Saturday, May 29, 2010

Open and User Innovation and Intellectual Property Enforcement part 2

Session III (Licenses - Open and Closed)

Jason Schultz spoke about creating a kind of GPL for patents (and then my computer crashed, so sad). The project is designed to deal with one of the big barriers to defensive patenting: the fear in open source types that a defensive strategy will not stay defensive once a property right exists, given that plenty of companies have said that they were only patenting defensively and have later changed their practices. So the idea is a nearly irrevocable license to anyone who agrees to reciprocate across their entire patent portfolio; if you then start using patents offensively against people in the GPL community, you lose the license.

Dan Burk: Questions about antitrust.

Van Houweling: Some hesitance about licensing generally—Niva Elkin-Koren has noted that pre-CC was a world of lots of tolerated uses; CC licenses may encourage people to think more about themselves as rightsholders, and there are possible inconsistencies between licenses. Claiming of rights by user-innovators can raise transactions costs, creating a bigger mess and bigger need for exemptions. Which isn’t to say that exclusion rights are unjustified, but using exclusion rights to create openness is tricky because of difficulties communicating about the terms and can create further barriers to innovation in ways that relying on the public domain wouldn’t—especially given that there is an automatic public domain in patent as there is not in copyright. What about publishing instead? Or what about trusteeship—transferring to some trusted intermediary?

Carroll: standardization around a license has real implications—OpenCourseware is finding that interoperability is emerging as a more important issue as a community begins to see itself as pulling from and contributing back to a larger pool. So the open courseware community has standardized around sharealike noncommercial, but attribution-only (or attribution-noncommercial) might be preferable; it’s a big debate and incompatibility issues exist. Nike approached Science Commons for Green licensing where Nike would license potentially useful environmental technology to noncompetitors/other industrial applications; Nike has put 100+ patents into this.

Stephen Maurer: There are people who have an urge to donate and you need to keep them involved. Synthetic biology: network effects around knowledge—better to have it held by a community rather than a private company. First best for company is to have access without donation; there you need to use IP or some other vehicle to enforce the second-best, in which the company contributes to and draws from the pool. That may allow the community pool to grow faster than the privatized pool, producing network effects without monopoly. Donation model and ruthless commercial trade are both open source, but very different from a design perspective.

Strandburg: has anyone looked at the endowment effect with respect to ownership (Chris Sprigman and Christopher Buccafusco have a haiku experiment) of patents/IP in this sphere? How do you bring people who don’t want patents into the sphere? Could we also say that the license covers people who don’t have patents?

Schultz: You can take the license no matter what you own or don’t own.

Strandburg: what if everyone disavows patents and then you have no defense against the patent troll? How much worry is there about the big outside bully?

Scotchmer: Two views of open source licensing. One, romantic view of contributors to common good; other, cold-blooded business strategy—these are reachthrough licenses, which are ordinarily considered nefarious and not common-good-promoting. If the first view were the only view, then dedication to the public domain would be sufficient. But open source can be collusive: agreement not to innovate and assert control in a rivalrous way. Open source can also be profitable because we agree not to hold each other up—there, there is no conflict with the public interest. Is this just a way for big firms to profit from little firms? If the locus of profit is this unprotectable learning-by-doing; if you’ll profit from your knowledge regardless of whether it’s patentable by getting little guys to contribute to making applications for your platform, then it’s just good business.

Von Hippel: for user innovators who benefit from the act of inventing—it makes them feel good about succeeding at something—that’s not dependent on the behavior of others; you want exemptions, not (necessarily) rights.

Baldwin: this form of property rights, in the hands of some players, can be an instrument of collusion to not invest in innovation. Those players wouldn’t be classic users, because for users the value of innovation is use value, so they always have motivation to invest to create value in use. What the collaborative institution does is allow splitting of effort and recombination of artifacts into larger systems that benefit nonrivalrous users. It’s not a desire to donate so much as a use-profit-seeking effect.

Maurer: open empirical question in synthetic biology: what’s the composition of the group? People at universities get paid anyway; but there is also a lot of money available commercially. If your big concern is that commercial entities will surprise us with a monopoly on some important technology, then the choice of policies is different.

Von Hippel: why isn’t an exemption just as good for users as a right?

Samuelson: there’s more than one way to achieve exemption-like status. Some policy levers like exemption might not be on the table right now, so don’t throw away rights as a possibility of achieving the desired result.

Baldwin: question: who’s the user core? Are there people who just like designing/get joy out of belonging to the community? Reduces costs—these are people for whom design cost is low. Other people: commercial participants, who find it better to be part of the community than outside it. Empirical question about who dominates. Suspicion: viable versions of this model have users who really care about the thing itself at the core, and have a hunger for design improvement. Nonuser/commercial groups will be attracted to a vibrant, healthy institution, but can’t take it over or it will die.

Kapczynski: because copyright is so hard to get rid of and patent so hard to get, open licensing will be more useful to the former. What is the proper form of the license? Folks who are not interested in commercializing may not be interested in resisting others’ commercialization with reachthrough licenses. What counts as open for them? Other conversation: for people who do open licensing, what is necessary to make space for users? Royalty-free versus RAND (reasonable and nondiscriminatory terms).

Dietmar Harhoff: Skeptical that general user exemption without restrictions on what “use” means is feasible. German patent law insulates prior users who don’t file for patents from later holdup by people who do get patents—let people stay out of the system and be safe.

Van Houweling: patent licensing may be less satisfactory because of the difference between copying and independent creation with respect to liability. When you have a copyright license, you know what you can do, but when you have a patent license, you don’t know very much; might be other patents out there. (On the other hand, even with a copyright license, you are still vulnerable to claims by some third party that you infringed their copyright—consider Coming to America, where the studio clearly had licenses from most of the relevant people.)

Session IV (Intermediaries and Secondary Liability)

Discussion of Blizzard case: the infringement theory was that the RAM copy of a user’s game was unauthorized because, though the user was an authorized user, the particular use was unauthorized.

Dan Burk: isn’t this what the GPL wants?

Brian Carver: the guys doing automated gameplay look like cheaters, so they’re unsympathetic, but they were doing this long before the license terms changed. Here’s a more sympathetic case: what if Microsoft changed the terms of use for Word saying that interoperable software wasn’t allowed? They could say that anyone who did was violating the license, and was an infringer as soon as they loaded the software into RAM; anyone who created a program that was interoperable would be inducing infringement—could shut down businesses like EndNote or Bluebeam with a stroke of the pen.

Schultz: Federal Circuit has now interpreted Grokster more than any other circuit—inducement is an issue in many IP areas, though Grokster may not have influenced the treatment of patent much. Inducement continues to be a big deal—recent Limewire case—so it chills people who are trying to help innovators. Level of knowledge accepted to trigger in copyright is much more general and vague than in patent—general knowledge that users are infringing something seems to suffice, whereas in patent you’d have to know about the specific patent that the users are infringing.

Notes that Facebook has sued Power for extracting information to aggregate all their social networking data; Facebook claims to own all user information, including photographs, status updates, and so on.

Session V (Infringement Exemptions, Fair Use, and Exhaustion)

Patent Act §287(c)(1): methods of surgery are patentable, but not enforceable against doctors, helping personnel, or institutions in which they’re done—Dan Burk says it’s a complicated and unclear provision. Not sure we understand who’s covered.

Strandburg: Only one case interpreting it, involving an independent lab, finding them covered by the exception.

Maurer: Secondary liability is the purpose of retaining patentability—someone who gives you an instrument to perform the method may be liable.

Samuelson: arose out of a case in which one surgeon sued another; the community went nuts. Debate over patentability v. exemption for practice. Partly because defining exclusion from subject matter was difficult, and because of concern about covering methods that doctors don’t actually practice, the decision was to create exclusion around people practicing medicine; also a sense that this would be more compatible with treaty obligations. Drugs aren’t covered.

