the district court’s irreparable harm finding. Apple needed to prove that the ‘381 patented technology was determinative to consumers’ purchasing decisions.  Without such a causal nexus, Apple could not get injunctive relief.
 
Please see the previous post: District Court’s Finding re Likely Validity of ‘381 Patent for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

District Court's Finding re Likely Validity of '381 Patent

The district court agreed with Apple and found that Apple would be likely to withstand Samsung’s validity challenges at trial.
 
Interestingly, the court did not address Apple’s point about the ‘381 successful re-exam. Rather, the district court walked through the prior art references Samsung had presented. Samsung argued that these references anticipated all of the claims in the ‘381 patent; invalidating the patent. Then, the court methodically rejected the references and found that the references were not anticipatory.  On the basis of those prior art references, the court rejected Samsung’s anticipation argument and instead found that Samsung had not raised substantial questions about the validity of the ’381 patent.
 
Accordingly, the district court found that Apple would be likely to succeed on the validity issue. The Federal Circuit’s appellate opinion did not address the district court’s finding of likely validity.
 
Our next blog will discuss Apple’s argument about irreparable harm (the prong upon which the court denied injunctive relief on ‘381 infringement).
 
Please see the previous post Apple's Main Argument in '381 Patent Case for more on this topic. For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Apple's Main Argument in '381 Patent Case

Apple’s main argument in support of the likely validity of its ‘381 patent was that the patent had survived a PTO re-examination. In prior litigation against Nokia, the PTO re-examined the ‘381 patent claims against all of the prior art that Nokia had asserted would invalidate the patent. However, the PTO confirmed the ‘381 patent claims during re-exam. Since the patent survived re-exam, Apple argued that it would be likely to defeat any of Samsung’s validity challenges. Case law supports Apple’s argument.

Apple cited to an unreported case to support its proposition that “grant of reexamination certificate supports clear case of validity for preliminary injunction” (Apple’s Motion for a Preliminary Injunction at 23). Other cited case law also referred to the fact that successful re-exam of a patent helped establish likely validity for preliminary injunction determinations.

Please see the previous post Tracking Apple's '381 Patent Infringement Case for more on this topic.

For more on emergency business litigation, click here or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Illinois Injunctions Case - Part 3

In our prior two posts, we considered Five Mile Capital Westin North Shore SPE, LLC v. Berkadia Commercial Mortgage, LLC, and other defendants, rendered by the Appellate Court of Illinois, First District, on December 24, 2012.  

Participant C objected to selling the property after it was acquired by a credit bid at a foreclosure sale because it would recoup none of its investment, and its appraisers claimed that the appraisal of the property obtained by the servicer was undervalued by about $14 million, and that if the property were held for a few more years, it would appreciate another $6 million.   In making that claim, the participant added credibility to its complaint--it had specific figures, backed by experts--but sowed the seeds of its own defeat in requesting a preliminary injunction, for by quantifying the damages that it was about to sustain by reason of what it claimed was a premature sale, it showed what money damages would compensate it for what it claimed was a breach of contract.   

An essential element of a preliminary injunction action is the inadequacy of a legal remedy.  You cannot on the one hand claim that your opponent has damaged you by a specific amount (the amount the property should be sold for less what the other participants would get from that sale) and then claim that amount is too speculative to support a money damages remedy, which is what this participant argued in trying to get an injunction that (either by getting itself appointed a special servicer or by directly stopping the sale) would enjoin the sale.   

For the plaintiff's sake, I hope none of its injunction court papers, when arguing that its money damages were speculative, impeached the value of the evidence it will need to introduce at the money damages trial.  

Illinois Injunction Case - Part 2

In our prior post, we set forth the facts of Five Mile Capital Westin North Shore SPE, LLC v. Berkadia Commercial Mortgage, LLC, and other defendants, rendered by the Appellate Court of Illinois,First District, on December 24, 2012, and whether the quashing of a lis pendens could be appealed before the final judgment in the case under Supreme Court Rule 307.  The court ruled that it could not be interlocutorily appealed, and then considered the refusal of the lower court to grant the requested preliminary injunction preventing the sale of the foreclosed on property.  The second interesting issue presented by the appeal was the standard of review.

The parties complicated the matter.  The defendant apparently filed only a motion to dismiss the injunction counts or prayers of the complaint.  The lower court treated the arguments of the parties as a request by the plaintiff for a preliminary injunction, opposed by the defendant based on the court papers filed. Ah, but motions to dismiss are appealed under a de novo standard, whereas preliminary injunction decisions are appealed under the abuse of discretion standard of review.

The appellate court stated that the lower court's handling of the issues was proper, although "unusual," and noted in a footnote that neither party objected and that interlocutory review would have been impossible had the court treated the paperwork and the arguments as merely a motion to dismiss, the granting of which would not have been appealable until the end of the case.  In fact, the lower court (Judge Flynn) handled the case more efficiently than the parties had presented it.  In light of these circumstances, the abuse of discretion standard of review was applied on appeal.

Improper Lis Pendens Filing in Illinois Injunction Case

 The case of Five Mile Capital Westin North Shore SPE, LLC v. Berkadia Commercial Mortgage, LLC and other defendants, rendered by the Illinois Appellate Court, First District, on December 24, 2012, presents several interesting injunction issues.

The Westin North Shore, a hotel in Wheeling, Illinois, obtained a loan from JPMorgan Chase Bank, N.S., but JPMorgan offloaded much of the risk of the loan to three other participants.  The "A" participant had the lowest risk and return; the "B" participant had more risk and a higher return; and the "C" participant had the highest risk and the best return.  Alas, the loan went into default.

The contract provided for that eventuality by appointing a "special servicer," which would, in the event of a default, handle the foreclosure and foreclosure sale, subject to contractual obligations to promptly sell the property and to take the best interests of the participants into account.  Depending on the appraised value of the property, one of the three participants would be the controlling participant with the power to veto any of the servicer's decisions that might adversely affect its investment. 

In this case, after the foreclosure and sale, at which the servicer obtained title with a credit bid, it decided to sell the property.  The appraisal it obtained showed that participant A would fully recoup its investment, participant B would recoup all but about $4 million, and participant C would get nothing, so participant C sued, alleging that the appraisal of the servicer was wrong and it the property were held for a few years it would appreciate in value.  But the servicer believed that participant B was the controlling participant, and it sided with the servicer in believing that an immediate sale should occur.  

When the lawsuit was filed, participant C filed a lis pendens against the property.  The lower court quashed the lis pendens, and the plaintiff filed an interlocutory appeal from that order, and the first of the interesting issues presented by this opinion is whether the order quashing the lis pendens was appealable.  The court held that it could not be appealed before the final judgment was issued.  Although Illinois Supreme Court Rule 307, which authorizes interlocutory appeals from orders granting, modifying, refusing, dissolving or refusing to dissolve or modify an injunction, a lis pendens is not an injunction, and the argument that quashing a lis pendens functions similarly to an injunction because the plaintiff is prevented from informing potential real estate purchasers about the existence of a lawsuit by way of the lis pendens would "stretch the meaning of an injunction beyond all recognition . . . ."  

The court believed the better analogy was to motions that refuse to quash subpoenas, which are not appealable, and further noted that quashing a lis pendens might not necessarily be an equitable order:  a lis pendens (a "creature of statute") improperly filed in conjunction with an automobile negligence action, for example, might be quashed by a court not sitting in equity.  We consider other interesting issues presented by this opinion in future posts.

Tracking Apple's '381 Patent Infringement Case

Here, both parties had a dispute over how the terms ‘display’ and ‘first direction’ should be interpreted. The court agreed with Apple on its construction of both terms. Regarding the ‘first direction’ term, the court felt that Apple’s construction was in line with the common-sense definition. In contrast, Samsung’s was a ‘hyper-technical reading that the claim is incapable of performing” (Court Order Denying Preliminary Injunction at 54).

Regarding ‘display’, the court used Apple’s construction of the term as the court felt it appropriately explained the term and the actual patent specification.

Based on the court’s interpretation of those two claim terms from the ‘381 patent claims, the court found that Apple would be likely to succeed at trial on the matter of infringement. On appeal, the Federal Circuit did not discuss the district court’s finding on likely infringement of the ‘381 patent.

Please see the previous post Apple's Motion for a Preliminary Injunction, Court's Denial, and Federal Circuit Appellate Opinion: Reasonable Likelihood of Success for more on this topic.  

For more on business litigation call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Apple's Motion for a Preliminary Injunction, Court's Denial, and Federal Circuit Appellate Opinion: Reasonable Likelihood of Success

Apple's Argument re Infringement of '381 Patent:

In order to demonstrate likelihood of success on the infringement topic, Apple needed to show that Samsung’s devices read on every single element of at least one of the ‘381 claims. To determine what the scope of the claim is, it is first necessary for the parties and the court to go through the claim construction process. Claim construction is the way in which the court defines the meaning of the terms that are in the claims. Both parties will submit briefs and declarations that support their respective ideas of how the terms should be defined. Then the court will decide how to interpret the terms.

Apple’s main infringement arguments were specifically detailed and argued in an expert’s declaration and exhibits. These documents were attached to Apple’s motion for a preliminary injunction. In the actual motion, Apple used a chart where one column contained the claim language and the second column just had text and images that showed how the Infuse 4G infringed on the claim. The Infuse 4G was used as just an example. According to Apple, the other three accused devices infringed the ‘381 in the exact same manner as the Infuse 4G. Per the district court opinion, the expert declaration Apple submitted had attached exhibits, some of which were video clips demonstrating how the four accused devices performed the same functions as those described in the ‘381 patent (Court Order Denying Motion for Preliminary Injunction at 55). It appears that the court found these video clips to be useful. Practitioners should take that into consideration while deciding how to present their claim construction arguments.

The next blog will discuss the court's decision on the likely infringement of the '381 patent.  Please see the previous post for more on this Preliminary Injunction.

Apple's Motion for a Preliminary Injunction, Court's Denial, and Federal Circuit Appellate Opinion:

Transition Between D’087 and ‘381

Given the structure of both Apple’s motion and the district court’s denial, normally we would follow the discussion of the D’087 patent with a discussion of the D’889 preliminary injunction analysis. However, since the D’889 patent would eventually go on to be basis for the injunction that Apple received, the discussion of the D’889 patent will be much more complicated and in depth. So, we have chosen to discuss the ‘381 patent first and then move on to the D’889.
The ‘381 patent is a utility patent for software. It claims, “a method for scrolling on a touch-screen device” (Court Order Denying Motion for Preliminary Injunction at 50). Apple alleged that all four of the accused devices that it sought to enjoin (the Galaxy S 4G, Infuse 4G, Droid Charge and the Galaxy Tab 10.1 tablet) infringed on multiple ‘381 patent claims.
Please see the previous post Apple’s Motion For A Preliminary Injunction, Court’s Denial, And Federal Circuit Appellate Opinion: Irreparable Harm for more on this topic.  
For more on business litigation visit http://www.pattersonlawfirm.com/ or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Apple's Motion for a Preliminary Injunction, Court's Denial, and Federal Circuit Appellate Opinion: Irreparable Harm

 As with its validity argument, Apple grouped all the patents together while discussing irreparable harm. Its motion for a preliminary injunction had one large section on the irreparable harm prong, but it discussed irreparable harm very generally. Thus, Apple did not have irreparable harm arguments that were specific to the D’087 patent. Rather, Apple applied the same loss of consumer goodwill and loss of market share arguments to D’087 as it did for D’677. Please see the irreparable harm of D’677 patent for an in depth analysis of Apple’s irreparable harm arguments.

Again, similar to its rejection of irreparable harm in the case of the D’677 patent, the district court ultimately rejected Apple’s D’087 irreparable harm argument on the basis of Apple’s failure to establish a causal nexus between the alleged D’087 infringement and the alleged harms.

The Federal Circuit also viewed the D’087 irreparable harm analysis as being “identical” to the D’677 irreparable harm analysis (Federal Circuit Opinion at 23). Since the Federal Circuit affirmed the court’s analyses of no irreparable harm from D’677 infringement, the no irreparable harm finding would also apply to the D’087. Consequently, the Federal Circuit also affirmed the lower court’s decision to deny an injunction against the two accused cell phones based on the D’087 patent.

Please see the previous post Apple's Motion for a Preliminary Injunction, Court's Denial, and Federal Circuit Appellate Opinion: Reasonable Likelihood of Success for a more in depth analysis of the court’s opinion.

For more on business litigation visit http://www.pattersonlawfirm.com/ or call 312-223-1699 to speak with one of our Chicago law firm attorneys.

Apple's Motion for a Preliminary Injunction, Court's Denial, and Federal Circuit Appellate Opinion: Reasonable Likelihood of Success

District Court’s Finding re Substantial Questions about D’087’s Validity

The district court found that Samsung had raised substantial questions about the invalidity of the D’087 patent. As a consequence, the court held that Apple did not prove it was likely to succeed at trial against Samsung’s validity challenge. Since Apple could not prove that it would be likely to succeed against a validity challenge for D’087, the court could not use alleged infringement of D’087 as the grounds for granting an injunction.
Samsung had presented the ‘638 patent as a prior art reference which anticipated the D’087 patent and made it invalid for being non-novel. The district court agreed. Presumably Samsung submitted visual side-by-side comparisons of both. The district court held that an ordinary observer would be likely to consider both patents to have substantially the same overall appearances. Though there were some differences between the two, such differences could be minor (and/or) obvious to a person of ordinary skill in the art.
The court’s discussion of the D’087’s likely validity is very brief. It is difficult to tell exactly why the district court felt so convinced by Samsung’s argument. Again, presumably, Samsung’s visual comparisons must have been very convincing. Apple’s motion itself did not discuss the ‘638 prior art reference, but Apple must have contested Samsung’s argument in a later reply or declaration (most of which were sealed).
The Federal Circuit did object to the district court’s analysis of the D’087 validity. It said that the district court had erred in finding that the ‘638 patent was substantially similar (and thus anticipated the D’087 patent). The error of the district court was in improperly defining the scope of the patent. The lower court had been too restrictive in defining what views of the design were being claimed in the D’087 patent. This seems to indicate that the Federal Circuit is far more generous in defining scope of claims and what is being protected. However, despite its disagreement, the Federal Circuit affirmed denial of an injunction on D’087 grounds due to the fact that it affirmed the lower court’s finding of no irreparable harm (discussed in the next blog).
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Apple's motion for a preliminaryinjuction, court's denial and federal circuit appellate opinion: Reasonable likelihood of Success

Apple’s Argument re Validity of D’087 Patent:

In Apple’s motion for a preliminary injunction, it grouped together the D’087, D’67 and D’889 patents in one section to discuss the likely validity of all three patents. Its arguments for validity were essentially the same for all three patents.

