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.

 

 

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 3

Today we will conclude our overview of the court's four-part decision in the Hearst v. Aereo copyright infringement case. If you recall, last week we concluded with the court's denial of Hearst's final two claims.

The court then turned to the question of whether Hearst had adequately shown that irreparable harm would be caused absent an injunction, and found that it had not. Hearst first claimed that allowing Aereo to continue its streaming service would leave Hearst unable to maintain its negotiating position in regards to the sale of rebroadcasting rights and the pursuit of other streams of revenue. While the court conceded that Aereo’s service might, in time, weaken Hearst’s ability to negotiate with rebroadcasters, it also noted that because these contracts were only re-negotiated every few years, rather than constantly, that the irreparable harm would likely not occur before the litigation ran its course, making a preliminary injunction unnecessary for preventing this damage.

Hearst next claimed that there would be irreparable harm to its advertising revenue, as advertising rates were based on viewership ratings, and those ratings did not measure those viewers who used streaming services such as Aereo. The court noted that Nielsen, the foremost ratings agency, had recently begun to count online viewers as part of its ratings, and thus ruled that Hearst had not shown irreparable harm from that source either. Finally, the court ruled that Hearst’s claim that Aereo’s service would harm Hearst’s efforts to create its own online streaming service was defective as well, as Hearst’s plans for such a service were too inchoate to be irreparably harmed at this time.

Having failed the first two prongs of the preliminary injunction test, the final two factors were more perfunctory than dispositive. The court, in two paragraphs, noted that the balance of harm does not appear to clearly favor either party, and the public interest similarly “cuts both ways.” In the end, it found that neither factor did much to change its earlier conclusions, and so ruled that because Hearst had failed to show a likelihood of success on the merits, and failed to show irreparable harm, its request for a preliminary injunction was denied.

What does this case mean in a larger context? For one, it is clear that attempts to use decades-old law to regulate cutting edge technology are bound to create serious problems of interpretation. The Copyright Law regarding these issues as cited by the court comes from 1976, when cable television was still in its infancy, and has not truly evolved to keep up with the times. The court’s ruling can be interpreted in different ways. Some will argue that it allows emergent forms of technology to effectively flout copyright laws and profit off the protected material of others due to unforeseen loopholes in the law. Others will take the opposing view, that the courts are unwilling to force new forms of technology into an antiquated regime of law, and will instead allow them to innovate new forms of content distribution until some elected body makes the conscious decision to regulate these new technologies.

 

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 Streams Run Downhill: Part 1

Today’s blog post will focus on yet another online television streaming case. In a recent decision by the Federal District Court in Massachusetts, a company owning a local broadcast network found itself unable to get a preliminary injunction to stop a new start-up from converting its signals into a digital, streaming format.

The set-up of the case is interesting, in that it shows how changing technology can, in some cases, create new conflicts. Aereo, the defendant in this case, had recently begun a new service that allowed users, for a fee, to receive digital versions of broadcast television signals that they could either watch live or save on a DVR system for later viewing. To accomplish this goal, Aereo had set up a number of antennae around Boston in order to receive the broadcast signals for digital conversion. The Hearst Group, a media conglomerate that counts WCVB-TV in Boston as one its holdings, brought suit in the District Court of Massachusetts, alleging copyright infringement by Aereo, and further filed for a preliminary injunction to stop Aereo’s service while the litigation was ongoing. Aereo responded by asking the court to transfer the case to the Southern District of New York, where the company was incorporated.

As a preliminary matter, the court first rejected the motion for transfer. It explained that even though Aereo was incorporated in New York, and the Hearst Group had its place of principal business there as well, the Hearst Group’s choice of venue would have to be given deference unless Aereo could show some reason why the action should be transferred. In this case, since the Hearst Group’s claim was restricted to Aereo’s conversion of signals only from WCVB, based in Boston, and since Aereo did a great deal of business in the city, there was no sufficient reason to transfer the case. Further, as the court pointed out, the litigation was in an advanced enough stage that the transfer would have the pernicious effect of delaying the litigation, which the court also deemed to be a factor in denying Aereo’s request. Looking at the rest of the decision, it is clear that at least one reason for Aereo’s attempt to move venue is that the 2nd circuit, which encompasses New York, had a more substantial body of favorable precedent than the 1st Circuit, and, in addition, Aereo had already prevailed in a similar suit in the 2nd Circuit just months prior.