Strandburg: user innovator community had enough clout to get Congress to pass a law for their social norms. That may be why there aren’t many cases—very few people would flout the norm. Doctors have the same reaction to diagnostic method patents, but people outside the community are involved in those; will they be able to get the same protections against those patents? There, absent further congressional action, relief would have to come from patentability rather than a practice community exemption.

Schultz: Boundaries of community: users are usually thought of as amateurs, but these are professionals with certification/licensing and a national association representing them. These boundaries and accompanying social status may make the exception seem more tolerable—it can’t expand.

Kapczynski: And the bounds of that community map pretty well onto the bounds of the community that would be engaged in the innovation in the first place.

Strandburg: which makes diagnostic tests an interesting comparator, where innovation may also come from outside though it’s not clear how often.

Dietmar Harhoff: The harm of these patents is in the overall information structure—becomes harder to determine whether you are violating any rights. Patent examiners think that these patents will be narrow, but their harm comes further down the line.

Samuelson: in theory, you could still get a patent, but with luck people will be deterred from patenting because they can’t enforce it against the key players.

Harhoff: but there are lots of reasons for patenting; not entirely protective.

Carroll: Tailoring can work on scope, on defenses, or on subject matter. Tailoring on subject matter requires confidence that what you’re carving out really doesn’t belong in the system; EU has done that but Supreme Court is unlikely to.

Harhoff: Proposition: Small patents clog up the patent system by creating uncertainty.

Samuelson: but doctors are unlikely to worry about patents with the exemption in play.

Burk: The argument is that trolls can succeed by going after small/medium size players and asking for sums less than the cost of litigating, even with invalid patents. Scope reforms won’t help with this.

Strandburg: likes use exemptions because it’s easier to figure out what a user is doing than to figure out whether a patent is “really” a business method.

Kapczynski: Ways to make a user exemption—a status? Not plausible, because no status exists that covers “users” in general. Motivation? Noncommercial—then we have to define that; may differ between patent and copyright. Form of the use? Also a relevance to space—private use?

Burk: only have one real subject matter carveout in the US, nuclear weapons. Compulsory license for civilian nuclear tech—technology-based rather than user-based; Clean Air Act has similar provisions. Could consider remedy limits to be a type of exemption/carveout—injunctive relief might be denied for certain uses, e.g., sewage treatment. Exemption for generic drug development.

Schultz: look at §117 in copyright—a right to tinker if you own a copy (from a period where that kind of tinkering was a more standard part of working with a computer program); ownership of a copy of software is uncommon now given licensing developments, so that’s not suitable but it’s a place to start.

Strandburg: line between repair and reconstruction is also unclear, especially since very few cases involve users. Possibilities: some kind of justifiable failure to license, like Wendy Gordon’s transaction costs rationale for fair use—market too small, or patentees trying to squelch further innovation, or anticommons type holdups like eBay v. Mercexchange. Added on: “blocking patent failure.” Ordinarily we say that a substantial improvement can be patented, but someone in an open source environment might not want to do that. Other considerations: Industry specificity: where are patents important? Exemptions should be granted more where there is less reliance on patents for innovation. Knowledge: is the user an independent inventor? Would the patent have been easy to foresee/find?

Peter Lee: Legislative history of medical technique exemption: doctors are well-organized, but it was also influential to say that the exemption helped patients. Build a narrative of the people who are harmed by the rights.

Van Houweling: Exhaustion seems both useful and problematic (because of boundary uncertainty and undertheorization). Fiddling with your own stuff as a motive hasn’t been discussed in the courts. Oral argument in Quanta: some Justices are concerned about users and even user-innovators.

Schultz: making and using v. importing and selling?

Burk: almost no cases about what “use” means in the Patent Act. Early cases suggest that “use” is pretty broad, but don’t give many reasons. Stockpiling ammunition: court says storage in preparation for war is use.

Carroll: courts have read a volition requirement into copyright—nothing in the statute says that but it’s a policy-based reading. Stories about consequences could lead a court to adopt such a reading. Farmer whose field is accidentally contaminated with genetically altered seeds might be an example in patent.

Strandburg: very creative interpretations of “use” exist in prior art context, which covers “public use.” “Experimental use” too—shouldn’t we try to interpret these terms in some coherent way.

Brian Carver: We’ve been patent focused for a while. Lots of user creativity going on in copyright too. Should that be infringing? There are albums that are classic and game-changing that couldn’t be made in the legal climate we have now: tell those stories.

Van Houweling: Rob Merges would say that these examples of user innovation show that the system is working, no chilling effect. Stories about things that can’t happen now can help.

Von Hippel: so the law is incompetent?

Van Houweling: lots of things fall through the cracks; she finds compelling the argument that we shouldn’t have to operate under the sword of Damocles.

Samuelson: Tim Wu’s argument about tolerated uses—things that are tolerated become accepted, putting burden on rightsholder to raise an objection that may not be validated by courts. Zone of tolerated use becomes normative.

Me: I don’t like the concept of toleration. Toleration is about power: toleration is about the normative allowing the non-normative to exist. Toleration can be withdrawn.

Van Houweling: though in Wu’s version it can’t be withdrawn if it lasts long enough.

Burk: laches, estoppel, adverse possession—toleration can have permanent effects in law. (But that has to be individual and the idea Wu presents is more that if owners generally tolerate something than a particular owner shouldn’t be allowed to object to the practice applied to the owner’s works; this is a massive and I think unlikely revision of the usual treatment of toleration in the law. Compare how hard it is for the public to get an easement over your land v. a neighbor.)

Scotchmer: We have a concept of equal protection; there’s no equal toleration under the law. People who get tolerated tend to be people with power: who gets tolerated when they park illegally? Who gets tolerated when they engage in illegal construction on the block? Some people get deference and others don’t.

Strandburg: can think of tolerated use as static or as an input to strategy. This may all be time-dependent. In the beginning, if someone’s the first person to fight back, they might lose. At a certain point, we find a person who can win. That comes up in gay rights too (comparing concepts of “toleration”)—there comes a point when it would look really bad to shut people down.

Schultz: Operationalizing licensing: some machinima licenses allow noncommercial uses—space of safety for some creativity, but it’s still a benevolent dictator. AU’s Best Practices around fair use—also trying to find particular genres of creativity, not with licensing but with naming norms around which to galvanize.

Samuelson: private use exemptions as exist in some countries might be another tactic in this space; US has tended to bundle with fair use, but we don’t need to. Could also tie limitations to definitions of exclusive rights—public performance right = implicit license to everyone to make private use. Or require commercial harm as a prerequisite for finding a violation of the excusive right.

Schultz: IP counsel worry about “sitting on their rights”—this generates a lot of bad threats, and we might want to avoid giving them a rhetorical excuse for going after people who aren’t doing any harm. (This is another reason I don’t like “tolerated use.” I think it encourages this type of argument: if I don’t go after it, then I’m tolerating it and may lose my right in its entirety—that’s not true as a matter of descriptive law, but it’s widely misunderstood.)

Gordon: Tolerance and custom: they are related, but custom doesn’t have some of the uglier connotations of custom. Systematizing relations between custom, toleration, and laches—Lloyd Weinreb argued for using custom to increase the scope of fair use. Jim Gibson argues that custom is a bad source of reference because customs of licensing arise out of fear rather than out of right (in either positive or normative sense).

Burk: The law doesn’t require you to go after everyone (I agree, but there’s a lot of misconception surrounding this), but estoppel and acquiescence are doctrines that are there for a reason. You don’t want IP owners to sit on their rights while you make a big investment. There’s still an important function for estoppel; don’t throw it out.