As you might remember, the validity section was fairly sparse, especially in terms of arguments specific to the D’087 patent. Apple emphasized that none of Samsung’s prior art posed a serious challenge to the novelty and non-obviousness of its patents. Moreover, Apple referred to media reports and consumer reviews of the iPhone to reinforce the fact that its design patents were new and non-obvious. Specifically with regards to the D’087 patent, Apple argued the patent had been found valid and enforceable by another court in a prior patent infringement suit. Accordingly, the other court findings provided additional support for its argument of likely validity.

The next blog will discuss the district court’s rejection of Apple’s argument. 

Apple's Motion for Preliminary Injunction, Court's Denial, and Federal Circuit Appellate Opinion: Reasonable Likelihood of Success

Apple’s Argument re Infringement of D’087 Patent, and the District Court’s Finding:
Using visual images to create a side-by-side comparison of the D’087 patent and Samsungs’ two accused phones (Galaxy S 4G and Infuse 4G), Apple argued that the phones had substantially similar designs as its D’087 patent. Like the D’677 patent, the D’087 patent involved the distinctive facial appearance of Apple’s instantly recognized iPhone (Apple’s Motion for a Preliminary Injunction at 11). Apple’s motion contained visual images of the front faces of both Samsung’s accused phones and Apple’s iphone. Apple compared the visual images to each other to argue that the Samsung phones copied the D’087 patented design. As such, the Samsung phones had substantially similar designs to the D’087 design, which meant that the two accused phones infringed the D’087 patent.
Because the district court decided that Apple would not be likely to prove the validity of D’087, the court did not address the question of D’087 infringement. Although, it did refer to visual images of the D’087 patent while discussing the likely infringement of the D’677 patent. The district court stated, “The D’087 patent is included in the visual comparison for reference only and forms no basis for the infringement analysis in light of the finding that Samsung has raised ‘substantial questions’ regarding the validity of the D’087 patent” (Court Order Denying Apple’s Motion, footnotes 18 and 19 at 25-26).
Because of these questions about the patent’s invalidity, the court denied Apple’s motion for an injunction based on the D’087 patent and didn’t discuss infringement. When the Federal Circuit heard this matter on appeal, it did not discuss the issue of infringement as it affirmed the court’s ultimate denial of the injunction request.
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Apple's Motion for a Preliminary Injunction, Court's Denial and Federal Circuit Appellate Opinion

Transition between D’677 and D’087           
Recall the last blog that discussed the district court’s finding that Apple had not fulfilled its burden of showing irreparable harm. Therefore, even though Apple had shown it was likely to succeed on the merits at trial, Apple’s failure to prove irreparable harm was fatal. The district court denied a preliminary injunction against the Samsung Galaxy S 4G and Infuse 4G cell phones on the basis of Samsung’s infringement of the D’677 patent.
However, Apple had also requested an injunction against those two devices on the basis of Samsung’s alleged infringement of another patent; this time the D’087 design patent. Apple alleged that Samsung’s Galaxy S4G and Infuse 4G cell phones also infringed the D’087 patent and should be granted a preliminary injunction against those devices on that basis. The next post will walk you through Apple’s argument about the D’087 infringement issue.

District Court's Finding rd Irreparable Harm from Infringement of D'677 - Part II

As mentioned previously, Apple’s argument for an injunction against the Galaxy S 4G and Infuse 4G based upon D’677 infringement failed due to a failure to establish likely irreparable harm. This post examines the court’s rejection of Apple’s argument about lost market share.

Apple had argued actual and potential loss of market share (lost sales) as being its second basis for irreparable harm. In order for Apple’s argument about lost market share to succeed, Apple must prove that it lost market share and that this loss was caused by Samsung’s infringement of D’677. Because D’677 is a design patent, not a technology patent, Apple must prove that design of its product is important to consumers’ purchasing decisions. If design is not important to consumers, then Samsung’s infringement of Apple’s design is irrelevant to purchasing designs and cannot be grounds for an injunction.

Accordingly, both parties sought to either prove or disprove the importance of design to consumer’s purchasing decisions. Apple argued that design was a determinative factor and the release of Samsung’s infringing products into the market will induce people that otherwise would have purchased Apple’s smartphones to instead purchase Samsung’s alleged copycat products (Court Order Denying Apple’s Motion for Preliminary Injunction, 33). Meanwhile, Samsung argued the opposite—that product design was a factor in purchasing decisions but certainly not a determinative one. To Samsung, Apple’s lost market share was not the result of Samsung’s infringement.

The parties used experts on this topic, and Samsung conducted consumer surveys. Much of this evidence is sealed from the public, so it is difficult to ascertain the details of the evidence (especially since, Apple’s evidence in the actual motion was somewhat bare-boned and mostly involved statistics about sales of Samsung’s accused phones). Though the details of the surveys are not clear, Samsung used the surveys to evince the importance of factors other than design on purchasing decisions. The court seemed to favor Samsung’s use of consumer surveys. In another later paragraph, the court seemed to suggest that Apple should have also used surveys to show consumer confusion between products or to show how Samsung’s design infringement otherwise affected consumers. For example, the court referred to the lack of evidence, establishing actual consumer confusion or some other direct or circumstantial evidence that Samsung’s design choices have impacted Apple’s market share. Surveys are generally a good way to provide direct evidence of consumer opinions. Overall, the court’s emphasis on surveys is important to note and should guide practitioners in their evidentiary decisions.

Based on Samsung’s presented evidence about the importance of other factors (such as the novelty to consumers), the court found that the evidence about the importance of product design to consumers’ purchasing decisions was ambiguous (Court Order Denying Apple’s Motion for Preliminary Injunction, 34). As such, Apple did not meet its burden in demonstrating that the design was a determinative factor to consumers. This meant that Apple did not prove the causal connection between Samsung’s design infringement and any market share loss that it suffered. Accordingly, the court did not find that Apple had proved likely irreparable harm.

The district court’s decision on Apple’s failure to establish likely irreparable harm was affirmed in the Federal Circuit’s appellate opinion. The Federal Circuit reiterated the necessity of showing a causal nexus between the infringement and the alleged harm. The Federal Circuit declined to overturn the lower court’s finding that Apple had not proved this nexus.

District Court's Finding re Irreparable Harm from Infringement of D'677- PART I

Recall that the district court had found in favor of Apple’s likely success on the merits. But when addressing the irreparable harm prong, the court found that Apple had failed to establish likely irreparable harm as a result of Samsung’s D’677 infringement. Because of this failure, district court denied an injunction based upon D’677 infringement against the Infuse 4G and Galaxy S 4G phones. Because of the length of this topic, the court’s finding will be discussed in two parts. This first part will focus on the rejection of Apple’s consumer goodwill argument. The second part will focus on the court’s rejection of Apple’s lost market share argument.

Apple had argued that Samsung’s infringement caused an erosion of Apple’s design and brand distinctiveness, which caused irreparable harm to Apple through loss of consumer goodwill. The court rejected this argument, mainly because Apple had failed to present sufficient proof.

Regarding the loss of design distinctiveness argument, the court felt that Apple had put forth a circular argument, stating its conclusion as the main support for the argument. For example, “Samsung’s phones are similarly designed to the iPhone, so the iPhone must not be so unique anymore, and we must have lost consumer goodwill” (Court Order Denying Apple’s Motion for Preliminary Injunction at 29). The only evidentiary support presented in the actual motion was some sales statistics and advertising descriptions. The court referred to Apple’s experts as having presented declarations and arguments on this point, but apparently those were similarly, ‘conclusory statements and theoretical arguments’.

The crux of the question here was if the dilution of Apple’s design caused consumers to lose goodwill toward Apple. Other than Apple’s claim that it did so, there was such a causal relationship between lost design distinctiveness and any lost consumer goodwill. In essence, the court boiled down to the fact that Apple had not articulated a theory as to how erosion of ‘design distinctiveness’ led to irreparable harm.

Regarding the brand dilution argument: the court was hesitant about this argument since brand dilution is actually a type of harm under trademark (not patent) law. The court was unsure about the applicability of a trademark injury as an irreparable harm for a design patent infringement matter.  However, the court did not have to resolve this issue since it found Apple had not presented sufficient evidence about the likelihood of brand dilution occurring. Surveys could have been conducted to demonstrate either consumer confusion (about the products) or consumer blurring of Apple’s brand with Samsung’s. The court also pointed out that such surveys could have proved the likelihood of brand dilution. However, without any such evidence, the court could not find that there was the likelihood of the harm of brand dilution.

On appeal, the Federal Circuit upheld the court’s rejection of Apple’s irreparable harm argument stating that: “The district court was correct to require a showing of some causal nexus between Samsung’s infringement and the alleged harm to Apple” (Federal Circuit Opinion at 16-17). It is important to note the Federal Circuit did have some interesting points about design and brand dilution, which will be discussed in a later post.

Sources:
1. Court Order Denying Apple’s Motion for Preliminary Injunction at 29.

2. Federal Circuit Opinion at 16-17.

Apple's Argument Regarding Irreparable Harm from Infingement of D'667 - Part II

In addition to loss of consumer goodwill, Apple argued that Samsung’s infringement also harmed their market share, causing both actual and potential market share loss.  Apple threw in several statistics in an attempt to support this statement. For example, after starting to sell “its iPhone-imitating Galaxy S,” Samsung experienced a 350% increase in the number of smartphones that it sold. These sales caused Samsung’s market share to also increase to 10.8% (when it was previously at 4.3%). These statistics are the only evidentiary proof provided in the motion for the argument that Samsung’s infringement caused Apple to lose some of its smartphone market share.  Again, Apple may have presented more evidence in its declarations and reply, but the evidence in the motion is very bare-boned.
It’s especially problematic that Apple sort of just threw in the conclusion that Samsung’s similar phone designs (infringement) must have been the main contributing factor for Samsung’s volume of sales and increased market share. Nor is there anything in the motion that would support a conclusion that consumers who bought Samsung phones bought them because of their similar design to Apple’s phones (or for that matter, that those same consumers would have purchased the iPhone if it were it not for Samsung’s copycatted design). I believe some of Apple’s experts may have tried to present evidence on this topic, but it must not have been very sufficient either (the court’s rejection of this argument is discussed in a later blog)

Apple's Argument Regarding Irreparable Harm from Infingement of D'667 - Part I

 Apple claimed it had suffered two types of irreparable harm as a result of Samsung’s infringement of D’677: loss of consumer goodwill and loss of market share.  Due to the length of this argument, this blog series has been split into two parts; today’s post examines Apple’s argument about loss of consumer goodwill.

Apple’s loss of goodwill argument surrounded the erosion of design distinctiveness. First, Apple’s D’677 and the iPhone design were distinctive; the iPhone’s immense commercial success and extensive design-centric advertising (ads that focused on product design) created consumer goodwill in the design of the iPhone.
Second, Samsung infringed Apple’s D’677 patent by marketing and selling phones that were substantially similar to the design of Apple’s iPhone (embodiment of D’677). Third, Samsung’s selling and marketing of such substantially similarly designed smart phones caused Apple to lose design distinctivenessalso called erosion or dilution of design distinctiveness. Fourth, this loss of design distinctiveness resulted in a loss of consumer goodwill for Apple. This loss of goodwill argument hinged upon Apple’s claim that product design was a determinative factor to consumers and their purchasing decisions. Apple summarized its argument as, “Samsung’s sale of products that mimic Apple’s designs threatens to erode the value of the designs and attenuate the hard-won link in the public’s mind between the designs and Apple” (Id. at 31).
However, there wasn’t much evidence to support this argument in the actual motion (other than sales statistics and descriptions of advertising). Apple made a very theoretical (not to mention, circular) argument, but it didn’t present much evidentiary supportat least not in the actual motion. Even if Apple presented more concrete evidence in its declarations and reply, this evidence must not have been very substantial as indicated by the district court’s response.
In its order denying Apple’s motion, the court also referenced an Apple argument about brand dilution (see note below). The gist of this brand dilution argument is that Samsung’s D’677 infringement also caused erosion of Apple’s brand distinctiveness, because “the design features of its products were closely intertwined with the Apple brand, and that Samsung’s products necessarily erode the distinctiveness of Apple’s brand” (Court Order Denying Apple’s Motion for Preliminary Injunction at 28, 29).
This brand dilution also resulted in Apple’s loss of consumer goodwill and irreparable harm. Like the design dilution argument, this brand dilution argument also relied on Apple’s claim that product design was important to consumers. Apple also argued that the dilution of its brand’s distinctiveness harmed the company, because the dilution threatened to diminish the value of Apple’s brand. (Although, that sort of argument really just restates the meaning of dilution in trademark law.)
**In the district court’s eventual denial of this motion, the court mentioned that Apple had made a brand dilution type argument to support irreparable harm in which it rejected. The district court even cited that this brand dilution argument was made on page 27 of Apple’s motion. However, I have scoured the public version of Apple’s motion, and I cannot find any mention of this argument. This brand dilution argument must have been made in a sealed version of the brief, a supporting declaration or reply brief, because I cannot find it in the public version of Apple’s brief online. **

District Court's Finding re Validity of D'677 Patent - Part II

 

This post is centered on Samsung’s argument about the D’677 patent’s invalidity. After having the ‘638 as a primary reference, Samsung argued that the other differences between the ‘638 patent and the D’677 patent would have been obvious. One of the main differences between them was the fact that the D’677 had a front face that was transparent, glass-like and black with an inset screen. A Samsung expert declared that using this black transparent screen on the front face would have been obvious because black screens were the only displays screens that were available for commercial purposes. Accordingly, using black for the unified front surface was not only an obvious choice, it was the natural default.

This same expert also provided some reasons as to why a person of ordinary skill in the art would have found it obvious to change the primary reference so the new device would have this transparent, glass-like black front surface. However, these reasons were not actually identified in the court’s opinion. But, the court did find them to be unsatisfactory in demonstrating obviousness.

 

Apple vs. Samsung: Court's Finding on Validity of D'667 Patent - Part I

The D’677 patent discloses that the front face surface of the iPhone has a black screen and is transparent and glass like. Arguing invalidity, Samsung attacked the D’677 patent as being obvious in light of the prior art. At the center of this argument was one particular patent: Japanese Patent No. 1241638 (‘638 patent). Per Samsung’s argument, the ‘638 patent worked in combination with other prior art to make D’677 obvious.  Due to the length of this discussion, we have split this entry into three parts.