Next week we will begin to review the court's process in reaching its decision.

 

Fox Broadcasting v. Dish Network

Recent developments in broadcasting technology have changed the way that people watch television. Unsurprisingly, however, there has been some push back from traditional broadcasters, who see their business model as being under siege from these new innovations. We have written about one such case in our last couple posts. The recent case of Fox Broadcasting v. Dish Network is one example of this type of clash.

The defendant, Dish Network, had recently introduced a service, “Autohop”, that allowed customers to fast-forward through commercials on certain shows they had digitally recorded previously. Fox Broadcasting, which derives a great deal of its revenue through the sale of ad time, sued Dish Network in the Federal  district court in Central California, claiming a breach of the contract between Fox Broadcasting and Dish Network, as well as copyright infringement. Fox also sought preliminary injunction to stop the Autohop service while the case was still pending.

The district court used the four-factor test for determining whether or not a preliminary injunction was warranted, and ultimately decided that it was not. The first factor, whether Fox had established a likelihood of success on the merits of the case, was likely the most dispositive. This factor turned on whether or not it was DirectTV, or the consumer, that was party that made the digital copy of Fox’s programming for later viewing. In order for Fox’s copyright infringement case to be likely to succeed, it would have to show that it was DirectTV making those copies, and thus directly infringing its copyright. In support of its position, Fox argued that since it was DirectTV that operated the system that made the copies possible, and set rules such as how long the copies would last in the memory, as well as editing the start and end times of the recorded shows, that it should be judged to be directly responsible for making the copies. The district court disagreed with this assessment, and instead ruled that this fact pattern was more akin to a person making a copy of a show on a VCR, and that it is the end user who is making the copies, and who be most likely liable for a direct infringement suit.

The court next turned to whether or not Fox could show a likelihood that DirectTV had was liable for secondary copyright infringement by facilitating the direct copying of its users. As there was no real question that the users in question were copying Fox’s copyright material, the burden shifted to DirectTV to show that the users were protected by fair use. The long-held precedent is that a person is entitled, under the doctrine of fair use, to record a program for the purpose of time-shifting. Fox argued, however, that fair use did not allow customers to skip commercials or build a library of recorded programs. When the Betamax case was decided, the technology had not yet reached the point where either of purposes was feasible and so that court had not ruled on whether they were permissible under fair use or not. As to the matter of skipping commercials, the court was not sympathetic to Fox’s argument, noting that, although Fox owned the copyright to the television shows being recorded, it did not own the copyright to the commercials being skipped, and could not sue for copyright infringement under that theory.

The court then examining DirectTV’s AutoHop program under the Fair Use factors. First, the use was noncommercial; it was done by private consumers for their own viewing convenience, not as a commercial activity. Next the court looked at the “nature of the work” and “amount of substantiality of the work shown”, ultimately concluding that, even though the users in question copied the entirety of the material copyrighted by Fox, they had been invited to watch this event free of charge, and merely copied the work in order to make its viewing more convenient. Finally, the court looked at the last factor, how the use would affect the market for this work, which they ultimately concluded would not be adversely affected by the commercial skipping technology. Next week’s blog post will focus on the next steps that the court took in coming to the conclusion.

The Court Answers Last Two Questions in Online Television Streaming Copyright Infringement

Last week we presented an overview of the court’s process in making its decision in a recent copyright infringement lawsuit involving broadcasters and an online television streaming company. This week’s wrap-up will focus on the ancillary questions presented at the end of last week’s post—what the scope of the injunction should be and what amount of bond should be required of the plaintiffs.

As to the first question, the matter of scope was complicated by jurisdictional issues. As the defendants’ business had been running on a nationwide basis, different district courts had already weighed in and while Ninth Circuit had come to a similar conclusion to this court, the Second Circuit, having come to a different conclusion on whether the streaming service violated copyright law, had not granted an injunction. Further, the Copyright Act mandated that whenever an injunction was granted based on a claim of copyright infringement, that the injunction should be “operative throughout the United States.” Attempting to square this circle, the court referred to D.C. Circuit precedent that allowed it to limit the scope of injunctions in circumstances such as these and, accordingly, limited the scope of the injunction to cover the entirety of the United States except for the Second Circuit.