Carroll: Toleration intersects with our concept of the scope of rights: in one concept, the right is far-reaching and the owner may tolerate a bunch of stuff within the scope of the right; in another, the right is limited, and overclaiming is a misuse of the right.

Samuelson (and others): discussion of misuse as an alternative—misuse can work like an exemption during the period before the misuse is cured.

Harhoff: influence of behavioral economics on whether people withhold innovation—there’s now general agreement that patents not be licensed even when licensing would promote progress/efficiency, because private and public interests need not be aligned, but we need now to add in things we know about imperfect rationality (including managerial conflicts).

Samuelson: we should also say more about fair use. Fred von Lohmann argued that should also rely more on first sale to support tinkering. Fair use does a lot of work (being asked to do too much) to facilitate innovation on the copyright side—potential application to patent reform? Can’t expect more general exemptions from any place but the courts these days. Courts have accepted licensing to defeat first sale much more readily in copyright than in patent, but we can push to change that.

Burk: deal with whether we should give people exemptions or rights; rights may allow them something to bargain with.

Session VI (Remedies)

Andrew Torrance: eBay v. Mercexchange has been characterized as a compulsory license regime. Have to treat patents like the rest of law in terms of injunction v. damages; 72% of the time injunction is awarded now as opposed to nearly 100% in the past. Reasonable royalty v. lost profits? Would make it easier on user-innovators in terms of risks faced. Denominator problem in patent reform: if I make a car with one screw covered by patent, what is the basis for calculating damages? Willfulness is also an issue. Also, even if you win, there’s a litigation penalty--$3-5 million to take a patent dispute to judgment.

Burk: Think broadly—restitution instead of damages/injunction. User innovation: the key is the preliminary injunction stage, so we should look at that in particular. Posting a bond: FRCP has provisions for putting the plaintiff at risk too.

Strandburg: allow users a setoff or some other consideration if user innovation had contributed to the invention of the patentee—what would happen naturally if both sides had relevant patents. (Does she mean that the particular user would need to have contributed, because that’s an unlikely scenario? How would we structure asserting third party contributions to the invention?)

Schultz: Need $100,000 to get to the PI stage—a bond might not be much help. Are there ways we can deal with the punishing cost of litigation before that? Remedy for knowing misrepresentation in DMCA notification—might be a way to push back. Question about burden of proof for defenses/exemptions at the PI stage. Defendant pleads fair use as a defense, but fair use is not an infringement of copyright according to the statute. Ninth Circuit in Google v. Perfect 10: court initially put the burden in some ways on Perfect 10 to prove it wasn’t fair use, and then took it out of the amended opinion. Tweaks would be useful. Winning on motion to dismiss: has happened in a couple of cases, and that’s even better.

Torrance: for users, have citations/really low fines for infringement, $100. Users could keep going: it’s a parking ticket.

Kapczynski: International law: are these deterrents?

Harhoff: US litigation cost allocation rule scares the crap out of the little guy; even if he has a good case, the other side can unilaterally drive up costs, and the cost level is extremely high comparatively. Average German patent case: 150,000 euros, over in 2 years, and you get reimbursed if you win; similar in France; 1 million pounds in Britain and resultant higher settlement rate. Which also means that validity of patents is swept under the rug. People have strategic incentives to litigate. Possible damages: the cost of inventing around—this would be better as a deterrent to trolls (Scotchmer points out that this could be reasonable royalty in many circumstances, though the law is messy). There are virtually no trolls in Europe because the cost levels/strategic use of litigation is not as possible. But Europe may be moving in the American direction.

Burk: reasonable royalty is like the Holy Roman Emperor: none of the above. It’s not designed to replace negotation, because the negotiation is only hypothetical and because courts are concerned not to give people an incentive to infringe, knowing that at worst they’ll only have to pay what they would have agreed to pay voluntarily.

Brian Carver: recall that statutory damages are good for users in one place: open-source licensing, when it’s violated. Jacobsen v. Katzer. Open-source projects are generally small and judgment proof, and the thought from some is that they don’t need to worry about patents—but that’s not true because there are commercial entities that want to control the market; if the commercial entity in this case could squash the open source competition, it would be the only one with model train software available. So enforcing the open source license against the commercial entity is a big deal. Turned out that the patent holder had copied open source software and removed the attribution; put the software project in a strong position for settlement. But Jacobsen had to live with a period in which his house was under threat: he’d gotten letters saying that the company’s patent read on his software project and thus he owed $200,000; the company also contacted his employers and did what he thought threatened his livelihood/grants.

Discussion about the class of unlawyered/unresourced innovators: when the complaint shows up is the key time for them. Tweaks later may not help.

Carver: make post-grant review a precondition of filing a patent lawsuit? Might help the little guy; could make this requirement only triggered for noncommercial users or other groups about which we’re worried. This would allow anyone who wanted to make an argument to bring it to the Patent Office’s attention.

Schultz: certain politicians have embraced new kinds of stories about participation/remix culture. Mike Doyle & DJ Girl Talk as a talking point. Rick Boucher: got in the fight because he was interested in libraries and fair use. Innovators in particular districts should talk to the representatives from their districts.

Open and User Innovation and Intellectual Property Enforcement

Thanks to the Engelberg Center at NYU for making this meeting possible, and Pam Samuelson for hosting!

Pam Samuelson: Aim: policy levers to make user innovation more lawful. What would a user-friendly IP system look like?

Eric von Hippel: Couldn’t believe it when he found out what the law said; thus began a conversation with lawyers. A firm can be both user and producer, depending on the innovation. Users tend to innovate before manufacturer comes in; producers look like innovators because they come in with resources and can invest more resources per unit. Missing: at the beginning of a market, the size of the market is small and uncertain. Producers may not have a large-scale advantage. Not that manufacturers identify user needs, develop products at private expense, and profit by protecting and selling what they developed, but rather that lead users innovate to solve their own needs at private expense, then freely reveal their innovations, some of which get adopted by other users, and begin to grow/separate out from the froth of experimentation. People get tired of reproducing the innovation each time, small firms appear to sell it, then large firms come in (and take credit).

Lead users have strong needs. The market isn’t there for them yet. Firms are not acting irrationally in refusing to provision them. But creates invisible front end where users act as feedstock for manufacturers. Because it’s a profitable feedstock, manufacturers trying to stop users might be made to see the purpose of encouraging innovation (he is very optimistic!). Survey of major new products: e.g., scientific instruments. Very few real game-changers over four decades. They come from users, and they don’t look like “products.” Manufacturers use engineering to turn the things into products with operator’s manual, etc. Manufacturers say they invented it, because the user design was a piece of crap and they engineered it to be nice. Typically it’s the manufacturers who then apply for patents.

Users developed GPS orientation for tractors to put fertilizer in right places, center pivot irrigation, and other agricultural developments. Prototype of latter used old bike and other materials to hand. Commercial version is very nice, but the same thing as the prototype, except from the manufacturer’s point of view—the quality of the welds on the prototype is terrible!

Similar results in other fields: health products (Gatorade), personal care (protein-base shampoo), sports equipment (mountain bike, mountain-climbing piton), apparel (sports bra), food (chocolate milk, graham cracker crust), etc.

Users aren’t always innovators: 77% in scientific instruments, 10% in engineering plastics. Users tend to develop novel functional capability (first sports nutrition bar, first scientific information of new type, first mountain bike)—82% of novel functional capabilities were user-developed. Manufacturers then develop dimension of merit: better-tasting nutrition bar, improvements to speed or size of laptop, smoother ball bearings for bike, improvements on power supply—87% of dimension of merit improvements were manufacturer-developed.