You might recall that a challenge on obviousness grounds requires that there be a primary reference. As a refresher, a primary reference is one prior art reference that has basically the same overall visual appearance as the D’677 patent.

The district court found that the ‘638 patent could act as a primary reference in the obviousness inquiry. Though the ‘638 patent did not disclose, “A black transparent and glass-like front surface,” it nonetheless “created basically the same visual impression” as the D’677 patent did (Court Order Denying Motion for Preliminary Injunction, 21-2). The court was unclear in explaining its rationale for finding the ‘638 patent to be a primary reference. It’s logic seemed to be: the D’087 and D’677 patent both had similar overall visual impressions and that the ‘638 patent worked as a primary reference for the D’087 patent. Because of the substantial similarities between D’087 and D’677, it was assumed that a reference that worked as a primary reference for D’087 should also work as a primary reference for D’087. 

For example, the court stated, “Given the similarities between the D’677 and D’087 patents, and the substantial similarities between the ‘638 patent and the D’087 patent, it is appropriate for the ‘638 patent to serve as a primary reference for the D’677 patent” (Court Order Denying Motion for Preliminary Injunction, 22).

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District Court's Finding Regarding Infringement of Apple's D'677 Patent

 The District Court agreed with Apple, finding that Samsung’s accused Infuse 4G and Galaxy S 4G phones would likely infringe Apple’s D’677 patent. The court looked at the side-by-side, pictorial comparisons in reaching this finding. According to the court, Samsung’s accused cell phones “would likely appear substantially the same [as the D’677 patent] to the ordinary observer” (Court Order Denying Motion for Preliminary Injunction at 26).

Substantial similarities that contributed to overall similarity of appearance between the Galaxy S 4G and D’677 included: Galaxy S 4G’s “similar shape, size and glass-like black front face as the D’677 patent”; the location of the speaker on the Samsung Galaxy S 4G was in almost the same place as the speaker on the D’677 patent; the screens on the Galaxy S 4G and D’677 were similarly sized. Substantial similarities between the Infuse 4G included: the Infuse 4G’s similar “large, flat, transparent black front screen, a slot-shaped speaker and a streamlined, simplistic design”.

On the whole, these similarities gave the Samsung accused cell phones the same overall appearance as the D’677 patent. Because of these findings, the court held that Apple would be likely to succeed at proving infringement at trial.

However, while this is the case, the court did disagree on the significance of the differences between Samsung’s accused cell phones and Apple’s D’677. Some of the identified differences between the Galaxy S4G and D’677 included: Samsung’s camera lens at the top of its Galaxy S 4G’s front faces; Samsung’s logo, as well as the service carrier’s logo on the front face of the Galaxy S 4G and four buttons at the bottom of Samsung’s Galaxy S 4G phones. Some of the identified differences between the Infuse 4G and D’677 included: the larger and broader size of the Infuse 4G; writing on Infuse 4G (no writing on D’677) and the buttons on Infuse 4G (not present in D’677).

Though the court defined these as minor differences, they also assumed greater significance for two reasons. The first was the general simplicity and minimalism of the design of both Apple’s D’677 and Samsung’s cell phones. The second was that the iPhone (embodiment of D’677) and Samsung’s cell phones were all expensive products, and consumers were likely to note and consider the differences while making their purchasing decisions. Additionally, the court also disagreed with Apple’s argument that its D’677 patent was conspicuously different from the prior art. Citing to another case, the court noted, “‘if the claimed design is close to the prior art designs, small differences between the accused design and the claimed design assume more importance”.Then, the court went on to state that the prior art for the D’677 patent “may make minor differences… take on greater significance”.

Nevertheless, the existence of these differences was not enough to detract from the overall substantial similarities in appearance between Samsung’s accused cell phones and the D’677 patent. The Federal Circuit did not address the issue of likely infringement of D’677 in its appellate opinion. This indicates that it did not disagree with the district court’s finding.

The next business litigation blog post will discuss Apple’s argument about the likely validity of the D’677 patent. 

Apple's Motion for a Preliminary Injunction, Court's Denial, and Federal Circuit Appellate Opinion: Reasonable Likelihood of Success

Apple’s Argument re Infringement of D’677 Patent:

The D’677 patent is the design of the ‘front face’ of the Apple iPhone. Apple argued that Samsung’s Galaxy S 4G and Infuse 4G infringed upon their design patent. Apple motioned for a preliminary injunction declaring that an ordinary observer would find the appearance of the front of Samsung phones to be substantially similar to the design of a front in the D’677 patent. Apple used pictorial, side-by-side comparisons to demonstrate these similarities in appearance between the accused Samsung phones and the Apple D’677. For additional evidence in support of the substantial similarities in appearance, Apple compared the D’677 design and Samsung’s accused phones to the prior art. Apple argued that Apple’s design was fairly different from the prior art, enough so that it “departs conspicuously from the prior art” and that the Samsung accused devices “copied the conspicuously different features” that were in Apple’s D’677. 

Apple acknowledged that there were some minor differences in the design of D’677 and Samsung’s accused phones. However, Apple termed these as ‘minor variations’, which did not detract from the substantial similarities in their overall appearances. These differences were even more insignificant in Apple’s view because of Samsung’s “concerted effort to mimic Apple’s distinctive design while rejecting a bevy of other design options".

The next blog will address the District Court’s finding on infringement of the D’677 patent.

District Court's Denial of Apple's Motion for Preliminary Injunction and Appeal to Federal Circuit

 The Northern District of California court denied Apple’s motion for preliminary injunctive relief.   This blog will only discuss on the reasonable likelihood of success and irreparable harm prongs, since these two prongs formed the basis for the district court’s ultimate denial of an injunction against all four devices.

A refresher: Apple sought to enjoin: Infuse 4G cell phone (alleged infringement of D’677, D’087, and US ‘381 patents); Galaxy S 4G cell phone (alleged infringement of D’677, D’087, and US ‘381 patents; Droid Charge cell phone (alleged infringement of US ‘381 patent); and the Galaxy Tab 10.1 Tablet (alleged infringement of D’889 and US ‘381 patents).

Here is an overview of the court’s rulings and reasoning:

D'677 Patent Allegedly Infringed Upon: Infuse 4G and Galaxy S 4G.  Likely to be valid, likely to be found to have been infringed.  But, no irreparable harm if deny injunction. So, court denied motion for injunction. 
D'087 Patent Allegedly Infringed Upon: Infuse 4G and Galaxy S 4G.  District court found that Samsung raised substantial questions re validity of this patient, so court denied any requests for injunctions based upon infringement of D'087.
D'889 Patent Allegedly Infringed Upon: Tab 10.1.  District court found that Samsung raised substantial questions re validity of this patient, so the court denied any requests for injunctions based upon infringement of D'889.
US'381 Patent Allegedly Infringed Upon: Infuse 4G, Galaxy S 4G, Droid Charge, and Tab 10.1. Likely to be valid, likely to be found to have been infringed.  But, no irreparable harm if deny injunction. So, court denied motion for injunction. 

The district court’s ruling did not put an end to Apple’s quest, however.  Far be it for something as minor as a pesky court order to stop Apple from pursing a goal it seeks to accomplish.  Taking full advantage of every litigation tactic in its arsenal, Apple appealed the denial of its motion for a preliminary injunction to the Federal Circuit.  Apple’s strategizing paid off.  The Federal Circuit reversed the district court’s decision on the likely invalidity of the D’889 patent and remanded back to the district court for further findings on the last two factors (balance of harms, public interest) as to the Galaxy Tab 10.1.  The Federal Circuit did affirm the denial of injunctive relief as to the other three devices. 

Prefacing Note on Intellectual Property Tests and Standards (Part 2 of 4)

As mentioned in the previous post, as part of the reasonable likelihood of success prong, Apple must establish that Samsung is not likely to be able to invalidate the patent at trial.  A patent can be invalidated on a few grounds.  Most relevant for our purposes are the novelty and obviousness grounds for invalidation.  Patent law requires that the claimed subject matter be both novel and non-obvious. Correspondingly, a patent claim is invalid if it is either anticipated (not-novel, lacking novelty) or obvious.

Figuring out the burdens for the validity part of the reasonable likelihood of success prong is slightly tricky.  The party seeking a preliminary injunction bears the burden of establishing all four prongs of the preliminary injunction analysis, including the reasonable likelihood of success.  In patent infringement cases, the reasonable likelihood of success prong involves patent validity.  Demonstrating patent invalidity is the defendant’s task, since patents are presumptively valid.  This presumptive validity is also applicable during the preliminary injunction inquiry.  Thus, at the start of the invalidity arguments, it is Samsung’s burden to present evidence about the patent’s invalidity.  After Samsung raises the question of invalidity, Apple takes the burden of rebutting Samsung’s invalidity challenge.  If the court thinks that Samsung has raised a substantial question about the patent’s validity, then Apple has not met its burden in demonstrating reasonable likelihood of success “on the merits of the validity issue.” Court Order Denying Motion for Preliminary Injunction at 9. The district court summarized, “[u]ltimately, at the preliminary injunction state, Apple bears the burden of persuading the Court that it is more likely than not that Samsung will be unable to prove invalidity by clear and convincing evidence at trial.” Id.

[NOTE:  Apple’s section on the validity of its design patents is rather sparse, which goes along with the procedural nature of validity challenges.  Samsung bears the initial burden to produce the prior art that could challenge the validity of the patent at issue, after which Apple would then respond at length.  Samsung’s actual opposition brief, which would presumably contain the bulk of its invalidity arguments, appears to have been filed under seal (although there were several declarations and accompanying exhibits that were not).  Apple’s reply brief in support of its motion, which followed Samsung’s opposition brief, also appears to have been filed under seal (although several declarations and exhibits were not). In light of these constraints, we focus on the material available in Apple’s brief and the district court’s opinion.]

Prefacing Note on Intellectual Property Tests and Standards (Part 1 of 4)

                Before we further analyze Apple’s motion and the Court’s denial of it, we must first examine some of the tests and standards used in intellectual property law.  These tests and standards are key to understanding the reasonable likelihood of success prong.  For the reasonable likelihood of success on merits prong, Apple must demonstrate that it would be likely to prove infringement at trial and that Samsung would not be likely to prove invalidity at trial.

                With respect to three design patents (D’677, D’087, D’899), the test for infringement asks: “would an ordinary observer perceive the design of the accuse device to be ‘substantially the same’ as the design of the patent?”  This ‘substantially the same’ (or substantial similarities) standard is met when “‘the resemblance [between the accused device’s design and design patent] is such to deceive such an observer, inducing him to purchase one supposing it to be the other.’”  Court Order Denying Motion for Preliminary Injunction at 24. With respect to software patent ‘381, Apple must prove likely infringement of at least one the claims of the ‘381 patent.  A patent claim is infringed if the accused device reads on every element of the claim.

Apple v. Motorola: Injunction Hearing - General Point of Interest for Practitioners

 Another note of interest to IP practitioners also came up during Judge Posner’s questioning of Apple’s argument about Motorola’s infringement causing harm in the form of loss of consumer goodwill.  Apple’s attorneys had sought to bring in multiple news articles and reviews of the iPhone as evidence.  Judge Posner questioned Apple as to the relevance of these articles, because they generally did not relate to the specific features that were the technology of the four patents at issue.  He asked for articles that dealt specifically with the features that were being protected in the patents, because such articles could demonstrate how important those specific features were to consumers and their purchasing decisions.  For example, one of the patents at issue had to do with a feature for a notification bar.  The Judge seemed highly dubious of the value or importance of that feature to consumers, and he indicated that he would have wanted to see some articles about the notification bar feature, which could support Apple’s argument that infringement of that feature harmed its goodwill or market share.

One suggestion is that parties should really focus on providing concrete, direct proof of how the infringement is leading to the harms being asserted.  Especially with patents that deal with one tiny part of a larger machine and/or device; some direct evidence of the importance of the patented technology to consumers would be helpful.  Apple argued that Judge Posner was being too “granular” in his focus.   I am not sure that persuaded him.  

Apple's 1st Motion for a Preliminary Injuction

On July 1, 2011, Apple filed a motion for a preliminary injunction against some of the Samsung’s Galaxy smartphones and tablets at issue in the case.  Apple’s motion for a preliminary injunction was limited to four of the accused Samsung devices (Infuse 4G, Galaxy S 4G, Droid Charge smartphones, and the Galaxy Tab 10.1), which allegedly infringed the following four Apple patents: D’677, D’087, D’889, US Patent No. 7,469,381(one of the utility patents in suit, and it covers software).

For two reasons, the motion is interesting for how it starts.  First, it explained why it limited the motion to four devices and four patents, claiming that the decision would be easy for the court:

“[i]n order to expedite resolution of this motion, Apple has selected intellectual property rights that lend themselves readily to adjudication without trial…Deciding infringement of these design patents is as simple as comparing Apple’s design patents to images of the Samsung products and observing the substantial similarity between the two. The same is true for validity: a visual comparison of prior art designs with Apple’s design patents confirms that Apple’s patented designs are radically different from the prior art...the claims of the ‘381 patent are so clear…[a] simple demonstration proves that Samsung’s products infringe…For even greater simplicity, Apple is limiting this motion to new products that Samsung recently released in the U.S.” Apple’s Motion for a Preliminary Injunction, 2011-07-01, Docket No. 86 at 8-9.

Second, Apple’s motion, after bragging about the “unique and refined” look of its products, explained that it had tried to convince Samsung to abandon this course of copying to no avail.  “[T]hose [Apple’s] pleas fell on deaf ears.”  Attempts to resolve matters outside court are generally welcomed by the courts.

The Interplay between Preliminary versus Permanent Injunctions

If a patentee plaintiff wins his patent infringement suit, he may not necessarily be awarded a permanent injunction against the defendant.  Of course, this seems somewhat strange, since the whole point of getting a patent (and disclosing the secrets of your patented subject matter) is that the patentee receives the exclusive right to make/use/sell/offer to sell/etc the patented subject matter, which implies that the patentee should be able to permanently enjoin any infringing use of his valid patent.  However, this idea was explicitly rejected in the Supreme Court’s eBay decision “eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).”   Prior to the Supreme Court’s holding in eBay, the Federal Circuit had held that as a “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.”  In the eBay holding, the Supreme Court overturned the Federal Circuit’s approach to permanent injunctions in patent cases and rejected the general rule.  The Court held that it did not find any statutory support for the differentiation of patent law cases from other cases.

