What Corporate Attorneys Should Do About Trademarks Before Forming a Corporation

StartupA client arrives at your law office and wants to start a company and form a corporation or LLC. Your client had a company name in mind. You search the Secretary of State records for other companies with the same or similar name and find nothing. You also search the state trademark database and find nothing. You prepare an engagement agreement for the work of forming the corporation. Is your client in the clear to use the name? Not necessarily.

The formation of almost every company implicates trademark law. Every new company needs a name. That name will often be used with the relevant group of purchasers or suppliers. Therefore, in addition to counseling on whether the chosen name is protectable as a strong trademark, an attorney’s process forming a corporation, LLC, or other entity should include a trademark search or an informed waiver by the client of the trademark search. Below I explain the reasons why a search or waiver is necessary and provide an example client waiver.

Searching Secretary of State Corporate Records is Insufficient

Searching the corporate, LLC, and DBA records of the relevant secretary of state is not enough. Trademark rights, e.g. the right to use a name or other indicia to identify a source of goods or services, is controlled by federal law under the Lanham Act. As federal law trumps state law, approval of the name of the new corporation by the Secretary of State cannot be used to defend against claims of trademark infringement. The decision of the secretary of state does not authorize your client to use a name, if that name would infringe a third party’s prior trademark rights.

Obtaining a State Trademark is Insufficient

Moreover, an Illinois state trademark registration provide few benefits because they are subordinate to federal and common law trademark rights. Burger King of Florida Inc. v. Hoots, 403 F.2d 904 (7th Cir. 1968) demonstrated that an Illinois state trademark registrations is subordinate to a federal trademark registration. Steak & Brew Inc. v. Beef & Brew Restaurant, Inc., 370 Supp. 1030 (S.D.Ill. 1974) demonstrated that an Illinois state trademark registration does not grant the owner rights throughout the state. Therefore obtaining a Illinois state trademark will not insulate your client from claims of trademark infringement.

Searching USPTO Trademark Database is Insufficient

Still further, searching the trademark database at the U.S. Patent and Trademark Office is not sufficient to fully clear a name for use. This is true because in the United States trademark rights can be obtained by use alone. A registration is not necessary for a person or entity to obtain trademark rights. Therefore, searching the U.S. Patent and Trademark Office (USPTO) trademark database is not sufficient to determine whether your use of a mark is clear. Someone could have gained superior rights in the mark by use without registering.

U.S. common law provides rights based on use alone because trademarks are designed to prevent consumer confusion. Therefore, in one example, the law grants rights to trademark users where the relevant purchasing public has come to recognize a particular trademark as representing a source of particular goods/services, even if that trademark is not registered. This rule protects consumers, but increases the search burden on companies because searching the USPTO database may not find all relevant uses of a mark.

Receiving a Federal Registration is Insufficient

Further, even if the USPTO grants a trademark registration on the mark, that is no guarantee that your client can use your mark. This is true because, as stated above in the U.S. trademark rights can be generated based on use alone without any registration. The USPTO will only check the USPTO database and will not check state databases, the Internet, or common law usages to see if someone else has previously used the same or similar mark for the same or similar goods / services as your client plans.

If a prior user has superior rights, in some circumstances, the prior user can seek to have your client’s trademark registration canceled along with demanding your client stop using the mark. For example, 15 USC 1052(d) provides that a mark may not be registered if it “so resembles a … mark or trade name previously used in the United States by another and not abandoned, as to be likely, when used on or in connection with the goods or services of the applicant, to cause confusion, or to cause mistake, or to deceive….” See TBMP 309.03(c).  Therefore, if a third party was first to use the same or similar mark on the same or similar goods, that third party might be able to oppose your client’s trademark application or seek to cancel your client’s trademark registration.

In other circumstances, the prior user might have trademark rights in the geographic area that they were operating in before your client registered. Such rights might prevent your client from expanding to market and sell in that area. The way to know that your client is clear to use the mark throughout the U.S. is to have a comprehensive trademark search performed. Therefore, you cannot rely on the USPTO’s approval of the mark as clearance.

Comprehensive Searching

The comprehensive search should include direct hits (identical wording/characters) as well as marks that are similar or might lead to consumer confusion. This search frequently includes searching for homonyms, synonyms, phonetic equivalents, alternative spellings, anagrams, marks with similar components, and marks that start or end the same, or that have any other similarity.