8% of UK consumers in last three years developed/modified a product. Scale of dark matter here is huge, 100-1 relative to producer activities. Because it’s not visible, it’s not in policy, and that’s a problem. Note that publications and patents are better evidence than use in fighting off a patent.

Dan Burk: what are patents supposed to do? Reward innovation or its commercialization?

Kathy Strandburg: Also depends how easy it is for the user to make it, or make it for someone else—that affects commercialization.

Von Hippel: also notes that users are predominant innovators of technique, which is often beyond the scope of patent. In rodeo kayaking, users developed 100% of technique innovations, sometimes modifying rivers to create moves. Product innovation is the area most favorable to producer activity. Consumers collectively spend much more money and person-hours on innovation than do producers in at least one field—data from whitewater kayaking, $100 million sport (though we can’t tell whether/how much it’s wasted effort).

Users are also developers of many important services: study of retail and commercial banking services; hotels (remember trying to use internet in your hotel room in early days, when you’d unscrew the phone so you could use AOL?—hotels responded with tamper-proof screws, then users responded with screwdrivers, then hotels eventually monetized it and said they’d invented in-room internet—a typical story of active resistance to user innovation). Typical time to commercialization: 7 years, waiting for demand to build up.

Bottom line: determining authorship of community developed innovations, or allocating shares of authorship, is very difficult. Lego has 200 internal R&D people and ~50 model (piece) developers, and 20,000 self-organizing people outside, many of whom innovate. Lego has now in effect outsourced design—users can post a design for an object and Lego allows you to create a box with the necessary pieces; Lego then monitors how many boxes sell, and can commercialize ones that do well.

Users tend to be open than producers: process innovations more open, product innovations more closed. Dutch companies as both producers and users: Many more product innovations (made in the role of producer) are protected with IP (45% v.s. 11%); 85% of process innovations (made in the role of user) voluntarily help with copying/transfer of knowledge, because what they want is the product, compared to 17% of producer/product innovations. Greenhouse owner wants a robot to tend flowers to save space; shows the manufacturer how to make it.

Comment: hedge funds are user-innovators, but aren’t open—competitive advantage is relevant.

Von Hippel: yes, but at least some users typically are unlikely to regard an innovation as a competitive advantage.

Dan Burk/Michael Carroll: process and product are not the same as user and producer—there may be a terminology issue, especially since process has a specific meaning in patent, whereas von Hippel is using it to define whether the innovation is an input to the thing they want to sell.

Pam Samuelson: Data show firms are much less likely to patent process innovations, in part because they can be kept as trade secrets. More generally: you just want to make your thing better/faster/cheaper; you’re still focused on the product.

Von Hippel: as competition goes up, you might try harder for secrecy; but secrecy is expensive.

Kathy Strandburg: The voluntary transfer data suggests that the trade secret story isn’t particularly explanatory.

Burk: process patents are murder to enforce; why waste the money on getting one/maintaining secrecy?

Strandburg: in von Hippel’s terms, process innovations (perhaps better term would be internal innovations) could be transferred to competitors, but really they’re more usefully transferred to the people who will make/engineer the machine for the user—the guy who will make the robot for the greenhouse operator. Whereas what von Hippel calls product innovations, if transferred, would be transferred to competitors; the reasons for doing this would be different. And you might be able to maintain some control over competitors’ access to an internal innovation even if you outsource production.

Von Hippel: data on user innovations transferred to producers. Many innovations aren’t interesting to producers (asset specificity: not useful), of course, whereas others are held for competitive reasons, but the percentage of innovations transferred was in the 22-26% range in international comparisons. 48%-60% were transferred at no cost.

Strandburg: compare this to %age of patents that are successfully commercialized, which is a lot lower.

Carliss Baldwin (presenting on work she did with von Hippel): what kind of system will give rise to what innovation and by whom? Since Schumpeter, economists, policymakers and business managers have assumed that the dominant mode of innovation is a producer’s model. Producer initiates change and consumers are taught to want new things. Teece 1996: “[T]he business firm is clearly the leading player in the development and commercialization of new products and processes.”

But that’s only one mode of innovation. Others: innovations by single user firms or individuals, and open collaborative innovation projects. Not new, but newly important. Requirements for successful open collaborative innovation projects: modularity in design, chunked in ways that are largely independent but will operate in an overall system. Task divisibility within the modules. (Related to the expense of information about the tasks.) Another requirement: Very cheap all-to-all communication technology, so you don’t need a producer coordinating.

Modeling innovation: assume people are rational actors, who compare value of innovation to costs. Value is use value for users (willingness to pay) whether they collaborate or not. Revenue to producers is less than the sum of users’ willingness to pay. Costs: design, communication, production, transactions. Assume the last two are constant across type of innovation for now (though they won’t be). Communication is the cost of working together. Design cost is the effort of creating the design—a set of instructions on how to make something—can take experimentation and testing—right number of minutes to bake a cake, for example: design cost is the cost of starting with an idea/need and ending up with a set of instructions that will allow you to make the artifact/fulfill the need. Production cost is the cost of making the artifact using the instructions. (In reply to question from Burk about fixed/marginal: Fixed costs of setting up channel of communication may be much larger than marginal cost of using—that can be important to communication costs. It’s not costly for me to use my phone; moreover, buying the phone didn’t cost as much as it would have 50 years ago. Cost of information transmission over a distance has dropped a lot.)

Samuelson: design v. production cost?

Baldwin: the interface between design and production is the set of instructions. The process of coming up with a new artifact is part creation of instructions and part carrying them out. Production cost is the latter. In real production facilities, people tweak design all the time, but this is a clean theoretical interface because the design is pure information; the good itself may also be an information good, in which case the difference between the two is the cost of copying. As long as you’re tweaking the instructions, that’s design. So for software, coding that is nonalgorithmic but choice-based will be part of the design process by her definition; coding turned over to a compiler is production. This theory of design allows design to be consistent across fields.

Samuelson: Software folks do use the term “design” differently. There’s no variable production cost left when you get to compiling.

Suzanne Scotchmer: For software, production is copying.

Baldwin: right. The cost of copying is now nearly zero, but it wasn’t always so. [in response to question] Communication cost is the cost of communicating anything from one agent to another. You used to have to feed the messenger who’d take your message by horse; now you send an email: this is a decrease in communication cost even if you assign part of the infrastructure cost to the particular communication. Globally, both communication and design costs have fallen by orders of magnitude, though this is not uniform.

Single user innovator has no costs of communication (or if single user is firm, has lower in-firm communication costs than outside). So design cost is the key for deciding whether to invest. Very tacit designs thus must be single-user: example—a new course for a professor, where it’s simply prospectively incommunicable how you want the course to go—you have to create it to have the course; you can’t delegate to teaching assistants.

Producer has to communicate to users that it has an artifact for sale; this is part of communications costs. Sears Roebuck = example of communication cost decreasing, where catalog goes all over the US, notifying them of their options.

Open collaborative innovation: each contributor figures out the part she wants and can do at reasonable cost, and the part that would be nice to have but that she can’t do herself at reasonable cost. Each contributor has the option to communicate and probabalistically expects some (use) value. (Expected value of contribution can be negative, for example for a hedge fund that would expect its strategy to be appropriated if disclosed.) A church recipe book: we can make a meal using each other’s recipes. The total feasible cost is much higher than one person could afford acting alone, if she had to test all the recipes herself. If each contributes, you blow through that design cost limit.

Combining the models, we see that single-use innovators occupy some exclusive space (where communications costs are very high), and some which overlaps with producer innovators (who also have their own exclusive space, with moderate communication and design costs) and with open collaborative innovators (who also have their own exclusive space, where design cost is very high). Producer who has users do 9/10 of the design will do better than producer who tries to do all the design itself.