Thus, after findings of patent infringement, courts analyze permanent injunctions under the rubric of the four factor test re-articulated in eBay, which specified that a plaintiff must establish all of the following: (a) irreparable injury/harm; (b) that the other remedies available (i.e., monetary damages) are inadequate to compensate the plaintiff for the harm he suffered; (c) after balancing the hardships to both parties, equity favors a decision for the plaintiff; and (d) public interest would not be harmed if a permanent injunction issued.  These four factors are similar to the four preliminary injunction factors with two exceptions.   First, the preliminary injunction analysis makes “inadequacy of other remedies” into a component of irreparable harm, whereas “inadequacy of other remedies” is its own requirement, wholly separate from irreparable harm, in the permanent injunction analysis.  The overlap between irreparable harm and (in) adequacy of other remedies makes this a technical distinction.   Second, the preliminary injunction analysis requires considering the plaintiff’s reasonable likelihood of success on the merits, whereas a permanent injunction is not even being considered until the plaintiff has won.

Apple's Motion for Preliminary Injunction Attempts to stop Samsung

Apple’s motion for preliminary injunction sought to prohibit Samsung from “making, using, offering to sell, selling within the US, or importing into the US” the infringing products.   These are the rights that every patentee holds over a valid patent.  In order to protect these rights, which are exclusive to the patentee, the patent must be both infringed and valid.  For example, if the defendant can successfully argue that the patent is invalid with clear and convincing evidence, then the patentee plaintiff has no rights over his patented subject matter, and the defendant’s “infringement” doesn’t matter. 

If the plaintiff has won a preliminary injunction but eventually goes on to lose the case, then the defendant has suffered an inequitable wrong.   One way to attempt to prevent such a wrong from taking place is for the courts to require the movant to show a “reasonable likelihood of success” on the merits.  The “reasonable likelihood of success on the merits” is the first of four requirements for preliminary injunctions, all of which must be proved by the movant in order to win. Correspondingly, “to establish a reasonable likelihood of success” in a patent infringement case, the movant “‘must show that it will likely prove infringement, and that it will likely withstand challenges, if any, to the validity of the patent.’” 

About the author: The Patterson Law Firm is a Chicago Law Firm that handles Business Litigation cases about has over 100 years of combined experience practicing law.

Our First Post About An Injunction Issued In Another Country

Apple versus Samsung.  Samsung unveiled its new Galaxy Tab 7.7, a new Android tablet, but had to remove it from a convention show and from its German website after a court in Germany issued an injunction against Samsung and in favor of Apple.  Very brief details were contained in the Engadget September 4th post by Amor Toor.  We are trying to locate the court papers and ruling for further comment.

Re:Exactly Which Trade Secrets Am I Enjoined From Using?

In an excellent blog post , attorney Michael R. Greco refers to case IDG USA v. Kevin Schupp and the need to be specific when requesting an injunction and when drafting an order. This often presents a quandary in trade secret litigation because a detailed description reveals the trade secret you want to conceal. In some cases, filing under seal may be the answer.

Patent Litigators: If You Need a Preliminary Injunction, Where You File Your Case Matters

LegalMetric Research reports that success rates on contested preliminary injunction motions in patent cases is 30% nationwide.  But the success rate varies by district.  California Central’s win rate is 38% and New Jersey’s win rate is 40%.  Here is the link to LegalMetric.  Its full report costs several hundred dollars.

The report includes:

    • District and individual judge analysis of over 1300 Preliminary Injunction rulings.
    • Win rates for all districts having at least one decided Preliminary Injunction Motion in patent cases.
    • Length of time from motion filing to decision for all decided Preliminary Injunction Motions in patent cases.
    • Click here to view a typical district excerpt.

Turning Defeat Into Victory

The owner of a computer school that suffered a crippling burglary of high-tech equipment came to us after losing a trial--while he was represented by a different lawyer--against his insurance company. He had immediately sought compensation from his insurance company in order to resume operations and prevent canceling classes. After a grueling eight month insurance investigation, the insurer claimed the owner was not entitled to any payment under the policy because he allegedly misrepresented or concealed material facts during the course of the investigation. The owner sued unsuccessfully, seeking compensation for replacement equipment and business income losses. Once we were retained to replace the prior lawyer, we successfully asked the judge to grant a new trial, defeated a petition for leave to appeal that decision, and then won the second jury trial, obtaining a jury verdict of $534,000. The verdict included compensation for all losses claimed: business income loss, lost equipment and software, building repairs and extra costs incurred.

Amylin Pharm. v. Eli Lilly Part II

 This is Part II of a post on the Amylin v. Eil Lilly Litigation.  For background on the case and to read about the original TRO see Part I of the post.

 

Denial of Preliminary Injunction

After granting the temporary restraining order, the parties further briefed the matter and a preliminary injunction hearing was held on June 2, 2011.  As a result, the Court vacated the TRO and denied the preliminary injunction.

The main thrust of the Court’s reversal comes from a more careful analysis of the irreparable harm factor. The Court did not address the remaining elements of the preliminary injunction after determining that Amylin failed to show irreparable harm: 

Under Winter, Amylin “must establish that irreparable harm is likely, not just possible, in order to obtain a preliminary injunction.” Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131 (9th Cir. 2011). “‘Irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction. . . . Accordingly, the moving party must first demonstrate that such injury is likely before other requirements for the issuance of an injunction will be considered.’” Freedom Holdings, Inc. v. Spitzer, 408 F.3d 112, 114 (2d Cir. 2005) (alteration in original) (quoting Rodriguez ex rel. Rodriguez v. DeBuono, 175 F.3d 227, 233–34 (2d Cir. 1999)).

In footnote 2 of its order, the Court repudiated the presumption of irreparable harm from the original TRO.  Instead, the Court examined Amylin’s injury claims: (1) harm attributable to Defendant’s misuse of Amylin’s confidential information and (2) loss of prospective customer and goodwill. 

The Court found Amylin’s claim of harm—misuse of confidential information— was too speculative.  “Speculative injury does not constitute irreparable injury sufficient to warrant granting a preliminary injunction.” Carribean Marine Servs. Co. v. Baldrige, 844 F.2d 668, 674 (9th Cir. 1988).  The Court does not do a great job explaining this finding.  Instead, it passes the buck to the two points below.

Secondly, the Court points to Food and Drug Administration’s regulations that prohibit Lilly’s sales representatives from making any potentially misleading statement regarding Amylin’s product without adequate supporting data, including statements comparing the attributes of the other product.  Amylin’s argument that the Defendant’s sales representatives would intentionally mislead consumers to the detriment of Amylin is clearly specious.  The Court concluded that the sales representatives would not risk FDA sanctions to maximize sales of a competing product.

Finally, in order to prevail in a preliminary injunction, damages cannot be monetarily compensable: “[E]conomic injury alone does not support a finding of irreparable harm, because such injury can be remedied by a damage award.” Rent-A-Center, Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 603 (9th Cir. 1991).  The Court relied on Defendant’s economic expert who asserted money damages were sufficient to cover any harm arising from Defendant’s actions:

To the extent that Amylin would suffer from the alleged actions, the resulting loss would take the form of profits on lost exenatide sales. Losses of this nature are generally calculable through the use of standard economic analyses undertaken in the calculation of economic harm generally and, specifically, in antitrust actions.  Amylin Pharmaceuticals, Inc. v. Eli Lilly and Company, Case No. 11-CV-1061 JLS (NLS) (S.D. Cal. June 8, 2011)

The courts do not enjoin actions that would result in a calculable economic injury. Accordingly, misappropriation of a trade secret can be remedied with money damages.

Finding no irreparable harm, the Court ended its analysis.    

 

Amylin Pharm. v. Eli Lilly Part I

By Jay Lewis

Amylin Pharmaceuticals, Inc. v. Eli Lilly and Company, Case No. 11-CV-1061 JLS (NLS) (S.D. Cal. June 8, 2011)

Background

Amylin Pharmaceuticals (“Amylin”) and Eli Lilly (“Defendant”) entered into a business relationship in 2002 to develop and commercialize exenatide, a drug used for treatment of type-2 diabetes.  In early 2011, Defendant announced that it was entering a similar alliance with Boehringer Ingelheim GmbH (“Boehringer”) to develop and commercialize linagliptin, also a drug used for treatment of type-2 diabetes.  Amylin and Boehringer are direct competitors so needless to say, Amylin was opposed to Defendant’s entering into the second agreement.

Amylin and Defendant held private negotiations regarding the Boehringer alliance.  The parties were unable to resolve the matter so Amylin filed for a temporary restraining order (“TRO”) and preliminary injunction.  Amylin requested the Court to restrain and enjoin Defendant and others acting in concert from 1) disclosing any of Amylin’s confidential information; 2) using the same sales force used for Amylin’s drug; and 3) falsely describing Amylin’s products.

Legal Standard

The Court applied the appropriate legal standard, citing Winter v. Natural Res. Def. Council, 555 U.S. 7 (2008) for the general factors a plaintiff must show to obtain a preliminary injunction:

  1. A likelihood of success on the merits of the legal claim,
  2. Irreparable harm in the absence of preliminary relief,
  3. The balance of equities tips in the favor plaintiff’s favor, and
  4. The relief is in the public interest.

The Court further applied the 9th Circuit’s sliding scale balancing test as articulated in Alliance for Wild Rockies v. Cottrell, 622 F.3d 1045 (9th Cir. 2010).  Under this test, a stronger application of one factor may offset a weaker application of another. Alliance, 1049-53.

Original TRO

The Court granted Amylin’s request for a TRO but would later deny all of Amylin’s requests in a subsequent hearing.  The Court’s analysis in the original TRO decision was focused on Amylin’s likelihood of success on the merits.  Specifically, the Court found that Amylin would likely prove that the Defendant-Boehringer alliance would violate the confidentiality clause in Defendant-Amylin’s existing agreement.  The Court reasoned that the sales force for Defendant was already privy to Amylin’s confidential information and to task that same individuals with the sale of the Boehringer drug ostensibly puts Amylin’s confidential information in the hands of its competitor.

After finding a likely success on the merits, the Court briefly discussed irreparable harm by reiterating the risk of loss of confidential information to a competitor.  The Court quoted TMX Funding, Inc., v. Impero Technologies, Inc., 2010 WL 1028254, at *8 (N.D. Cal. March 18, 2010), “California courts have presumed irreparable harm when proprietary information is misappropriated.”  The Court was similarly brief in discussing the balance of equities and public interest and held in favor of preventing the sales force from promoting Boehringer’s products.

Part II will discuss the subsequent denial of the preliminary injunction.

 

Emergency Litigation Wrap-up

By Jay Lewis

The following are links to several current emergency litigation matters:

Apple escalates patent war claiming Samsung is slavishly copying Apple's products.  Apple claims Samsung is violating iPad and iPhone hardware and software patents.

Court of Appeals in Manila denies motion to lift preliminary injunction. "The Court of Appeals has denied the plea of the Banco Filipino Savings and Mortgage Bank for the lifting of the writ of preliminary injunction that had stopped what could have been a P25-billion assistance package for the beleaguered bank." The Court wrote, "[A]llowing the case a quo to proceed will prevent the [Monetary Board] from, or hamper their functions in, exercising regulatory functions over private respondent, which in turn, would work great injustice and cause irreparable injury to the general public,” 

Vermilion cancels single-sex classes.  "A second attempt at getting a preliminary injunction to halt single-sex classes at Rene Rost Middle School in Kaplan is now moot because of the Vermilion Parish School Board's decision to discontinue the classes."  

Medical marijuana injunction hearing starts Monday in Helena.  Montana Cannabis Industry Association filed for an injunction to stop a new law that would make it more difficult for users of medical marijuana to obtain the drug.  In 2004, Montana voters passed a law allowing its use, but in 2011, the legislature attempted to implement stringent restrictions.  Hearing is scheduled for the next two days. "Those seeking the injunction contend the new law violates the plaintiffs' constitutional rights to equal protection, privacy, dignity, freedom of speech and due process."

Judge grants Greensboro landfill opponents a victory.  The Judge granted a preliminary injunction against the City Council, barring it from entering into a contract with a company that would open new dump areas.

Rhode Island Supreme Court upholds eviction of homeless from Providence park.  The City of Providence was successful in enjoining the encampment of homeless in a city park that "was not fit for human habitation."  Additionally, the camp "violated a city ordinance against camping overnight in public parks, had no clean water, no garbage facilities, no electricity, no sanitation or bathroom facilities."

7th Circuit Preliminary Injunction to Enforce Right of First Refusal Part II

By Jay Lewis

Hold-Separate Conditions

In order to maintain Roche’s rights, the lower Court set forth conditions for MAS and Alere’s sale to move forward.  The hold-separate portion of the order contained the following:

  1. MAS survives the merger in its current form as an independent, though wholly or partially owned, corporate entity;
  2. There are no material changes in MAS’s operations;
  3. There are no material changes in MAS’s business plans;
  4. Alere does not hire any current or former employees, officers, or directors of MAS;
  5. MAS does not hire any current or former employees, officers, or directors, of Alere;
  6. No current or former employees, officers, or directors of Alere serve as directors or board members of MAS;
  7. No current or former employees, officers, or directors of MAS serve as directors or board members of Alere;
  8. MAS does not share with Alere any confidential or proprietary information regarding Roche or any other company with which MAS does business;
  9. MAS does not share with Alere any of MAS’s own confidential and proprietary information except to the extent that MAS shares such information with third parties in its normal course of business; and
  10. MAS does not transfer or dispose of any material assets or make any material acquisitions.

The ten conditions above, however, did not address MAS and Alere’s agreement preventing MAS from incurring substantial liabilities before a completed purchase.  Under the agreement, MAS could not allow its assets to become subject to liens, sell new stock or acquire new business, dispose of intellectual property, or incur debt other than in the ordinary course of business prior to close.  The Appellate Court added an additional condition to appease Alere’s concerns.

  1. If Alere acquires MAS subject to the first 10 conditions, then MAS remains bound by all promises in §7.7 of the acquisition agreement for as long as this injunction remains in force.

If MAS and Alere meet conditions one through eleven, they would be allowed to move forward with the sale.  Once the arbitrator makes a final deicison as to Roche’s right of first refusal, the sale would either close or die on the vine, but either way, Roche’s rights would not be harmed prior to the completion of the arbitration.

Bond

In dicta, the Court addresses the lower court’s decision not to require Roche to post a bond.  Although the Roche-MAS contract waives the parties’ entitlement to an injunction bond, the Court cautions judges to take care in setting a bond, “[P]reliminary injunctions…are more likely to be erroneous than injunction issued at the close of the litigation.  A party injured by an erroneous preliminary injunction is entitled to be made whole.”  The Court also stated, “Judges therefore should take care that the bond is set high enough to cover the losses that their handiwork could cause.”