A comprehensive search may look in federal and state trademark databases, online databases, trade directories, product catalogs, internet domain names, and the like. The goal is to find an actual use of the proposed mark, or a similar mark, whether or not it is officially registered. Third party search services may be able to provide such raw comprehensive search results. Then the search results will need to be analyzed to determine whether any of the search results present a risk.

 Client Acknowledgement / Waiver

Many times a client may decide to forgo the comprehensive trademark searching due to the expense. If the client decides to skip searching, the lawyer should include a written acknowledgement of the risks and the client’s decision in the lawyer’s engagement agreement or in a separate writing. One sample acknowledgement could be:

This engagement does not include undertaking any trademark searching. This engagement does not include advising whether or not the use of the above listed Mark/corporate name would infringe another’s trademark rights. The (1) approval of a trademark application by the U.S. Patent and Trademark Office or (2) acceptance of the articles of incorporation by the Secretary of State does not guarantee you can use the Mark/corporate name and does not guarantee that the use of the above listed Mark/corporate name will not infringe another’s trademark rights.  Only a comprehensive trademark search can reveal information sufficient to provide advice regarding whether the Mark/corporate name is clear to use. Comprehensive searching and related analysis is not included within the scope of this engagement.

Name changes are disruptive and can be expensive. The client should know what risks they are taking when skipping a comprehensive search. Including a written explanation of the risks in the client engagement letter can avoid problems between you and your client down the road if valid claims of infringement are made by a third party.

Photo credit to flickr user dierken under this creative commons license.

Shredding Parties to Destroy Evidence Could Cost Rambus $350+ Mil

Hynix Semiconductor v. Rambus, 2009-1299 (Fed. Cir. May 13, 2011) [PDF] and Micron Technology v. Rambus, 2009-1263 (Fed. Cir. May 13, 2011) [PDF].

In both of the above cited cases Rambus sued makers of SDRAM and DDR SDRAM alleging infringement of a number of Rambus owned patents.  A key issue addressed by the Federal Circuit was whether Rambus engaged in spoliation of evidence by destroying certain evidence.

In Hynix Semiconductor v. Rambus, the district court found Rambus did not spoil evidence, found for Rambus on several of Rambus’ infringement claims, and entered a 350 million dollar judgement in favor of Rambus. The district court in Micron Technology v. Rambus, found–on substantially the same facts as in Hynix— that Rambus did spoil evidence and as a sanction dismissed Rambus’ case with prejudice.  The Federal Circuit affirmed the spoliation ruling of the district court in Micron Technology and reversed the district court in Hynix Semiconductor finding the Hynix court applied too narrow an interpretation of whether the litigation was reasonably foreseeable.

Facts. Rambus’ primary business is licensing its intellectual property to DRAM Manufacturers. Rambus first attempted to license its rights in several patents covering RDRAM memory to manufacturers. It had modest success until in 1999 manufactures failed to deliver the promised manufacturing capacity and Intel began to back away from using RDRAM technology. At some point at or after Rambus began licensing RDRAM it under took a strategy for preparing to seek licensing revenue and litigation damages from manufactures adopting SDRAM. The following events occurred:

  1. At a Feb. 2, 1998 meeting between Rambus and its attorneys regarding licensing to infringing  SDRAM manufacturers, Rambus proposed a royalty rate that was so high that Rambus’ attorneys said “you’re not going to have a licensing program, you’re going to hav a lawsuit on your hands. Rambus representative’s said they didn’t to be “Battle Ready” for litigation. Rambus attorney’s recommended a document retention policy.
  2. Meeting notes for a November 1998 meeting showed that Rambus planned to assert its patents against SDRAM manufacturers.
  3. In December 1998, Joel Karp, Rambus VP of IP drafted a memo describing a “nuclear winter” scenario if Intel moved away from RDRAM and outlined plans to sue Intel ad SDRAM manufacturers. The memo also noted that infringement charts for Micron Devices were complete.
  4. A July 22, 1998, Rambus Document retention policy stated that destruction of relevant and discoverable evidence did not need to stop until the commencement of litigation.
  5. Karp told employees to look fora helpful document to keep, including documents that would help establish conception and prove that Rambus has IP.
  6. On March 16, 1998, a Rambus email discussed the growing worry that email backup tapes were discoverable information.
  7. On May 14, 1998, Rambus implemented a new policy of keeping email backup tapes for only 3 months.
  8. In July 1998, Rambus erased all but 1 of the 1,269 tapes storing email backups for the past several years. The one tape saved had documents the helped establish a priority date for one of its inventions.
  9. On September 3, 1998, Rambus held its first “shred day” to implement its newly adopted document retention policy.
  10. In April 1999, Karp instructed Rambus’ outside patent prosecution counsel to implement the document retention policy and discard material from its patent prosecution files, including draft patent applications, claims, amendments, attorney notes, and correspondence with Rambus.
  11. On August 26, 1999, Rambus held a shredding party (second shred day) as a part of its IP litigation readiness goals and destroyed between 9,000 and 18,000 pounds of documents in 300 boxes.
  12. In November 1999, negotiations with on SDRAM manufacturer, Hitachi broke down.
  13. In December 1999, Rambus instituted a litigation hold to preserve evidence.
  14. In January 2000, Rambus sued Hitachi. The case settled in June 2000.
  15. Rambus negotiated SDRAM licenses with SDRAM Manufacturers Toshiba, Oki, and NEC.
  16. Rambus sued Infineon in August 2000
  17. On August 18, 2000, Rambus approached Mircon about licensing.
  18. On August 28, 2000, Mircon sued Rambus for declaratory judgment of invalidity, non-infringement, and unenforceability of Rambus patents .
  19. On August 29, 2000, Hynix Semiconductor filed a similar declaratory judgment suit against Rambus in a different court.

Law on Spoliation of evidence. The court noted that “[d]ocument retention policies, which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business. ”  It also noted that “It is, of  course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.” A party can only be sanctioned for the destruction of evidence when it has a duty to preserve it. Therefore “spoliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.” The mere existence of a potential claim or distant possibility of litigation is not enough to trigger the duty to preserve. However, the standard does not require litigation to be imminent or probable with out significant contingencies.

Findings. The Federal Circuit found the district court’s finding of spoliation in Micron was not in error for the following reasons.

  1. The reason for the existence of Rambus’ document retention (or destruction) policy “was to further Rambus’s litigation strategy by frustrating the fact-finding efforts of parties adverse to Rambus.”
  2. “Rambus was on notice of likely infringing activities by particular manufacturers.”
  3. “Rambus took several steps in furtherance of litigation prior to its second shredding party on August 26, 1999.”
  4. As the plaintiff-patentee, Rambus could more likely foresee the litigation commencing because whether litigation occurred was largely dependent on Rambus’ own decision to litigate.
  5. “In general, when parties have a business relationship that is mutually beneficial and that ultimately turns sour, sparking litigation, the litigation will generally be less foreseeable than would litigation resulting from a relationship that is not mutually beneficial or is naturally adversarial.” However, the Rambus’ relationship with the RDRAM manufacturers did nothing to make litigation significantly less likely, and “Rambus and the manufacturers did not have a longstanding and mutually beneficial relationship regarding SDRAM.”

When to Preserve. Therefore, materials should be preserved at least when:

  1. The reason for the destruction of materials is or can be understood as being to frustrate fact-finding efforts of adverse parties;
  2. A patent owner/potential plaintiff is on notice of likely infringing activities; or
  3. Steps have been taken in the furtherance of litigation.

U.S. District Court Invalidates Computer Aided Method of Managing a Credit Application under Bilski

Dealertrack, Inc. v. Huber, et al., Doc. No. 06-2335 (C.D. Cal. 2009) [PDF]

Summary. The court granted summary judgment finding the asserted claims directed to a computer aided method of managing a credit application were invalid as failing the machine-or-transformation test from Bilski. The court found the process claims were not tied to a particular machine.

Facts. The plaintiff DealerTrack, Inc. (DealerTrack) asserted that defendant’s Finance Express and RouteOne infringed three of DealerTracks patents, including U.S. Patent 7,181,427 [Link] (the 427 Patent). The ‘427 patent provides a computer based credit application processing system [that] provides a graphical user interface, automatic software update downloading, lender to lender routing of credit applications, and integration with in-house finance and insurance systems and third party data entry facilities, among other features.