Von Hippel would say single innovator-users have three big advantages over producer innovators: apply sticky info about their own needs, no transaction costs, mostly freely reveal. Baldwin: Big disadvantages: may develop redundant designs, lack capacity to undertake large design projects, and most of the time they have higher unit production costs. Von Hippel would say: Letting producer-innovators run wild was a devil’s bargain because they created monopoly and secrecy, plus transaction costs; we don’t have to tolerate these any more. Baldwin: yes, but open innovation only has the capacity to take on certain large projects. Giving something away may threaten someone else’s rent, so it’s no surprise to see producer innovators seeking to claim territory.

Scotchmer: why can’t all these benefits be achieved within the firm? (Doesn’t Yochai Benkler go through this argument in some detail?)

Baldwin: in order to get actual work done, you need transaction-free zone. Contracts can be the boundary but you can’t be contracting within the zone. That’s Coase’s theory of the firm. Because of complementary use values, people discovered that it was viable and valuable to have a transaction free zone with no contractual boundaries.

Inventorship and Authorship by Communities

Andrew Torrance: starting from the proposition that user collaboration/innovation is significant, what legal changes are indicated?

Molly van Houweling: note that in the realm of user-generated copyrightable material, copyright is easy to get—e.g. my Facebook status—leading to difficult questions of who owns what; whereas patents are hard to get and so it’s less often worth it for, say, mountain bike racing innovations, so the issue of ownership simply comes up less often.

Wendy Gordon: there was a case involving collaborative theater—after a while, nobody can remember who contributed what; the judge said that everyone could own something, but each had to be able to identify their own contributions, which didn’t help.

Von Hippel: if something is developed collaboratively, there’s often very little documentary evidence to dispute a later commercializing company’s ownership claims.

Samuelson: patent scope as a lever: if the commercialization is merely an improvement, then some claims may be invalid, or might narrow construction of the claims. Pioneering inventions get a very broad scope; showing prior innovation might affect scope of patent, consistent with current law.

Strandburg: patent, we ask questions similar to those asked about traditional knowledge. Under current doctrine, it would be hard to define inventors, because everyone made a tiny contribution. Makes it hard for them to get a patent, but do we care? Is there a problem? Because this stuff is out there and not very well documented, it can be copied/stolen (traditional knowledge again): vulnerable to attack from outside patenters. Copyright is different because there, if you are not a joint author, then you don’t have a right and you can’t keep another from taking ownership.

Me: I may be misunderstanding Strandburg but I don’t get the distinction she’s offering between copyright and patent here. Especially given the power of legal threats, whether or not one could win a case. Are we just offering different prototypes of patentable/copyrightable works, the former more likely to be the product of large-scale collaboration? Maybe we think there’s a difference between patent trolls and strike suits in copyright? That is, patent trolls represent bad patents (patents that should not exist) whereas strike suits are more likely to involve good copyrights, just claimed by the wrong person (one not entitled to make a claim)?

Strandburg: Patent is not automatic—so if collaborators don’t get together to patent, there is no patent, whereas the copyright will be automatic; and you’re vulnerable to later claims by someone else who claims to have a valid patent. (But that part is true for copyright too: Stouffer suing J.K. Rowling for infringing Larry Potter & the Muggles. I don’t think this is about collaboration on the front end, it’s about vulnerability on the back end.)

Brian Carver: In terms of barriers to user innovation, contracts are also at issue: users can be stifled from the outset if contracts prevail over IP rights/freedoms. When restrictive terms become the norm, you stifle all manner of user innovation, providing monopolies in external markets outside the copyright—Blizzard has a monopoly on its game, which is fine, but now it has a monopoly on matchmaking so that you can find someone else with whom to play.

Stephen Maurer: why not rely more on defensive publishing to keep outsiders from appropriating too much? GPL can also prevent appropriation.

Amy Kapczynski: other stories about why users might have interests in using/innovating—researcher’s exemptions, farmers’ rights, moral interests (as Wendy Gordon has discussed), lack of participation in the market as justification for not making them pay.

Von Hippel: companies are eating their own feedstock. (Their time horizons are not ours.)

Strandburg: what’s wrong with a company patenting an improvement on a user innovation? Is there a problem with the fact that the users aren’t compensated? Maybe there’s an incentive problem; maybe we want users to be allowed to use the next step without paying the company because we want further follow-on innovation.

Jason Schultz: various doctrines about telling the truth about the people involved in an invention/work might be policy levers for finding/rewarding the people who deserve to be rewarded for an innovation: inequitable conduct, false marking, false designation of origin, copyright management information (at least in the way that it could work, though not as the statute has it).

Van Houweling: the standard prospect theory says that if users are good innovators patentees will license them on good terms, but the account of innovation we’re hearing fights that because it indicates that firms/improvers are not necessarily the experts on their own patented matter; if they aren’t the experts, then the stewardship argument doesn’t work very well.

Overlapping Rights, Derivative Works, and Blocking Patent Failure

Pam Samuelson: the way derivative works are defined now: (1) based on a preexisting work—not nuts about that, because what does it mean? But (2) gives nine examples in the statute as the kinds of things contemplated as derivative works: motion picture version of novel, novelization of dramatic play, translations, musical arrangements, etc. If we limited the right to other analogous uses, that would limit the disturbing/unbounded scope of the right. If plaintiffs had to show that the thing they were complaining about was like one of the existing, staid derivatives, and if they had the burden of proof, that would be a cheap fix. We could still get to that by reading this as Congress’s intent, but the courts have gone haywire over “any other form in which the work is recast, transformed or adapted.” Cutting the pictures out of a book = derivative work in the 9th Circuit, which is baloney.

We’ve screwed up all infringement analysis by following the idea that the derivative works right is superfluous to the reproduction right, and then we say that things that can’t possibly be substantially similar are—it is insane to say a Chewbacca toy is substantially similar to Star Wars. We should use common-law evolution to ignite an improvement defense (Wendy Gordon says fair use, but Samuelson wants to make fair use do less work). Baker v. Selden was argued as, in part, an improvement case. The 3 American commentators were all high-protectionists and wrote the improvement precedents out. It’s always the high-protectionists who write the treatises!

Me: I want to ask Strandburg’s question again: what exactly is the problem for improvers? Their problem is not that they can’t get further rights to commercialize. It’s not, despite many fears, that they can’t get compensated for unauthorized commercialization by the original authors. It’s that they get shut down (and maybe that third parties make money from it when the improvers can’t). If we are interested in policy levers, going for something that sounds like the right to get compensation may be so unpalatable that we lose what more user-innovators need, which is the right to be left alone.

Kapczynski: By definition, these people are usually not interested in excluding others.

Gordon: doesn’t see any way to argue that copyright beats patent in terms of blocking rights. The right to be left alone could be achieved with a sharp sword—some sort of blocking right. She would limit the derivative work right by requiring (1) a new instantiation—a book from a movie, as opposed to pictures cut out of a book; (2) use would have to be foreseeable, as the listed uses are; (3) use would have to be economically significant for incentives, as movie rights are. Loves the idea of improvement as a defense from history.

Carroll: Motives for tinkering are heterogenous; don’t funnel stories into efficiency. In copyright, people are talking back to culture. We want a regime that allows that, whether or not these works produce social welfare—they produce personal welfare that has value of its own and should be protected even if my criticism harms your view of an iconic work.

Samuelson: People want to concentrate on free speech, but some derivatives, especially on the software side, aren’t about speech. Innovation and competition matter too—that’s her unbundling fair uses paper. Free speech is important, but not the only thing.

Friday, May 28, 2010

secondary liability in false advertising

Campagnolo S.R.L. v. Full Speed Ahead, Inc., 2010 WL 2079694 (W.D. Wash.)