The Court attempted to hedge any potential mistake in entering a conditional injunction by asking Roche to promise to pay for MAS the same amount as Alere.  “[I]f Roche eventually acquires the shares it will pay the investors at least $43 million plus interest from the time the MAS-Alere deal originally was scheduled to close.”

7th Circuit Preliminary Injunction to Enforce Right of First Refusal Part I

By Jay Lewis 

Roche Diagnostics Corporation v. Medical Automation Systems, Inc; Gregory A. Menke; and Kurt M. Wassenar, Case No. 11-1446 (7th Cir. May 24, 2011)

Facts

Roche Diagnostics (Roche) is a glucose monitor manufacturer.  Medical Automation Systems (MAS) is a software company.  Roche and MAS entered into a contract whereby MAS would supply software for Roche’s glucose monitors.  During the course of the contract, MAS agreed to sell its stock and assets to Alere, Inc. (“Alere”), one of Roche’s competitors.  Roche claimed a right of first refusal under the contract.  MAS denied that the right of first refusal was effective because the sale was scheduled to close after the expiration of the contract.  Roche filed for injunctive relief.  On February 23, 2011, the Southern District Court of Indiana allowed the sale to move forward subject to hold-separate conditions.  Roche appealed.  The Seventh Circuit affirmed the lower court’s ruling with an additional condition.

Arbitration Clause

The Roche-MAS contract contained an arbitration clause covering any disputes over the right of first refusal. The clause allowed either party to seek equitable relief pending arbitration.  The Court acknowledged this clause and refrained from discussing the merits of the contract dispute.  Instead, the Court focused solely on the equitable relief.  Specifically, the Court examined the potential for irreparable harm to the parties should the sale take place prior to a resolution in arbitration.

Balance of Harms

Roche’s right of first refusal would be damaged or eliminated if MAS was allowed to move forward with the sale of its assets.  It would be incredibly difficult to unravel a sale if the arbitrator later decided Roche had a right to buy the company. However, enjoining the sale could harm MAS by killing the deal or diminishing its value should the arbitrator decide that Roche has no right of first refusal.  The Court decided to set aside the uncertainty in the arbitrator’s decision and examine who faces the greater harm. 

The Court found that Roche faced the greatest harm.  Should an unbridled sale go forward, the parties would be completely unable to “unscramble the eggs.”  Changes to the corporate structure and management, disclosure of intellectual property, sell-off of assets, and alterations in strategy all create a potential impossibility of restoring the status quo ante.  Additionally, MAS has two potential purchasers and any uncertainty will be resolved when the arbitrator decides who gets to buy it.  Ultimately, the Court decided that the sale could continue on the condition MAS and Alere were separately maintained during arbitration.  

Part II will delineate the Hold-Separate Conditions.

Emergency Litigation Around the Nation

A judge issued a preliminary injunction last week in a lawsuit against the city of Enid, preventing the use of a construction manager at-risk contract for the Enid Renaissance Project.

Plaintiffs withdraw their request for a preliminary injunction preventing the sale of Lubrizol to Berkshire Hathaway. The plaintiffs have opted to allow the shareholders to vote on whether to sell rather than seek a preliminary injunction.

Judge denies a taxicab company's request for an injunction to stop the city of Charlotte from awarding airport contracts to three different companies.

Catholic Charities filed an emergency injunction against the Illinois Attorney General and Department of Children and Family Services for threatening to enforce new policies that require Catholic Charities to accommodate unmarried couples or civil union couples who want to become foster parents.

Daytona Beach-based insurance agency, Brown & Brown, seeks to temporarily shut down a rival company formed by former executives.

Tiffany & Co. won a temporary restraining order June 7 against a Michigan jewelry store it claims is selling counterfeit Tiffany rings on eBay.

 

WORLDCARE Trademark Injunction Part III

 Written by Jay Lewis

Irreparable Harm

The Court presumed the threat of irreparable harm to the movant based on the likelihood of confusion and success on the merits. Because trademarks are similar to “intangible assets such as reputation and goodwill, a showing of irreparable injury can be satisfied if it appears that [the movant] can demonstrate a likelihood of consumer confusion.” General Mills, 824 F.2d at 625.

Public Interest

So after finding (1) the balance of harms weighed in favor of Worldcare, (2) Worldcare was likely to demonstrate consumer confusion and therefore likely succeed on the merits and (3) Irreparable harm was presumed based on the consumer confusion; the Court found that (4) an injunction favors the public interest.  “A strong public interest exists in preventing confusion as to the source of products and services included in a medical coverage insurance policy, and as to who will be providing those services.” Worldcare.

After careful examination, the Court ordered the following:

  1. The Motion for Preliminary Injunction filed by Plaintiff WorldCare Limited Corporation is granted; and
  2. Defendant World Insurance Company and its officers, agents, servants, employees, and all persons acting in concert with World Insurance, are enjoined from using the designation "WORLDCARE" or any other name or mark confusingly similar to "WORLDCARE," either alone or in combination with other words or symbols, as part of any trademark, service mark, trade name, product name, corporate name, assumed name, domain name, Web site name, email address or in any other manner in connection with healthcare or medical-related services during the pendency of this action.

For in-depth discussion of Trademark Infringement, see Chapter 10 of Handling the Business Emergency.

 

WORLDCARE Trademark Injunction Part II

Written by Jay Lewis 

Probability of Success on the Merits 

Worldcare established trademark infringement by proving, “it ha[d] ownership or rights in the trademark and that the defendant ha[d] used the mark in connection with goods or services in a manner [that] cause[d] consumer confusion as to the source and sponsorship of the goods or services.” Community of Christ Copyright Corp. v. Devon Park Restoration Branch of Jesus Christ’s Church, 634 F.3d 1005, 1008-09 (8th Cir. 2011).  The parties agreed that Worldcare had acquired rights in the mark.  The parties disagreed that confusion existed with use of the WORLDCARE mark.  The following is the six-factor test used by the Eighth Circuit to determine whether a trademark is likely to cause confusion:

  1. Strength of the owner’s mark;
  2. the similarity between the owner’s mark and the alleged infringer’s mark;
  3. the degree to which the products compete with each other;
  4. the alleged infringer’s intent to ‘pass off’ its goods as those of the trademark owner;
  5. incidents of actual confusion;
  6. the type of product, its cost, and conditions of purchase.

Frosty Treats v. Sony Computer Ent. Am. Inc., 426 F.3d 1001, 1008 (8th Cir. 2005).  Not all factors must be satisfied. Id.

The Court determined that the WORLDCARE mark was both conceptually and commercially strong.  The mark fell into the “suggestive” category under the conceptual strength test.  “A suggestive mark is one that requires some measure of imagination to reach a conclusion regarding the nature of the product.” Duluth News-Tribune, a Div. Of Nw. Publ’n, Inc. v. Mesabi Pub. Co., 84 F.3d 1093, 1096 (8th Cir. 1996).  According to the Court, this makes Worldcare’s mark conceptually strong.  In determining the commercial strength, the Court pointed to the Worldcare’s uncontested use of the mark for nearly ten years.  Other organizations’ simultaneous use of the mark in non-healthcare industries did not weaken Worldcare’s commercial strength within the healthcare industry. 

The second factor, the similarity of the owner’s mark and the alleged infringer’s mark, was clearly met in this case.  The United State Patent and Trademark Office (“PTO”) had rejected Defendant’s trademark application.  The PTO found that the wording was identical and believed that consumers would likely be confused as to the source of the services.

The third factor compared the degree of competition between the products.  Both companies operate in the insurance industry.  Worldcare’s products are sold as a rider to health insurance policies.  Likewise, Defendant’s product is sold as a medical insurance plan.  The Court determined that the products were aligned closely enough to create confusion among consumers.

The Court found no evidence that Defendant intended to pass off its products as those of Worldcare.  Although Defendant knew of the protected mark, knowledge is not equivalent to intent.  General Mills, Inc. v. Kellog Co., 824 F.2d 622, 627 (8th Cir. 1987).

Under factor five, Worldcare attempted to show evidence of actual confusion in the form of alleged misdirected phone calls received in the summer of 2009.  Worldcare claimed these calls were in regards to insurance products.  The Court found this evidence limited and could not conclude actual confusion.  However, Worldcare was not required to show incidents of actual confusion to succeed in an infringement case.  Sunsient Tech. Corp. v. SensoryEffects Flavor Co., 613 F.3d 754 (8th Cir. 2010).

The sixth and final factor the Court examined was the condition of purchase and the degree of care expected of customers.  “In considering this factor, [the Court] must stand in the shoes of the ordinary purchaser; buying under the normally prevalent conditions of the market and giving the attention such purchasers usually give in buying that class of goods.” Luigino's, Inc. v. Stouffer Corp., 170 F.3d 827, 831 (8th Cir.1999).  The Court found this factor weighed in favor of Worldcare stating: “When selecting medical coverage and related products, a customer or potential customer may not recognize that distinct products with different WORLDCARE marks would come from different sources.”  Worldcare, Case No. 8:11CV99 (D. Neb. 2011).

The Court found that customer confusion between the marks was likely in this case.  The marks were identical and both companies sold their products in the insurance market.  Therefore, Worldcare would likely succeed on the merits of their claim.

Part III will examine the remaining elements of the Injunction.

WORLDCARE Trademark Injunction Part I

 Worldcare Limited Corporation v. World Insurance Company, Case No. 8:11CV99 (D. Neb. May 9, 2011).

Written by Jay Lewis

On May 9, 2011, WorldCare Limited Corporation (“WorldCare”) was granted a preliminary injunction against World Insurance Corporation (“Defendant”) preventing further use of the “WORLDCARE” mark or name.

WorldCare is a provider of second-opinion telemedicine services.  The service allows individuals and insureds to request second opinions through WorldCare’s consortium of specialized physicians at highly regarded hospitals and universities.  WorldCare sells its services through insurance policies as an additional benefit.  WorldCare registered its trademark, “WORLDCARE,” in June of 1996.

Defendant provides health insurance products and services including basic medical, major medical, comprehensive major medical, short-term medical, and dental insurance.  Defendant began using WORLDCARE in February 2003 as a brand name on its insurance products.  Defendant applied for a registration of the WORLDCARE mark on March 28, 2005, but the application was rejected.  Defendant continued to use the mark creating customer confusion in violation of the Lanham Act, 15 U.S.C. §§ 1114(a), 1125(a). WorldCare filed for a preliminary injunction against Defendant on September 21, 2010.

Defendant argued that WorldCare failed to renew its ownership in the WORLDCARE mark under 15 U.S.C. § 1059(a). The Court stated: “Nevertheless, ownership of registration is not determinative of ownership of trademark rights, and ‘the absence of federal registration does not unleash the mark to public use.’" quoting, Gilbert/Robinson, Inc. v. Carrie Beverage-Missouri, Inc., 989 F.2d 985, 992 (8th Cir. 1993).

The Court cited Dataphase Sys., Inc. v. C.L. Systems Inc., 640 F.2d 109 (8th Cir. 1981) for the four factors of a preliminary injunction: “(1) The threat of irreparable harm to the movant; (2) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest.” Dataphase at 114.

Balance of Harms

The Court first reviewed the ‘balance of harms’ between the parties and found in favor of WorldCare.  Defendant’s executive testified that the company had already started to phase out the use of the WORLDCARE mark from its products.  The executive explained, however, the phase-out was only temporary.  Defendant was not willing to consent to a complete termination of the mark’s use.  The executive believed the company was not legally obligated to terminate the use and it could be harmed by a negative public perception if did so voluntarily.  The Court found that due to Defendant’s own actions in phasing out the use of the mark, the burden of an injunction had been significantly minimized.  An injunction reinforcing the phase-out would not cause significant additional harm.

Part II of this post will examine the Probability of Success on the Merits.

Verizon Litigation

 By Jay Lewis

Part III

 

After finding that Verizon had met all the four factors, the Court turned to the Defendants’ arguments:

  1. Mootness of Injunctive Relief
  2. Dormant Commerce Clause
  3. Primary Jurisdiction Doctrine
  4. Unclean Hands

The Court found that each of the Defendants’ arguments failed.  The Defendants argued that the injunctive relief was moot because Verizon already shut them out of the network therefore an injunction was irrelevant.  However, the Defendants had been shut out once before but were again on the network violating the MMA Best Practices.  The Court held that if Defendants were not enjoined, they could legally attempt to regain access again and again.

The Dormant Commerce Clause invalidates state regulation if it excessively burdens interstate commerce.  The Court found the Defendants did not make a showing that the ACFA discriminates against out-of-state commerce or that the burdens imposed by the ACFA are excessive in light of the local benefits.

Under the primary jurisdiction doctrine, the Defendants argued that the Court could not decide the standards to apply in this case as the industry is regulated by the Federal Communications Commission and the Federal Trade Commission.  The Court countered by stating the MMA Best Practices applied because the Defendants contractually agreed to those standards.

The defense of unclean hands is an equitable remedy whereby the asserting party must prove inequitable conduct by the opposing party.  Defendants alleged that Verizon misrepresented Defendants’ web pages to the Court, released false press releases, misrepresented business practices to the Texas Attorney General, and alleged that the Defendants’ corporate structure was rife with criminal conspiracy while Verizon maintained a complicated corporate structure.  The Court found Verizon’s conduct did not rise to the level of fraud nor was its conduct false or misleading.

The Court granted Verizon’s request for preliminary injunction effective upon payment of a relatively token $25,000 bond.

 

Verizon Litigation

By Jay Lewis

 Part II

Verizon filed a motion for preliminary injunction based on Defendants’ deceptive acts, which induced customers to purchase non-compliant premium services.  Verizon also claimed that the customers, in turn, threatened to leave the Verizon network because of Defendants’ actions.  The Court granted Verizon’s motion for a preliminary injunction after conducting a hearing. 

The Court cited Winter v. Natural Res. Def. Council, 555 U.S. 7 (2008) for the general factors a plaintiff must show to obtain a preliminary injunction:

  1. A likelihood of success on the merits of the legal claim,
  2. Irreparable harm in the absence of preliminary relief,
  3. The balance of equities tips in the favor plaintiff’s favor, and
  4. The relief is in the public interest.

The Court further cited Alliance for Wild Rockies v. Cottrell, 622 F.3d 1045 (9th Cir. 2010) for the 9th Circuit sliding scale balancing test.  Under this 9th Circuit test, if the balance of hardships tips sharply in the plaintiff’s favor, likelihood of success on the merits becomes less of a factor to consider. Alliance, 1049-53.