Finally, the court turned to the issue of bond. As it noted, the D.C. Circuit is not a mandatory-bond jurisdiction and, as a result, the court had the option of requiring no bond if the circumstances warranted it. The defendants, concerned that the injunction might destroy their business, asked the court to require a $10,000,000 bond. The court, however, noting the “considerable assets” held by the plaintiffs of this case, instead imposed a $250,000 bond.

               

 

Broadcasters Obtain Second Win in Court Case against FilmOn

Several lawsuits have resulted from the emergence of live streaming services broadcasting television via the internet.  Music streaming companies such as Napster involved similar issues, but the courts have only recently tackled the issue of television streaming.

A recent decision in Washington, D.C. granted a preliminary injunction against FilmOn, providing some insight into the future of these copyright issues.

The U.S. District Court for the District of Columbia handed out a preliminary injunction as the second win for the broadcasters in a series of three decisions in their copyright battle.

Both television streaming companies (FilmOn used to be associated with Aereo under a different name before striking out on its own) contend that they are not in violation of the law because they merely provide consumers with their own antennae, not access to the copyrighted content.

While it appears that the broadcasters involved in the lawsuit against FilmOn (Fox, NBC Universal, Telemundo, ABC, CBS, Allbritton Communications, Gannett Co.) will achieve a victory, having already been granted an injunction preventing FilmOn from continuing to stream television from their networks without permission, the U.S. District Court for the District of Columbia’s decision opposes a New York court’s decision in a similar case there against the streaming company Aereo.

What does this mean for the issue of copyright law associated with live streaming? It could mean that the issue will reach the Supreme Court. While the U.S. District Court of the District of Columbia’s decision extends to many territories beyond the D.C. area, the injunction is not nation-wide. It is yet to be determined whether or not the issue will reach the Supreme Court, but two major decisions reaching opposite conclusions opens a door to that possibility.  

Tune into our blog next week for a more comprehensive run through of the Court’s decision.

The Patterson Law Firm has handled many intellectual property cases and we stay abreast of the trends within this sphere in order to provide the best service to our clients. To learn more about the services we offer visit pattersonlawfirm.com or call 312.223.1699.

 

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.  

 

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.

               

 

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.

 

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.

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.

Kraft vs. Starbucks: The Beginning To The End (3)

In response, Starbucks argued that an injunction was unnecessary because Kraft failed to show that it would suffer irreparable harm in the absence of injunctive relief. Starbucks stated that it had the undisputed right to terminate the contract at any time because Kraft had materially breached the terms by failing to perform its obligations under the contract by “withholding sales presentations and other materials” and failing to improve Starbucks’ declining sales, thereby releasing Starbucks of its obligations under the contract. (Response, pp 6). Further, pursuant to the termination provision of the underlying contract, the damages that Kraft would suffer would be compensable by money damages based on Kraft’s alleged harm of losing the exclusive right to distribute a product through Starbucks. Kraft is the largest food company in North America, and revenues from Starbucks account for 1% of Kraft’s annual revenue. (Response, pp 16).

Is this numerical value significant enough to demonstrate irreparable harm to Kraft? Starbucks said no and cited the following cases. In Litho Prestige, Div. of Unimedia Group, Inc. v. News Am. Publ’g, Inc., 652 F. Supp. 804, 808 (S.D.N.Y. 1986), the court stated that an argument that a four percent business loss would cripple the plaintiff was “wholly unpersuasive”. In Reiter’s Beer Distribs., Inc. v. Christian Schmidt Brewing Co., No. 86 CS 534, 1986 WL 13950, at *11 (E.D.N.Y. Sept. 9, 1986), the court found no irreparable harm where sales of beers at issue constituted between 17% and 29% of distributor’s total sales. Based on these holdings, the potential 1% loss of Kraft’s annual revenue is far from demonstrating irreparable harm. 

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).