Tien Hsin Industries is a Taiwan corporation that manufacturers bicycle components sold in America by Full Speed Ahead (FSA). Tien Hsin moved for summary judgment on Campagnolo’s false advertising claims on the ground that it had no knowledge of or involvement with the allegedly false ads published by FSA. Tien Hsin is owned by four shareholders: Yudi Chiang, her husband Douglas Chiang, Douglas Chiang’s mother, and Douglas Chiang's sister. Yudi Chiang is FSA’s sole shareholder. FSA and Tien Hsin do not share any employees, and FSA is managed on a day-to-day basis by people other than Chiang. Before 2001, when FSA was reincorporated in Washington, Tien Hsin marketed its products in North America directly and placed ads on its own behalf. Tien Hsin owns the FSA trademark, with FSA holding an oral license. Tien Hsin invoices FSA in writing for products. In particular, neither Yudi Chiang nor any Tien Hsin employee directs FSA’s advertising. Tien Hsin does not advertise FSA-branded products on its website.

Tien Hsin did indirectly influence the ad campaign at issue. It publishes a yearly manual with product information for all its products, including FSA branded products, and FSA often gets technical information from that manual. In the ads at issue here, however, independent testing was the basis of the challenged claims. Tien Hsin also provided FSA’s European branch with the prototype crankset that was independently tested, resulting in data used as the basis of the ad campaign. Tien Hsin indirectly compensates FSA for advertising on its own behalf and for Tien Hsin’s benefit. Tien Hsin sells to FSA at lower prices than to other distributors. FSA’s marketing benefits Tien Hsin not just because the products originate with Tien Hsin, but because FSA meets with customers, distributors, and OEMs to promote its own goods; because many of those do significant business in Asia, they often end up buying directly from Tien Hsin. Thus, the low price FSA pays is compensation for FSA sales efforts that benefit Tien Hsin and not FSA.

The business relationship is close enough that one of FSA’s witnesses referred to FSA as “our [Tien Hsin’s] U.S. company” or “the U.S. office.” And sometimes Yudi Chiang will ask FSA’s manager to negotiate business deals on behalf of Tien Hsin because Yudi Chiang and her husband do not speak fluent English. Tien Hsin makes the decisions, but the manager communicates and represents Tien Hsin’s position.

First the court found no direct liability. No Tien Hsin employees contributed to, commissioned, reviewed, or participated in the creation or dissemination of the ads. There was no evidence that the challenged ads were based on data from any Tien Hsin publication, and Campagnolo didn’t allege that Tien Hsin’s product guide was itself a false ad. Nor did providing the crankset help Campagnolo’s case, because there was no evidence that Tien Hsin provided it for the purpose of creating ads, or that Tien Hsin had a hand in allegedly misusing that testing data.

Campagnolo argued intentional inducement, which the court found to be a cognizable theory of liability for false advertising. However, there was no evidence of inducement here; no Tien Hsin employees were involved with creating the ads. “Tien Hsin may have contemplated through its pricing arrangement that FSA would advertise and Tien Hsin would benefit as the owner of the FSA trademark, but Tien Hsin did not direct or control the advertisements nor induce FSA to make its advertisements false.”

Campagnolo also analogized to contributory trademark infringement, which can lead to liability for one who continues to supply a product knowing that the recipient is using it to infringe. The court, however, found no cases holding that a defendant can be subject to liability for false advertising by selling a product falsely advertised by the buyer, and Campagnolo did not convince the court that the rationales were the same. Anyway, here there was no evidence that Tien Hsin knew of the ads, or “more importantly” of their falsity.

The court then rejected vicarious liability as well. Campagnolo argued that Tien Hsin was FSA’s alter ego, and that FSA is Tien Hsin’s agent. The court found it clear that the two are closely related, with FSA existing almost solely to distribute Tien Hsin’s products, Tien Hsin owning the FSA mark without any written contract, and FSA paying an “aggressively” low price for Tien Hsin products in order to subsidize FSA’s ads, which redound to Tien Hsin’s benefit. Plus, FSA on occasion conducts negotiations on behalf of Tien Hsin.

This was, the court ruled, akin to a subsidiary-parent relationship. FSA can’t function independently of Tien Hsin. “It is not an ordinary business practice for an independent company to have the trademark to its own name owned by a completely unrelated company, especially when there is no written agreement guaranteeing a continued license to that mark.” Despite the close relationship, however, they are separately incorporated companies. A parent corporation is not liable for the acts of its subsidiaries, save in exceptional cases involving abuse of the corporate form: where there is unity of interest/ownership such that the two entities no longer exist separately, and where failure to disregard the corporate form would allow fraud or injustice—not merely limitation of liability, since limitation of liability is the purpose of the corporate form.

Here, the facts couldn’t support a finding that one company was an alter ego of the other. FSA and Tien Hsin have separate offices, assets, and employees, supervised and financed separately. FSA is not undercapitalized, a major factor in “piercing the veil” of limitation of liability. There was no indication of abuse of the corporate form to avoid a duty.

Additionally, a principal may be liable for the acts of its agent if those acts are on the principal’s behalf and within the scope of the agency. Control is often the crucial factor in determining agency; control can’t just be a right to supervise performance in conformity with the contract, but must extend to the manner of performance. But it’s not clear how to apply this where the alleged principal and agent are separately incorporated entities. “A corporation’s managers always act as agents for its shareholders--the principals. Yet even where a subsidiary is wholly owned, the parent corporation--the shareholder or principal--is generally not liable for the subsidiary’s torts.” The court expressed doubt whether alter ego and agency theories of liability were in fact separate. To the extent that they are, agency liability required more than the agency present in all parent-subsidiary relations: total control, “well beyond the normal control exercised by parents over subsidiaries.”

Tien Hsin had some control because it owned the FSA trademark, Yudi Chiang owned the stock, and Tien Hsin was nearly the sole supplier. But that wasn’t “total domination” sufficient for vicarious liability. FSA wasn’t a sham or a shell, and Tien Hsin didn’t control its day-to-day operations. Specifically, Tien Hsin didn’t exercise any oversight over ad content. On the rare occasions when FSA’s manager would negotiate on behalf of Tien Hsin, Tien Hsin's directors explicitly authorized it in writing.

Summary judgment for Tien Hsin.

Tuesday, May 25, 2010

Victor's Little Secret's last stand?

V Secret Catalogue, Inc. v. Moseley, --- F.3d ----, 2010 WL 1979429 (6th Cir.)

Over a vigorous dissent, which seems to me entirely correct, the court here holds that even without any evidence of actual consumer impact, a “semantic association” between a famous mark and a mark used to sell “sexual toys, videos, and similar soft-core pornographic products” is sufficient to establish tarnishment. Because Congress intended to reduce the burden of proof on the trademark holder, there is “a kind of rebuttable presumption, or at least a very strong inference, that a new mark used to sell sex-related products is likely to tarnish a famous mark if there is a clear semantic association between the two.” The majority suggested that this “res ipsa loquitur-like effect … places on the owner of the new mark the burden of coming forward with evidence that there is no likelihood or probability of tarnishment,” which could be surveys or consumer testimony—even though, as the dissent pointed out, the only consumer perception evidence in the case was pretty clear that the consumer at issue didn’t think less of Victoria’s Secret, only of Victor’s Little Secret. Still, “[t]he new law seems designed to protect trademarks from any unfavorable sexual associations. Thus, any new mark with a lewd or offensive-to-some sexual association raises a strong inference of tarnishment.”

Judge Moore’s dissent pointed out that there’s a difference between changing the evidentiary requirement from a showing of actual tarnishment to one of likely tarnishment, which the FTDA did, and putting the burden of production or proof on the defendant, which it did not do. Though there is an association between Victoria’s Secret and Victor’s Little Secret, there was no evidence that this association was likely to harm Victoria’s Secret by altering or undermining its positive associations.