Verizon based its request for preliminary injunction on three legal bases:

  1. Arizona Consumer Fraud Act (“ACFA”),
  2. Tortious Interference with Contract, and
  3. Unjust Enrichment.

ACFA, the Court decided, did not apply in this case.  AFCA protects the merchant-consumer relationship.  It provides a means for consumers to bring an action against merchants for deceptive or fraudulent practices.  Here, Verizon was not a purchaser of Defendants services but merely a conduit to the customers.  Therefore, Verizon would not likely succeed on the merits of its AFCA claim.

The Court held that Verizon would likely succeed on the merits of its claim for tortious interference with contractual relations.  The Court affirmatively stated that, under Arizona law, a civil defendant can be held liable for tortious interference with contractual relations if the interference made the plaintiff’s compliance with a contract more expensive. This is an extension of Arizona precedent where the facts of previous tortious interference cases indicate the contract ended in breach or termination.  In Verizon’s case, the Court applies Restatement (Second) of Torts §767 (1979) which punishes tortious actions that merely burden the plaintiff’s performance on an existing contract.  The fact that Verizon paid reimbursement fees to retain customers and monitoring fees to prevent continued deception met the criteria set forth in §767.

The Court found that Verizon’s theory for unjust enrichment would not likely succeed on the merits.  Specifically, Verizon did not suffer the required impoverishment.  In fact, Verizon gained an estimated $24 million from Defendants’ actions.

After determining that Verizon has a likelihood of success on the merits for tortious interference, the Court found the three other factors of a preliminary injunction had been met:

  • Verizon would suffer irreparable harm to its business reputation if Defendants were allowed to continue deceiving customers; damage to goodwill constituted irreparable harm.
  • The balance of harms tipped in Verizon’s favor as Verizon has an interest in protecting its customer relationships and Defendants have no legitimate interest in accessing the network through deceptive means. 
  • The public interest in this matter is to protect contractual relationships from exploitation through improper means.

 Part III shall discuss the Defendants' arguments.

 

Verizon Litigation

Written by Jay Lewis

Cellco Partnership d/b/a Verizon Wireless v. Jason Hope, et al., CV11-0432-PHX-DGC (D. Ariz. 2011)

In the United Stated District Court for the District of Arizona, Verizon Wireless (“Verizon”) filed a complaint and motion for preliminary injunction against Jason Hope, Wayne Destefano, and Eye Level Holdings, LLC, d/b/a JAWA (“Defendants”) to prevent ongoing deceptive practices. The court granted Verizon’s motion.  The facts are as follows:

Verizon operates a wireless telephone network.  Defendants market and sell premium short message service (“PSMS”) on Verizon’s network.  PSMS sends content to the user’s wireless device such as ring tones, horoscopes, recipes, celebrity gossip and news alerts for a standard monthly fee.  The fee appears on the customer’s Verizon bill.

Verizon requires that companies who seek access to Verizon’s customers comply with guidelines for marketing practices developed by the Mobile Marketing Association (“MMA Best Practices”).  Under the guidelines, content providers like the Defendants, must submit details of their marketing and sales programs to Verizon through a third-party, known as an aggregator.  Once approved, the content provider can begin to provide services like PSMS on the Verizon network.  After the services begin, Verizon uses a third-party auditor, Aegis, to ensure that the provider is not violating the MMA Best Practices.

Previous to this lawsuit, the Defendants had been suspended from the Verizon network for violating the MMA Best Practices.  As a result of the suspension, Verizon required Defendants to identify themselves as Hope and Destefano when submitting a marketing and sales plan to the aggregator.  Instead, the Defendants set up separate limited liability companies in the names of other employees with principal places of business at various UPS stores throughout the country. This was a ploy to prevent Verizon from associating the LLCs and their applications for network access with the named Defendants.  The Defendants were successful in regaining access to the Verizon network and its customers.

Defendants sell their services through their websites.  A customer will visit one of Defendants’ websites and enter information to sign up for the premium services.  Verizon requires these websites to be MMA Best Practices compliant.  This includes details on price, terms, conditions, cancellation policy, as well as requirements for font size and font color.  The MMA Best Practices also requires that certain disclosures appear on the first page of the site.  The third-party auditor, Aegis, monitors the sites for compliance.

At first, the Defendants operated websites that were MMA Best Practices compliant. However, they soon began dropping prices from the site, reducing font size, failing to provide termination information, and removing terms and conditions from the first page.  In order to avoid detection, Defendants used either a firewall or cloaking software to prevent Aegis from viewing the non-compliant landing pages.  When an Aegis auditor attempted to review the Defendants non-compliant website, the software would detect the auditor’s Internet Protocol address and redirect that auditor to a compliant site.

Aegis and Verizon eventually caught on to Defendants’ actions and barred them from the Verizon network.  Verizon also took remedial steps in satisfying customer complaints by refunding subscription fees and increasing the costs of monitoring the Defendants’ actions.

PART II will discuss the legal aspects of this case.

Chinese Telecom Wins Injunction Against Rival

By: Jay Lewis

On the international front, Chinese telecom equipment supplier, Huawei, has won another battle in the intellectual property war against its rivals.  On May 12, 2011, a German court awarded Huawei with an injunction preventing ZTE from using a trademark designed by Huawei.  The trademark was used to signify compliance with European environmental standards.  Full article here.  ZTE has filed patent infringement cases against Huawei and has applied to have Huawei's trademark revoked.

Back in February, Huawei had been successful in winning an injunction against Motorola who was on the verge of selling assets to Nokia Siemens.  Huawei had provided competitive trade secrets to Motorola when helping develop and design communication networks.  The court ruled that Huawei would suffer irreperable harm if Motorola was allowed to sell assets to Nokia.  Article here.  Huawei later settled the dispute for an undisclosed amount which cleared the way for the Motorola-Nokia deal.

 

 

 

 

Avisena, Inc, v. Santalo, Case No. 3D10-178 (Fla. 3d DCA 2011)

By: Jay Lewis

On September 15, 2008, Alberto C. Santalo was terminated by Avisena, Inc., a Florida corporation. On September 16, 2009, Santalo’s newly formed business, CareCloud, began to compete with Avisena. Santalo had been the founder, president and chief executive officer of Avisena before his termination. Avisena filed a complaint and request for a temporary injunction claiming that Santalo was violating the non-compete clause of his employment contract. The employment contract included a post-employment restrictive convenant with time restrictions dependent on how his employment was terminated. If the Santalo was terminated for cause, he could not compete for 18 months. If the he was terminated without cause, Santalo could not compete for one year. Finally, if Santalo terminated his own employment without cause, he could not compete for a period of two years. Although the parties stipulated that Santalo was terminated by the company without cause, Avisena requested that the two-year restriction be placed on Santalo.

In the preliminary hearing, Santalo testified that he formed CareCloud in January, 2009, but he did not begin to compete with Avisena until after the twelve-month restriction had expired. Avisena argued the two-year, not the twelve-month, non-compete applied. The trial court agreed with Santalo’s interpretation of the contract and refused Avisena’s request for a preliminary injunction. Avisena appealed.

Florida law requires a party seeking a temporary injunction to establish all four of the traditional elements: (1) a likelihood of irreparable harm and the unavailability of an adequate remedy at law; (2) a substantial likelihood of success on the merits; (3) the threatened injury to the petitioner outweighs any possible harm to the respondent, and (4) the granting of a temporary injunction will not disserve the public interest. The burden of persuasion rests on the applicant. See Cordis Corp. v. Prooslin, 482 So. 2d at 489, 490 (Fla. 3d DCA 1986).

The appellate court affirmed the lower court’s finding that Avisena had failed to prove a substantial likelihood of success on the merits. The appellate court interpreted the underlying employment contract to provide for a twelve-month non-competition period following a termination by the company without cause. Avisena asserted the applicable restrictive clause states, "Employee shall not for a period of two (2) years during the period of time immediately following the Employee's termination of employment with the company [compete with the company]” However, the court highlighted the language “...Employee’s termination of employment…” and interpreted it to mean that if the employee decided to terminate his own employment, only then will a two-year restriction apply. But because the Avisena had stipulated that it had terminated Santalo without cause, the court determined a one year restriction applied.

Additionally, the appellate court found no evidence that Santalo had violated the clause by soliciting Avisena’s customers or employees prior to the expiration of the one-year restriction. The court cited Harllee v. Professional Serv. Indus., Inc., 619 So.2d 298 (Fla. 3d DCA 1992) which held that “mere preparation to open a competing business, such as assisting in the opening of a bank account, the obtaining of office space and other services with respect to the future employer are insufficient to demonstrate a breach.”

The dissent argued that the majority is “read[ing] language into the parties' agreement that simply is not there.” The dissent further asserted that in the case of ambiguity in contract interpretation, extrinsic evidence should be considered so as to do justice to the contracting parties’ intent. The dissent pointed to Avisena’s testimony that it was both parties’ intent to have Santalo restricted for two years after termination. Santalo did not recall any such conversation. The dissenting justice argued that if an individual does not recall an event it does not mean that the event did not happen and therefore the majority should have looked to parole evidence to make its decision.

The Weinstein Company Crow-ing over Distribution Rights, Part II

A preliminary matter likely to be raised in Relativity’s Response, as was raised in Ms. Genis’ letter, is whether the Superior Court of the State of California will entertain a motion for a preliminary injunction despite an arbitration clause in the Contract.  Ms. Genis states that the arbitration clause “sets forth the arbitration forum, rules, and appeal process.”  But without further examination of the terms, we cannot be certain whether the clause is applicable in this situation.  

However, the location of the claim can be a key indicator as to whether a Court will grant a preliminary injunction.  The Ninth Circuit has held that even though a dispute is arbitrable, that does not foreclose the right of preliminary relief pending arbitration if the elements for an injunction are met. (See PMS Distrib. Co. v. Huber & Suhner, A.G., 863 F. 2d 639, (9th Cir. 1988). 

Therefore, the Court may grant a preliminary injunction to preserve the status quo if it finds that the elements are met.  From Ms. Genis' letter, the underlying Contract and the possible breaches smacks of a need for full scale arbitration.  As such, TWC desires an injunction to prevent Relativity from causing irrevocable harm to TWC's distribution rights while the matter is sorted out in arbitration.

We will report back when more information becomes available.

 

The Weinstein Company Crow-ing over Distribution Rights.

By: Jay Lewis

 

Hollywood has lost the ability and/or the willingness to foster new ideas.  Instead, millions of dollars are invested in remaking prior films —especially superhero movies. (Batman, Spider-man, X-men).  Even lesser known superheroes are getting a reboot. (Thor, Green Lantern, Green Hornet). One production company, Relativity Media, Inc. (“Relativity”), plans to remake a middling 1994 superhero film called The Crow.  The original film gained notoriety after its lead, Brandon Lee, was accidentally shot and killed on the set, and the film has since developed a cult-like following.  

With half-baked reboots easily grossing over $50 million in U.S. theaters, it is common for distribution companies to compete for sole rights to distribute these films both in the States and internationally.  The Weinstein Company (“TWC”) is a film production and distribution company that has recently produced or distributed highly acclaimed films such as The Fighter and King’s Speech.  However, TWC lacks a portfolio of the higher grossing action features that the industry covets.  For them, rights to distribute The Crow, which already has a built-in fan base, could prove lucrative.

On April 20, 2011, TWC filed for Injunctive Relief against Relativity.  See Complaint here TWC alleges that it entered a contract with Relativity on March 25, 2009 (“Contract”) wherein TWC was granted exclusive distribution for any and all remakes, sequels, and prequels to The Crow.  TWC further alleges that Relativity plans on selling those distribution rights to other companies in breach of the Contract.  I have not yet read the Contract but I have read a letter from Carol Genis of K&L Gates on behalf of Relativity.  Ms. Genis alleges that TWC has already breached the Contract or as she refers to it, the Termination Agreement.  She goes on to discuss the “NDA” but never defines it. She states the NDA sets forth in great detail that all disputes shall be arbitrated.  However, she later states that the NDA is terminated and therefore Relativity is not bound by it. See the letter here.

Part II will be posted tomorrow.

Kraft vs. Starbucks: The Beginning To The End (2)

Two months after Kraft denied Starbucks’ offer, Starbucks accused Kraft of materially breaching the contract and informed Kraft that it would be terminating the contract effective March 1, 2011, unless Kraft “cured the alleged breaches within 30 days,” resulting in Kraft’s filing a complaint and motion for preliminary injunction. (Complaint, ¶ 58). In its complaint, Kraft alleged that Starbucks made misleading statements to the press, its investors and Kraft’s customers by “falsely maligning Kraft’s performance” in order to avoid the amount of money that Starbucks would be obligated to pay Kraft for its material breach of the business contract. (Complaint, ¶ 1).

Kraft argued that Starbucks’ breach allegations lacked merit because Kraft’s overall performance under the contract and its “effective in promoting Starbucks Products ha[d] been outstanding by any reasonable measure,” and that Starbucks’ attempt to terminate the contract without complying with its disputed resolution provisions was improper. (Complaint, ¶ 61, 67). Further, Kraft argued that Starbucks’ issuance of a press release impugning Kraft’s performance was misleading and caused an interference with Kraft’s customer relationships. (Complaint, ¶ 76).

Kraft’s argument that it would suffer irreparable harm if injunction was not granted was as follows: 1) Kraft would lose its right to arbitration, 2) Starbucks would continue to publicize the purported termination of its contract with Kraft thereby confusing the market, and 3) Kraft would have no adequate remedy at law, and “money simply [would] not be able to compensate Kraft for the damage that will ensue to its business and reputation.” (Complaint, ¶ 131).

Kraft vs. Starbucks: The Beginning To The End

Kraft Foods filed a complaint and motion for preliminary injunction relief against Starbucks in attempt to protect its twelve-year relationship with the Coffee Company and to provisionally restrain Starbucks from acting on its purported termination of the contract with Kraft. Kraft Foods Global, Inc. v. Starbucks Corporation, Case Number 7:10-cv-09085 S.D.N.Y.).

Under the contract, Starbucks manufactured and supplied the Starbucks branded products to Kraft, and Kraft owned the exclusive right to sell, market and distribute certain packaged Starbucks roasted whole bean and ground coffee to Kraft’s customer base of grocery stores and other retail food outlets. This contract between the parties had an initial term that would expire in 2014 and an automatic renewal for successive ten-year terms.