Claim 1 of the ‘427 patent provides:

A computer aided method of managing a credit application, the method comprising the steps of:

receiving credit application data from a remote application entry and display device;
selectively forwarding the credit application data to remote funding source terminal devices;
forwarding funding decision data from at least one of theremote funding source terminal devices to the remote application entry and display device;
wherein the selectively forwarding the credit application data step further comprises:
sending at least a portion of a credit application to more than one of said remote funding sources substantially at the same time;
sending at least a portion of a credit application to more than one of said remote funding sources sequentially until a finding [sic] source returns a positive funding decision;
sending . . . a credit application . . . after a predetermined time . . . ; or;
sending the credit application from a first remote funding source to a second remote finding [sic] source . . . .

DealerTrack arged that the claims of the 427 Patent were tied to a (1) central processor consisting of a specially programmed computer hardware and database, a (2) remote application entry and display device, and a remote funding source terminal device.

Central Processor Not Specially Programmed. The court stated, “The 427 Patent does not specify precisely how the computer hardware and database are ‘specially programmed,’ and the claimed central processor is nothing more than a general purpose computer that has been programmed in some unspecified manner.” See Ex Parte Nawathe, No. 2007-3360, 2009 WL 327520, (BPAI Feb. 9, 2009) (rejecting under Section 101 a claim reciting a computerized method of inputting and representing XML documents as insufficiently tied to a particular computer specifically programmed for executing the steps of the claimed method).

Not Tied to a Particular Machine. In an earlier claim construction order the court found:

  • “remote application entry and display device included any device, e.g.,personal computer or dumb terminal, remote from the central processor, for application entry and display.”
  • terminal device as any device, e.g., personal computer or dumb terminal, located at a logical or physical terminus of the system.”

The court has little trouble finding these devices were not particular machines withing the meaning of Bilski after finding that these various “devices” include “any device.”

IP Audit Links

IP Audit Links:

  • Conducting an IP Audit – IP Toolbox [Australian Government] — – The Australian Government provides a comprehensive step-by-step guide to performing an IP Audit. An IP audit is a systematic review of the IP owned, used or acquired by a company. An audit’s principal goal is to identify all the IP your company may have.
  • Don’t leave money on the table: Run an IP audit [Massachusetts Biotech and Technology News] — – An IP audit is a periodic and systematic review of the IP owned, used or acquired by a business. Its purpose is to inventory all IP owned, licensed or acquired by the company, to project the future cost and value associated with each piece of IP, to mine underused corporate assets, to identify any threats to a company’s bottom line, and to enable business executives to devise informed strategies that will maintain and improve the company’s market position.
  • An IP Audit Of Spongebob Squarepants [Erik J. Heels] — – Erik performs an informative comprehensive IP audit based on the pretext that Spongebob’s creator Stephen Hillenburg has contacted Erick for advice about protecting his IP related to Spongebob Squarepants.
  • Top 5 IP audit mistakes [IP Thinktank Blog] — – #4 “Too much focus on protecting new IP and too little on exploiting or killing what you have.”
  • The IP Management Audit: Start Top-down, Then Across [IP Frontline] — – A checklist that every IP audit manager needs as a starting point the what, where, who and how of initiating a company-wide intellectual property management audit.
  • IP Audit – A “How to” Guide. [ WIPO] — – “An IP Audit is defined as a systematic review of the IP assets owned, used or acquired by a business. Its purpose is to uncover under-utilized IP assets, to identify any threats to a companys bottom line, and to enable business planners to devise informed strategies that will maintain and improve the companys market position.”

New Pilot Project: Pre-First Action Interview as of Right

USPTOThe USPTO announced that it is launching a program to allow an Examiner interview before first action. Here’s the process. First the applicant requests a first-action interview. The examiner conducts a prior art search and provides the applicant a pre-interview communication. This is a condensed preview of objections or rejections proposed against the claims. Then, within 30 days, the applicant must either elect (1) not to have a first action interview with the Examiner, or (2) to schedule the interview and file a proposed amendment and/or remarks.

The pilot only applies to applications classified in Class 709 (electrical computers and digital processing systems: multi-computer data transferring) and applications in Class 707 (data processing: database and file management or data structures.

In all other cases, MPEP 713.02 applies to allow pre-examination interviews at the descretion of the Examiner.