Honestly, as a matter of IP law, I expect no better from dilution cases. I’m more offended as a feminist. Apparently Victoria’s Secret’s “sexy and playful” reputation, which depends on women sexually displaying themselves—on selling women’s bodies as a tease—is to be protected against any suggestion that actual orgasms might be available. Sexualization (represented by Victoria’s Secret’s repeated invocation of “sexy”) is wholesome; “sex” is apparently not.

Monday, May 24, 2010

How do you get to Carnegie Hall?

I just watched Copyright Criminals, an interesting documentary about sampling in music that does a good job of letting interviewees speak for themselves. Some observations:

1. Men interviewed: so many I didn’t count. Women interviewed: 3, 1 artist (her music was not played); total time on screen maybe 1 minute of 54 (plus extra interview footage of 3 guys).

2. Someday I should try to write a piece on How to suppress women's remix.

3. I liked best Siva Vaidhyanathan’s statement about the early cases on sampling: the courts were uninterested in hearing young black men speak about their creative processes.

4. A recording engineer, who to his credit doesn’t think the law should prohibit sampling, advanced the anti-sampling aesthetic ideology that participation is bad. He argued that sampling makes making music too easy: one should be ashamed of sampling, he stated, much as one should be ashamed of dancing badly.

What seems easy to me, of course, are the responses: Assuming you value good dancing, where do you think good dancers come from? (Hint: bad dancers play a role, sometimes even the role of Young Good Dancer.) Is shame a good motivator to improve one’s creative output, or is it more likely to suppress the creative impulse entirely? Do I get to decide what I think good dancing is, even if I don’t like the ballet (or hip-hop)? Once you’re out of adolescence, are you ashamed when your family members dance badly? Look, I get the idea that there is One True Standard of aesthetic goodness. What I don’t get is the further conclusion that if we only got rid of the dreck we’d have more of the good stuff. I guess it’s yet another expression of the romantic idea that Art comes out of nowhere, rather than in reaction to the creator’s surroundings.

Lanham Act analysis in consumer plaintiff case

Buetow v. A.L.S. Enterprises, Inc., 2010 WL 1957489 (D. Minn.)

Consumer-plaintiffs sued defendants for misrepresenting that their clothing eliminates human odor and is capable of being “reactivated” in a dryer. “Because game animals have an acute sense of smell, there is a demand for odor-controlling clothing in the hunting market.” So ALS patented and sold hunting clothing with embedded activated carbon. ALS licenses its patent and Scent-Lok brand to other retailers, including the other defendants.

Defendants published “countless” ads promoting their clothing, almost all of which used the slogans “odor eliminating technology” or “odor-eliminating clothing.” Many say things like “eliminates all types of odor,” promise elimination of “100% of your scent” or “all human odor,” or use graphics indicating that odor can’t escape the fabric. They also published “numerous” ads saying that consumers can “reactivate” the fabric in a standard clothes dryer. Some ads don’t describe the extent to which odors can be removed, while others say that reactivation makes the clothing “like new” or “pristine.” While there are factual disputes, both parties’ experts agreed that the clothing could not eliminate 100% of a hunter’s odor, and that the clothing, once saturated with odor, couldn’t be reactivated to “like new” or “pristine.”

Plaintiffs sued for violation of various Minnesota state laws. The parties, for some reason, agreed that the appropriate analysis for the claims is the same as that applied under the Lanham Act. (Compare California, which has numerous cases holding that the explicit/implicit distinction does not apply to California consumer protection law, so factfinders can use their own judgment to find a claim misleading even without explicit falsity and even without a consumer survey. When one has actual consumers as plaintiffs, whose reasonability can be assessed—or more broadly, when the direct subjects of the law’s protection are suing rather than competitors whose interests are derivative of those of deceived consumers—this makes sense. Starting from the Lanham Act did substantial harm to plaintiffs here, even though they start out with a very strong position given that even defendants’ experts can’t defend the ad claims.)

Defendants argued that the court could only consider ads that the plaintiffs specifically recalled reviewing and relying on—which meant limiting their claims to the terms “elimination” and “reactivation,” as those were the only statements plaintiffs recalled with specificity. The court disagreed. Because literal falsity would entitle plaintiffs to injunctive relief, the court could consider the other elements of the ads to the extent they were literally false. Defendants argued that plaintiffs lacked constitutional standing to challenge ads they didn’t recall with specificity. After noting that defendants were attempting to prevent the court from reviewing the ads most likely to be found literally false, the court rejected this argument, reasoning that failure to recall specific ads with precision was not fatal, because the record indicated that plaintiffs were exposed to countless ads from the defendants and that they did recall reading and relying on several specific ad claims. The ads upon which they relied were “fairly representative” of defendants’ ad campaign. Since they were undisputably exposed to the ad campaign, they could fairly trace their injuries to the ads sufficient to have standing for injunctive relief.

The court then turned to the odor elimination claim, finding all such ads to be literally false as a matter of law, no matter how expressed. “Eliminate” is subject to only one reasonable interpretation, complete elimination. The court relied on dictionary definitions. Defendants found some dictionary definitions equating “eliminate” with “remove,” and argued that their clothing removes a substantial amount of odor. But the court found that “remove” would also be literally false if used in defendants’ ads. “If an advertisement states that a product will remove roaches from a home, the only reasonable expectation would be that all roaches would be removed, not just some.” Defendants also submitted ads for various other products using “elimination” language, which they argued proved that “eliminate” has several meanings. The court pointed out that (1) those products might actually eliminate what they claimed to eliminate, or (2) those products might be falsely advertised; either way, nothing changed. (I wonder if any of defendants’ lawyers would have been satisfied with an exterminator who claimed to have eliminated roaches in their houses, but later contended that he’d removed a substantial amount of the roaches and thus made good on his claim.)

Some of the ads also made “scent-free,” “odor-free,” and “100%” claims about removing human odor, including graphics showing odor unable to escape the fabric. This too was literally false.

Some ads used “odor-eliminating technology” or “odor-eliminating clothing,” but qualified this (or contradicted it) with further statements—for example, later stating that activated carbon would “virtually eliminat[e]” odor or that the clothing “substantially reduces the chance” that deer will catch the hunter’s scent (I don’t understand why that one is a qualification of the elimination claims—given that humans have been hunting deer successfully for a while, the chance that a hunter not wearing the clothing will be detected is not 100%; a reduction from 30% to 0% is surely substantial). The court found these ads not literally false because the qualifying language might lead reasonable consumers to understand that the clothing can only reduce odor. (If the elimination claim is the slogan, isn’t it a bit bait and switch to sort of qualify the claim later on?)

Plaintiffs’ testimony, along with testimony of several plaintiffs in related cases, was insufficient to create a credible inference of confusion among a significant portion of consumers. (Why is this true? Are these plaintiffs unreasonable consumers? In trademark cases, we routinely presume that consumer confusion is so hard to uncover, because consumers are so unlikely to take the effort to complain, that any evidence of actual confusion is good evidence of likely confusion. Certainly such evidence is more than enough to substitute for a survey; as Barton Beebe has shown, TM surveys are pretty rare and successful TM plaintiffs are not nearly so rare. Moreover, courts tend to poke pretty hard at surveys when they are present, for reasons that are often justified; why idealize the truth-finding power of surveys when they’re not present and actual deceived consumers are?)