In 2010, Starbucks decided that it wanted to take over Kraft’s portion of the business and sought to terminate its contract with Kraft. Pursuant to the contract, Starbucks had the express right to terminate its relationship with Kraft as long as it 1) provided 180 days’ advance notice, and 2) compensated Kraft for the loss of its rights under the contract in an amount tied to fair market value of the business. Starbucks gave notice to Kraft and offered $750 million in exchange for a consensual termination of the contract to which Kraft declined alleging that $750 was not the fair market value of its business. (Agreement, ¶ 5).

Injunctions under the Commodity Exchange Act (part 2)

(Blog written by: Jay Lewis)

In Simmons, a Complaint for Injunctive Relief and a Motion for a Statutory Restraining Order were brought under Section 6c(a) of the Commodity Exchange Act (the “Act”), 7 U.S.C. §6c(a) (2006).  The Act allows U.S. district courts to grant ex parte restraining orders, to freeze assets, and prohibit any person from destroying records. (7 U.S.C. §13a-1 (2006)).  Under the Act, restraining orders may be issued whenever it appears that any person has engaged in a practice constituting a violation of the Act.  (Memorandum p 25, citing CFTC v Clothier, 788 F. Supp. 490, 492-3 (D. Kan. 1992)).  A prima facie case of illegality is sufficient under the Act eliminating the need for proof of irreparable injury or inadequacy of other remedies otherwise required in private actions seeking injunctions. (Memorandum p 27, citing NRLB v Aerovox Corp., 389 F. 2d 475, 477 (4th Cir. 1967). Additionally, a preliminary injunction pursuant to the Act may be granted without bond. (7 U.S.C. §13a-1(b) (2006)).

 

On February 11, 2011, Chief U.S. District Judge Robert Conrad signed an Order finding that:

·        The Court has jurisdiction over the parties and subject matter pursuant to Section 6c of the Act and venue is proper under 6c(e).

·        The Court found good cause to believe that the named Defendants engaged in acts that violated the Act.

·        The named Relief Defendants received assets as a result of Defendants’ acts and have been unjustly enriched.

·        Immediate and irreparable damage to the Court’s ability to grant effective final relief in the form of monetary redress will occur unless the Defendants and Relief Defendants are immediately restrained and enjoined.

·        The Court found good cause to freeze assets controlled by Defendants and Relief Defendants.

·        The Court found good case to prohibit Defendants from denying Commission representatives access to books and records.

·        The Court found good cause to order repatriation of assets controlled by Defendants and Relief Defendants.

·        The Court found good cause for expedited discovery.

·        The Court also weighed the equities and considered the Commission’s likelihood of success in its claims, and as a result, found that it is in the public’s interest to issue a restraining order.

 

As a result of the findings above, the Judge ordered the following:

·        The Defendants were ordered not to transfer, dissipate, or dispose of assets.

·        The Judge ordered any financial or brokerage institutions, business entity, or others controlling the Defendants’ assets to prohibit the Defendants from removing any such assets and to deny Defendants access to safe deposit boxes.

·        Judge Conrad also required businesses to provide expedited discovery to the CFTC in the form of account numbers, account balances, account dates, and safe deposit box numbers.

·        The Judge ordered Defendants to provide full accounting for all accounts inside and outside the United States within 10 days of the Order.

·        The Defendants are also ordered to transfer all assets from outside the United States to inside the United States.

·        The Judge ordered that any and all of the Defendants’ business records may not be destroyed.

·        CFTC is allowed to inspect and copy all of Defendants’ books and records.

·        CFTC is allowed to conduct expedited discovery- they may take depositions with only 5 days notice.

·        Pursuant to the Act, CFTC is not required to post a bond.

 

As of February 23, 2011, discovery in this case has been stayed pending the Keith F. Simmons criminal case.

 

Injunctions under the Commodity Exchange Act (part 1)

(Blog written by: Jay Lewis)

 

In United States Commodity Futures Trading Commission (“CFTC”) v. Simmons et. al., (Case Number 3:11-cv-00023 W.D.N.C.), CFTC filed a Motion for Preliminary Injunction against a plethora of defendants including Keith F. Simmons and Black Diamond Capital Solutions, L.L.C. for their roles in an alleged Ponzi scheme.  The Complaint was filed on January 13, 2011.

 

CFTC alleges that starting in April 2007 until Simmons’ arrest in December 2009 $35 million was fraudulently solicited from more than 240 individuals and businesses. (Complaint, ¶ 2).  The Defendants in Simmons obtained investments with promises of remarkable returns using a forex trading system. (Complaint, ¶ 4).  Forex is short-hand for foreign exchange market, an over-the-counter market used to exchange one national currency for another.  The forex was created to assist corporations transacting business overseas to pay each other in their respective currencies, but is now dominated by speculators.  Mark Levinson, Guide to Financial Markets pp 14-36 (4th ed., The Economist 2006).

 

In Simmons, the Defendants persuaded investors they had developed an advanced computerized trading system created by a group of software developers.  (Plaintiff’s Memorandum in Support of its Motion for a Statutory Restraining Order, p 10).  They enticed investors with promotional materials claiming a track record of exceptional returns. (Memorandum p 11).  But according to the CFTC allegations no such system ever existed, and the Defendants never traded a dime of investors’ money in the forex market.  (Memorandum pp 9-16).  Instead, CFTC alleges the investments went to pay for the Defendants’ real estate purchases, cars and lavish trips. (Memorandum pp 14-15). 

 

However, once investors started demanding their returns on investment or attempted to withdraw principal, the whole system crumbles and the schemers are left making excuses.  CFTC alleges that starting in March of 2009 the Defendants created fanciful reasons as to why the investors were unable to receive any payments. (Complaint ¶¶ 8-9)  To keep investors placated, they altered existing bank statements by fraudulently multiplying actual assets ten-fold.  (Memorandum p 20).  CFTC alleges the Defendants claimed agencies froze Black Diamond’s accounts to conduct investigations, that banking restrictions limited the payouts, and that “a non-existent German liquidity provider by the name of Klaus” was planning to buy out Black Diamond.  (Complaint ¶ 9).  Allegedly these frauds were still perpetuated even as the Defendants failed to pay their own employees.  (Memorandum pp 18-24).  By December of 2009 it was obvious to the investors they had been scammed and the FBI arrested Keith F. Simmons for his role in the fraud.

Amaretto v. Ozimals: Non-opposition to the entry of a preliminary injunction

A TRO lasts for a very short amount of time, usually only ten days. So, it wasn’t surprising that after the Court granted its motion for a TRO Amaretto moved for a preliminary injunction, which can last indefinitely. However, what was unexpected is that Defendant Ozimals filed a Statement of Non-Opposition to Amaretto’s request for a preliminary injunction. Ozimals filed a complaint for copyright infringement against Amaretto in the United States District Court for the Northern District of Alabama. Thus, Ozimals believed that the parties were well beyond the DMCA notification activity and didn’t object to Amaretto’s service provider being enjoined from acting on Ozimal’s takedown notice. While it didn’t oppose the entry of a preliminary injunction, Ozimals requested that the Court vacate the injunction hearing. In its Statement of Non-Opposition, Amaretto expressed its concerns that conducing a hearing would be an inefficient use of judicial resources. Amaretto also feared that a hearing would cause the Court to rule on the likelihood of success on the merits “on an extremely abbreviated schedule and without the opportunity for full briefing or evidentiary submissions by the parties, or even any discovery at all by the parties.” (Defendant Ozimals, Inc.’s Response and Statement of Non-Opposition to Plaintiff Amaretto Ranch Breedables, LLC’s Motion for Preliminary Injunction; Request to Vacate Hearing, p. 2). The Court entered the preliminary injunction as unopposed and vacated the hearing. Ozimals’ decision not to oppose Amaretto’s motion for a preliminary injunction was tactical. If an evidentiary hearing was held on the injunction, there was a risk that the Court could make various findings against Ozimals, which could ultimately be detrimental in its copyright infringement action. Thus, Ozimals determined that would it be better to yield to the entry of a preliminary injunction, barring Amaretto’s service provider from taking down offending material on its website, in order to maximize its chances of ultimate success.

The Future of TRO in the Virtual World

In light of the ruling summarized previously, one can't help but ponder the effect of the virtual world. If Amaretto didn't sell virtual animals and products, would the court have granted an ex parte TRO? If Amaretto simply sold another more conventional product, which wasn't at risk of virtual death, would Amaretto have been successful in arguing a loss of good will and reputational harm? This case is a good example of how the concept of irreparable harm expands as technology progresses and becomes more sophisticated.

Irreparable harm: Advocating for your client

The Amaretto case further serves to demonstrate how lawyers should always critically analyze the facts of a case, as the lawyers in this case did, and also be sensitive to the concerns of our clients and relate their fears to the Court. Amaretto's Motion for a TRO stated:

If the company is not able to sell its products for even a short period of time, Plaintiff's virtual horses, sold to hundreds of customer users, will die if not fed. The virtual animated horses "virtual food" grow into different stages if they continue to eat the "virtual food," but will die within 72 hours if not fed the "virtual food". If Plaintiff is not able to sell virtual food to its customers, the horses die, and the customer is deprived of the product (the virtual horse) they purchased from the Plaintiff. Customers denied the ability to buy food for their virtual pets will no longer trust a company that cannot fulfill its obligations and therefore, will unlikely return to Plaintiff's business. (Plaintiffs' Memorandum of Points and Authorities in Support of Plaintiff's Ex Parte Application for Entry of Temporary Restraining Order, p. 10).

Amaretto's plea for the survival of its virtual animals inevitably bolstered the strength of its argument regarding loss of good will and reputational harm.

Virtual Death: A New Type of Irreparable Harm

In my Book (www.abanet.org/abastore/index.cfm) I lay out various categories of what constitutes irreparable harm, which is paramount in demonstrating the need for injunctive relief. In Amaretto Ranch Breedables, LLC v. Ozimals, Inc. (case no. CV 10 5696, (N.D. Cal.)) the Plaintiff's allegations and arguments regarding its risk of irreparable harm were innovative.

Amaretto and Ozimals are in the business of creating and selling animated, virtual digital breedable animals and products, including virtual food, in their virtual stores. On December 1, 2010, Ozimals filed a take-down notice with Amaretto's internet provider under the Digital Millennium Copy Act ("DMCA"), in accordance with 17 USC 512, claiming that Amaretto's Horse Product Line infringes with and is a clone of Ozimals' virtual bunny.

Despite providing a Counter DMCA Notification, Amaretto feared that its service provider was about to take down its virtual animals and product line. Thus, Amaretto filed a Motion for an ex-parte TRO. Amaretto argued that it would be irreparably harmed if it was not able to sell its horse product line, especially during the Holiday Season, and that the Company's business and reputation would be destroyed. In particular, Amaretto argued that depriving its customers of products for even a short time would have disastrous results, as the virtual horses, which were sold to many customers, would die if not fed virtual food.

The Court granted the Motion and agreed that Amaretto would suffer a loss of goodwill and reputation harm if its products were taken down, especially during the prime buying season.

Our next posts will consider the implications of this ruling.

Greater Protection for Shareholders in the New Year?

The Supreme Court’s begins hearing January arguments today. Of interest to shareholders, however, is not a case argued today but rather a case heard in November 2009. Before the end of the current term, the Court will issue an opinion in Merck v. Richard ReynoldsMerck focuses on whether the statute of limitations on a federal securities fraud action begins to run when an investor obtains evidence of scienter of fraud or when any evidence of fraud is uncovered.

The distinction is real and would impact many securities fraud cases. Federal law requires securities fraud cases to be brought within the earlier of two years of knowledge or five years of the violation. Generally speaking, the two year period relating to knowledge does not run until all elements of a violation are discovered. The issue is important in security fraud cases because there is often evidence of fraud before there is evidence of the requisite intent. The evidence of fraud, however, is only recognizable in hindsight based on newer evidence demonstrating the intent to defraud. For example, in Merck, an internal study reached a suspicious but supportable conclusion. It was not until an independent study was published two years later that Merck’s original position demonstrated its intent to defraud.

If the statute of limitations is applied to the first instance of possible fraud, shareholders are put in a position whereby they need to take aggressive action to protect their rights. Such action is expensive, such as instituting preliminary injunction and temporary restraining order actions to preserve possible evidence of intent, and may not uncover any fraud on the part of the corporation. Corporations would also incur an added expense as they are forced to defend preliminary litigation. Waiting until all of the evidence necessary to bring a case is available will not harm corporations that are engaged in ethical practices. 

Merck will be an important case to watch not only for its impact on the discovery rule in securities fraud cases. As the Wall Street Journal Law Blog points out today, it may also demonstrate whether the Obama Administration can affect a change in the Court’s pro-business stance under President Bush.

When Do You Need A Preliminary Injunction In An Illinois Corporate Shareholder Dispute?

Illinois is supposed to be more shareholder friendly than Delaware. Its Business Corporation Act provides minority shareholders protections if the majority shareholders are

  1. committing waste;
  2. practicing fraud;
  3. acting illegally; or
  4. oppressing minority shareholders. 

There was an article in Business Law Today a while ago that contended that minority shares of stock are worthless apart from whatever rights were provided in a shareholders’ agreement, but I disagree: minority shareholders in Illinois--without any shareholders’ agreement-- have the rights given them by the Illinois Business Corporation Act (and this Act influenced the drafting of the Model Business Corporation Act). If they sue to vindicate these rights, the majority shareholders can elect to buy them out, and their buy out price is the fair value (not the fair market value) of their shares. 

Listing the rights given by statute begins to answer the question posed. If you are a minority shareholder, you need a preliminary injunction if the majority shareholders are doing one or more of the above acts and you or the corporation is going to be immediately irreparably harmed as a result. Waste of corporate assets might not be recoverable absent immediate action; an illegal act may cause the corporation to be sanctioned by law enforcement officials. Oppression is an elastic concept, but the standard is the reasonable expectation of the shareholders.   Most of these defalcations will diminish the goodwill of the corporation, a harm that is difficult to quantify, justifying a preliminary injunction.

In the midst of the ill-will that accompanies actions that necessitate shareholder actions, actual or threatened improper withdrawals from the corporation may require a preliminary injunction or temporary restraining order. Minority shareholders need to be vigilant in guarding the corporate purse. A preliminary injunction can be justified on a constructive trust theory (corporate money is a res that is the subject of dispute over whether the payment is proper). The Illinois Business Corporation Act codifies the court’s power to issue injunctions as well. And the Act provides panoply of remedies available to the court: appointment of a receiver or director, for example, and, more broadly, any order necessary.