The court quoted an earlier case which held that “a small group of [plaintiff’s] friends, allies, and supporters [does not constitute] a valid survey group from which to determine whether actual confusion exists.” How can this be true unless this is also a credibility finding? If the plaintiffs’ testimony is true, they were actually confused—and is it so hard to believe that they would be confused by the supposedly ambiguous ads when the court has already found, easily, that other ads using the same key language were literally false? It may be true that a pocket of confusion doesn’t establish likely confusion among a substantial number of reasonable consumers, but at the very least a factfinder could infer from these consumers’ confusion that other reasonable consumers are likely to react in the same way. However, the court held that the ads with qualifying language were “not misleading as a matter of law.”

Plaintiffs argued that there was evidence of intent to deceive the public, but the court held that “Plaintiffs cite no authority, and the Court finds none, holding that such evidence is an acceptable substitute for evidence of actual consumer confusion.” Somebody was using the wrong search terms. E.g., Porous Media Corp. v. Pall Corp., 110 F.3d 1329, 1333 (8th Cir. 1997) (noting, in a Lanham Act false advertising case, that a presumption of deception upon a finding of intent to deceive has been approved by several courts, and citing same). Here, have another: McNeilab, Inc. v. American Home Prods. Corp., 501 F. Supp. 517, 530 (S.D.N.Y. 1980) (“[P]roof that the advertiser intended to communicate a false or misleading claim is evidence that the claim was communicated, since it must be assumed that more often than not advertisements successfully project the messages they are intended to project, especially when they are professionally designed, as the ones involved here were.”).

On to the reactivation claim. Many of the ads simply stated that the clothing could be “reactivated” for future use; the court was unwilling to find that this communicated a “like new” claim. “Reactivate” has more than one reasonable interpretation—some continued beneficial use might count as reactivation, even if there’s not complete or total restoration. So, for the same reasons noted above, such ads weren’t actionable. However, the “like new” and “pristine” ads were literally false.

Finally, the court dismissed plaintiffs’ claim for injunctive relief under the Minnesota Uniform Deceptive Trade Practices Act, because the plaintiffs were at no risk of future harm, given that they were aware of the false advertising.

Sunday, May 23, 2010

A touch of false advertising

Schering-Plough Healthcare Products, Inc. v. Neutrogena Corp., 2010 WL 1992247 (D. Del.)

A very short opinion granting summary judgment on a falsity claim. The ads at issue here were for Neutrogena’s new Ultra Sheer Dry-Touch Sunblock SPF 100k sunscreen. Schering-Plough argued that the package and print ads falsely claimed that the 100k product contained Helioplex, a proprietary photostabilizing agent. Helioplex is the term Neutrogena adopted for a patented combination of avobenzone with diethylhexyl 2,6-naphthalate [ ("DEHN") ] and oxybenzone that prevented avobenzone (the sunscreen) from breaking down when exposed to sunlight. The court relied on this definition, supplied by Neutrogena, at previous stages in this litigation, and Neutrogena used the same definition in §43(a) litigation against Loreal. The problem was that the 100k product, though Helioplex-branded, didn’t contain DEHN until February 2010.

Neutrogena argued that Helioplex need not, by definition, contain DEHN. The court disagreed, because Neutrogena expressly defined Helioplex in its ads to the consuming public to include “DEHN (a stabilizer),” stating that “stabilization prevents bond breakage, allowing avobenzone to continue providing high UVA protection.” The public had no basis on which to perceive any flexibility in the formula.

Because of the literal falsity, confusion was presumed. The scope and duration of the violation was unclear; discovery had not yet occurred. The court therefore deferred issues of remedy.

Comment: materiality seems to be an issue. On the other hand, I don’t think that the proliferation of jargon does consumers much good. If Neutrogena is going to tell people that its product is better because it has Helioplex, it’s not too much to ask for that claim to mean something in particular—especially if Neutrogena ran ads explaining what it meant, and wants consumers to see Helioplex as a consistent product benefit of Neutrogena products.

Friday, May 21, 2010

modifying a CC license

Lucas Hilderbrand, Inherent Vice: Bootleg Histories of Videotape and Copyright

A good read, but right now I want to talk about the copyright statement, which has a few things going on. It reads: “© 2009 Duke University Press, All rights reserved…. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivs License …. ‘NonCommercial’ as defined in this license specifically excludes any sale of this work or any portion thereof for money, even if the sale does not result in a profit by the seller or if the sale is by a 501(c)(3) nonprofit or NGO.”

I found this variation—for it is, I think, a variation on the CC license, with all that means for standardization—on a few other books, Ian Condry, Hip-Hop Japan: Rap and the Paths of Cultural Globalization (Duke) (which despite the license was not, as far as I could find, available for download, and was only previewed on Google Books), Christopher Kelty’s Two Bits: The Cultural Significance of Free Software (also Duke) and Ted Striphas’s The Late Age of Print: Everyday Book Culture from Consumerism to Control (Columbia). It may well be on others that didn’t turn up in my search.

The meaning of noncommercial, of course, is hotly debated in the CC community. Is this addendum a bit of norm entrepreneurship? A fragmentation of the license that makes it less-than-machine-readable? And how are we supposed to understand “all rights reserved” other than as contradiction?

Thursday, May 20, 2010

naturally misleading

Von Koenig v. Snapple Beverage Corp., 2010 WL 1980208 (E.D. Cal.)

This is a putative class action under the usual California laws based on Snapple’s marketing of certain drinks as “All Natural” when they actually contain high fructose corn syrup. This allegedly increases sales by implying that Snapple’s products are better than competing products, and the ingredients statement disclosing the actual content is inconspicuous and hard to read. Plaintiffs alleged that HFCS does not occur naturally, but requires processing and addition of enzymes.

Snapple argued that the claims were barred by California’s safe harbor exception to its consumer protection laws, which allows any conduct specifically blessed by a relevant state or federal law. The safe harbor rule doesn’t bar claims just because some other statute doesn’t provide relief—the law must make the activity lawful, not just fail to make it unlawful. In appropriate circumstances, federal agency action—even action short of formal notice and comment rulemaking—may have the force of law for preemption purposes, and thus for safe harbor purposes.

The FDA has made policy statements on the use of the word “natural” and has also issued warning letters to various manufacturers telling them to remove “natural” from their labels. But this wasn’t sufficient to create a law that would override California consumer protection law. The FDA characterized its policy (which states that “natural” means “nothing artificial or synthetic (including colors regardless of source) is included in, or has been added to, the product that would not normally be expected to be there”) as “informal.” Though the FDA acknowledged that the ambiguity in the term could be abated if it were adequately defined, “[b]ecause of resource limitations and other agency priorities,” the FDA declined to undertake rulemaking and stated that it would maintain its current policy. The FDA’s failure to adopt a formal definition of the term, the court held, meant that the FDA policy wouldn’t be accorded the weight of federal law, even though the FDA has taken some isolated actions to enforce this informal policy.

The court also found that plaintiffs had pled fraud with particularity with respect to claims regarding the label; they submitted examples of the labels at issue and alleged a timeframe that the labeled bottles were available. They further alleged that the labels were deceptive and that they wouldn’t have bought the products without the deception. However, to the extent that they sought to bring claims based on other ads and marketing or other labels not submitted to the court, the claims were dismissed with leave to amend.

The court also ruled that plaintiffs had alleged sufficient injury and damages. Being induced to purchase a product one would not otherwise have purchased is not “loss of money or property” as required by the statute as long as the purchaser receives the benefit of the bargain. However, plaintiffs can sufficiently allege injury where they don’t receive the benefit of the bargain because a product cost more than similar, nonmisleadingly marketed products. Here, plaintiffs alleged that they paid more for Snapple’s drinks than they would have without the misleading labeling, and thus properly alleged that they didn’t receive the benefit of the bargain. Their damages, however, will not include the entire price, because the court found it reasonable to infer that they received at least some benefit from their purchases.