Ten Reasons Your Company Should Not File a Lawsuit To Resolve a Business Dispute

While I make my living suing people, I think all clients should be advised of the top ten reasons not to file a lawsuit. I offer this list:

  1. You owe your opponent more money than he or she owes you.
  2. You don’t want to turn over relevant documents to your opponent’s lawyer or they are already shredded.
  3. You fired all of your employees who are knowledgeable about the dispute.
  4. You lack the time to educate your lawyer about the dispute, retrieve relevant documents, or give a deposition.
  5. You think that all witnesses tell the truth.
  6. You regard yourself as superior to jurors or the Judge.
  7. You believe that just by filing the lawsuit, you will get a settlement.
  8. Your opponent has no money to pay a judgment.
  9. Your company or key witnesses must continue to do business with your opponent or his or her allies. 
  10. The cost of the lawsuit is more than you would benefit with total victory.

If none of your clients are now contemplating a lawsuit, print and save.

A tale of two orders

It was with some excitement that Volterra Semiconductor Corporation announced that U.S. District Court Judge Joseph Spero granted its motion for a preliminary injunction against Infineon Technologies AG, Infineon Technologies North America Corporation and Primarion Inc. (Infineon/Primarion) in its patent infringement lawsuit. (Case No. 08-cv-05129-JCS (N.D. Cal.).

Commentators note that this is a rare decision because, since the Supreme Court’s ruling in eBay, Inc. v. Mercexchange, L.L.C., which eliminated the presumption of irreparable harm in the context of permanent relief, it has been difficult to win injunctions in patent infringement cases. 

Thus, Volterra was obviously pleased and stated that “"[w]e believe this ruling signals the likelihood of success on the merits of our case against Infineon/Primarion, and validates the strength of our intellectual property position."

While the Judge orally ruled on the issue of granting the preliminary injunction, a formal order has not yet been issued. Instead, the court directed the parties to both file briefs on the amount of the bond and submit proposed orders. Not surprisingly, the parties’ proposed orders are vastly different. The language of an injunction order is important because it defines who is to be restrained, what acts are to be restrained, and essentially protects a judge from an embarrassing appeal. Fed. R. Civ. P. 65 (d) dictates what each order must contain:

  1. The reasons the court issued the injunction: Volterra’s proposed order states that a preliminary injunction is appropriate because the Company proved all the necessary elements, including that “Volterra is likely succeed on the merits of its patent infringement claims.” Conversely, Infineon’s proposed order simply notes that the preliminary injunction is “warranted.” While I understand why Infineon would probably not want to elaborate on the reasons why the Court granted the injunction, unfortunately, the language in its proposed order does not adhere to the mandate of Rule 65.
  2. The persons or entities to be restrained: Volterra and Infineon’s orders are fairly similar in that they restrain the defendants and the defendants’ affiliates. However, Infineon’s order would exempt third parties, who have either purchased or have already contracted to purchase enjoined products.
  3. The acts to be restrained: Volterra’s order would halt all sales, manufacturing or marketing of any product that contained its patents. Conversely, Infineon’s order is much more liberal and would not enjoin the defendants from:

    1. shipping enjoined products that have already been sold to customers or have already been promised to customers
    2. providing support for enjoined products that have already been sold or otherwise provided
    3. selling enjoined products that have been manufactured, but not yet sold.

Infineon’s order also cautions that any relief not granted in the order is denied.

 

  1. Bond: Volterra’s order does not speak to bond. Infineon’s order, on the other hand, would have Volterra post a $20 Million Bond.
  2. The date and hour of issuance: Infineon’s order states that the order shall not take place until the Plaintiff has posted bond. Infineon’s order also states that the order shall not take effect until 60 days until after the entry of the Order, so as to give the defendants time to review the Court’s Order and to explore a potential design-around.
  3. The order’s expiration date: Infineon’s order states that the injunction shall run until trial, unless there is an earlier order modifying, terminating, or vacating the order. Volterra’s order simply contains standard language stating that the order shall remain effect until further order of the Court.

The parties are currently briefing the issue of the proper bond amount. (As is the case in patent litigation, most portions of the briefs are redacted, and the exhibits are sealed). Judge Spero is expected to issue a formal order soon, and I will let you know when he does, as it will be interesting to see which order was more persuasive.

Antitrust TRO: mandatory injunctions and hold orders

My prior two posts noted that in Hart Intercivic, Inc. vs. Diebold, Inc., the District Court for the District of Delaware denied a request for a TRO but ordered discovery and scheduled a hearing for a preliminary injunction in a case in which one voting machine company challenged a merger between its dominant competitor and another failing company. 

The court’s opinion noted that the plaintiff requested the mandatory relief of undoing a merger. And the plaintiff did request in part an order of divestiture and the appointment of a trustee or receiver. 

But the plaintiff also requested a hold order by which the assets, personnel, accounts, customers, technology and intellectual property of the acquired company would be kept separate from the acquired company while the litigation pended. Based on Federal Trade Comm’n v. Weyerhaeuser Co., 665 F.2d 1072, 1075 n. 7 (D.C. Cir. 1981), a hold order keeps the acquired unit as a separate entity during the litigation to keep the assets “unscrambled” while the litigation pends, making divestiture easier if the plaintiff is successful after the final trial. Perhaps the court will consider this in more depth at the preliminary injunction hearing.

Antitrust TRO: Delay in Seeking a TRO

My prior post noted that in Hart Intercivic, Inc. vs. Diebold, Inc., the District Court for the District of Delaware denied a request for a TRO but ordered discovery and scheduled a hearing for a preliminary injunction in a case in which one voting machine company challenged a merger between its dominant competitor and another failing company that would result in the merged company controlling 68% of the market for voting machines.

The defendant effectively argued the plaintiff’s delay, stating the following:

  1. ”On September 11, 2009, eight days after the public announcement of the Transaction, [Plaintiff] filed its initial complaint. That complaint never was served upon [Defendant]. Three days later, on September 14, 2009, [plaintiff] filed an amended complaint. Again, [Plaintiff] chose not to serve the pleading.”
  2. ”On September 23, 209, some twenty (20) days after the Transaction was publicly announced, Plaintiff suddenly was struck with a sense of urgency and filed its Motion for TRO. The following day, [Defendant] received by Federal Express a copy of the Amended Complaint, a request to waive service, the Motion for TRO and supporting papers. Two days later, without contacting Defendants’ counsel, [Plaintiff’s] counsel apparently contacted the Court and arranged for a hearing to be held on Tuesday, September 29, 2009.”

The title for this section was “Plaintiff’s Schizophrenic Litigation Approach.”

When an injunction is not an injunction--Part II

Continuing our discussion of the Illinois Appellate Court case Santella v. Kolton, in the second part of the opinion, the court determined that it lacked jurisdiction to hear the appeal of a trial court order requiring the return of bonus money paid to the individual defendants who were officers of a close corporation.

The order requiring the return of bonus money was found to be an injunction but the appellate court declined to assert jurisdiction on this aspect of the order as well. Rule 307(a)(1) only grants jurisdiction for appeals of injunctions “that merely preserve the status quo pending a decision on the merits, conclude no rights, and are limited in duration, in no case extending beyond the conclusion of the action.” As the mandated return of money altered the status quo and did not provide for the return of the money to the defendants, it was a permanent injunction and jurisdiction was not available under Rule 307(a)(1). The court refused jurisdiction under Rule 304, which provides for appeal of final judgments that do not dispose of an entire proceeding, because the trial court did not provide the requisite finding that no just reason exists to delay enforcement or appeal of the order.

Parties seeking to appeal injunction orders now need to be especially vigilant to ensure that the order has the necessary language that it is temporary, that is, that it lasts only until a further order or to the end of the case. The court’s decision that Rule 307 does not permit the appeal of mandatory injunctions will cause problems. Parties will argue over whether the injunction was mandatory or prohibitory. What should be a fast vehicle to review the propriety of a preliminary injunction will morph into arguments over the meaning of the rule. If this cannot be changed by another appellate opinion, the rule itself should be amended.

When an injunction is not an injunction

In Santella v Kolton, a derivative and individual action alleging corporate waste and mismanagement of a close corporation, the plaintiff filed an emergency motion to enjoin the defendants from dissipating assets of the company and remove the m as officers pursuant to Illinois Business Corporation Act § 12.56. After an evidentiary hearing, the trial court ordered the defendant officers replaced and three years of their bonuses returned to the company. The defendants then appealed the trial court’s order under the Illinois rule permitting an interlocutory appeal from orders “granting, modifying, refusing, dissolving, or refusing to dissolve or modify an injunction.”

The appellate court never reached the merits. It held that under Rule 307(a)(1), the order removing the officers was not appealable for these reasons:

  • Removing the individual defendants as officers and directors did not operate in personam as they were not required to do or refrain from doing a particular thing.
  • Their removal was a statutory remedy that changed their legal status within the corporation.
  • Requiring the return of bonus money lacked a temporal scope and thus was permanent and not temporary.

Preliminary injunction orders that lack a temporal scope are often deemed overbroad; they should be written to end upon the conclusion of the trial on the merits or some other event. In support of its determination that there was no injunctive action in removing the officers and directors, the court cites a treatise and the CJS for the proposition that the removal of officers or directors cannot be done through an injunction. 

While removal of the officers is a statutory remedy, the statute also provides that injunctions can be entered to enforce its provisions. This may be the first case that decided that the Act provided a remedy easier to obtain than an injunction and impossible to appeal as an injunction. The statements about the lack of in personam jurisdiction ignored that they were removed from their positions and restrained from exercising their rights as officers. 

The other half of the opinion will be commented upon tomorrow.

Injunctive Relief--Use the four-factor test to make your case

A few days after the Court granted the Bank of America’s motion for an ex parte TRO, the Federal Deposit Insurance Corporation (“FDIC”), in its capacity as receiver for Colonial Bank, was substituted as the real party in the case, and moved the court to dissolve the TRO. The FDIC argued that, pursuant to 12 U.S.C. § 1821 (j), the Court lacked subject matter jurisdiction to restrain the FDIC in exercising its powers and functions as a receiver. Because the Court determined that the sale proceeds and loan agreements, which the Bank seeks the return of, are outside the receivership estate, it denied the FDIC’s jurisdiction argument.

Of interest to me today, however, is the fact that the FDIC admitted, in its motion to dissolve the TRO, that the Court properly issued the injunction. While declining to torture the FDIC with this admission, the Court noted that there may have been “public interest considerations contemplated by the injunctive-relief analysis,” in light of Colonial Bank’s collapse and subsequent involvement of the FDIC, but the FDIC’s failed to raise the issue. The FDIC could have strengthen its motion if it demonstrated how the four factor test weighed against the issuance of an injunction, emphasizing the public interest in supporting the FDIC in its role as receiver.

Ex Parte Injunctive Relief--Demonstrating Gravity

Bank of America, N.A. v. Federal Deposit Insurance Corp. (Receiver for Colonial Bank), Case No. 09-22384-CIV-JORDON, currently before U.S. District Court Judge Adalberto Jordan of the Southern District of Florida, has garnered some media attention in the Atlanta Business Chronicle and The New Times, but is of interest to us in today’s post because the court granted an emergency motion for an ex parte TRO in a billion dollar case.

Facts

Bank of America (“the Bank”) filed a lawsuit on August 12, 2009 against Colonial Bank (Colonial) to obtain the return of loan agreements, mortgages and sale proceeds valued in excess of a billion dollars. The Bank had sent Colonial a demand for all sale proceeds and loan agreements held by Colonial Bank. Colonial refused to return the loans, and the Bank filed suit for breach of trust and other agreements.

Motion for an Emergency ex parte TRO

Along with the complaint, Colonial filed a motion for an emergency temporary restraining order (TRO), which sought to enjoin Colonial from liquidating, transferring or otherwise encumbering the assets. The motion recited the familiar four-factor test, but is of interest to me today for these three reasons:

  1. The Bank didn’t rest solely on its motion; as new developments occurred, it filed supplemental papers. This is important because TROs are decided on the papers alone, so if new information develops after you have filed your motion, be sure to update the court with new information. Used appropriately, it builds momentum: “yesterday these terrible events took place; today it got worse; Judge please stop them!”
  2. The Bank used newspaper stories effectively. Under Fed. R. Evid. 902(6), newspaper stories are admissible. The Bank intelligently used this Rule.
  3. The Bank used supplemental sources of law. Rather than relying solely on its agreements (which should have and probably would have been sufficient), the Bank also asserted Fla. Stat. § 812.035(6), which relaxes the traditional “irreparable harm” requirement in cases involving civil theft, and instead only requires the movant to make “a showing of immediate danger of significant loss[.]” It is a good practice to always search for supplemental sources of law that may assist you in stating a claim.

Our next post will discuss a few other interesting aspects of this case.

Protecting the Judge

At a presentation last week to the DuPage County Bar Association, I mentioned that the federal courts required the movant to present a draft order along with the motion for a temporary restraining order or preliminary injunction. Illinois and many other states lack this requirement, but following a suggestion made by Maxwell II and Jacobs, I said it was useful to focus your attention on the exact relief you needed: who you are going to enjoin and what you are going to prohibit or require, because“[t]he first thing the court wants to know is precisely what action it is being asked to take.”  Edward B. Maxwell II & Jack B. Jacobs, How to Win an Injunction, 10 Litig. 20, 21 (1983). 

Afterward, Dupage County Circuit Court Judge Kenneth L.Popejoy agreed that it was useful for a Judge to see exactly what the movant was proposing, but mentioned a more important point: Judges are required to make specific findings of fact and conclusions of law. A draft order helps them focus on what facts have been shown and what conclusions the movant thinks are required by the facts. As a practitioner, I instantly agreed. 

One of the functions of an injunction requestor is to protect the court from being reversed on appeal or having to reconsider an order. To some extent this is true in every case, but injunctions happen quickly and interlocutory appeals are permitted, so an early mistake might not be as recoverable in injunction actions as it would be in ordinary litigation. Why embarrass a Judge by persuading him or her to enter an order that on its face is erroneous?

In a recent case, for example, my opponent got an ex parte TRO and tendered a draft order without mentioning a bond. In federal court, a bond is required, although the court has discretion to set the amount. Failure to discuss the bond required is a reason to vacate the TRO. In our motion opposing the extension of the TRO, we pointed out how the movant (not the Judge) had erred in failing to post a bond, and the Judge ruefully noted that perhaps he should have required one, and thereafter brokered a reasonable agreed order. I liked being able to challenge the credibility of an opponent on a clear requirement in my first appearance in the case.