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Demystifying the ITC: A Guide on the Role of the ITC in Patent Disputes

Posted on Modified on by Lynn Dudinsky

The International Trade Commission (ITC) received a lot of media attention in December of 2023 due to the patent dispute between Apple and Masimo resulting in a temporary ban on the importation and sale of certain models of the Apple Watch. While many people are familiar with State and Federal courts, most people are not familiar with ITC so Foresight created this primer to better understand the role of the ITC in patent disputes.

The ITC stands as a critical resource for patent holders, offering a unique avenue to counter patent infringements by preventing the importation of infringing products at U.S. ports of entry. However, the ITC’s procedures are distinct from those of Federal courts where patent disputes are normally litigated, demanding a nuanced understanding, especially for startups.

Filing a Complaint and Building Your Case

Initiating an ITC investigation is akin to commencing a lawsuit in Federal court. A formal complaint, known as a Section 337 action, is submitted, alleging that products arriving in the U.S. violate a valid patent. Simultaneously, the complaint must demonstrate the presence of a “domestic industry” linked to the allegedly infringed patented products.

Proving a “domestic industry” involves showcasing substantial investments in areas like labor, facilities, or research and development that support both the infringing products and the complainant’s own products. Following the complaint, the ITC evaluates whether to commence an investigation, typically within 30 days. Once initiated, the investigation becomes official and is documented in the Federal Register. Concurrently, any ongoing court cases dealing with the same issues and involving the same parties are temporarily paused during the ITC’s investigation.

The Role of the Judge and Special Staff

Throughout the investigation, an Administrative Law Judge (ALJ) assumes a central role as the fact-finder. The ALJ presides over hearings, issues decisions on motions, and substantially influences the investigation’s course. Adding to the complexity is the “Staff,” an attorney appointed from the Office of Unfair Import Investigations (OUII), who maintains an independent role during the investigation.

Timetables and Procedural Rules

The ITC strives for expedited investigations, determining an ultimate “target date” for the final decision, usually within 16 months of commencement. The ALJ establishes a procedural schedule encompassing deadlines for various aspects such as discovery, claim interpretation, motions, and hearings.

Collecting Evidence and Safeguarding Sensitive Information

After the investigation begins, both parties embark on evidence gathering, adhering to the established schedule. They employ tools like questions, document requests, and interviews. It is worth noting that in the ITC, responses to discovery requests must be provided within a shorter timeframe, just 10 days, in contrast to the more extended periods typically allowed in standard court proceedings. Renowned for its efficiency, an ITC investigation often concludes in months rather than the year or more typical in district court cases.

To safeguard sensitive information revealed during discovery, protective orders are issued, requiring attorneys to adhere to specific guidelines. Confidential business information (CBI) remains accessible only to specific individuals, including outside lawyers, experts, the Staff, ALJ, and the Commission.

Hearings and Witness Testimonies

ITC hearings depart significantly from traditional court trials. A jury is absent, and the ALJ serves as the fact-finder. Additionally, many ALJs opt for written witness statements instead of live testimony, with cross-examinations conducted during the hearing.

Initial and Final Decisions and Post-Investigation Remedies

Following the hearing and post-hearing arguments, the ALJ delivers an initial determination (ID). This document determines whether a violation of Section 337 occurred, based on evidence and the presence of a domestic industry. It also scrutinizes patent claims individually. Once the ITC’s determination has been finalized, and if a violation is established, remedies specified in the final determination (FD) become accessible.

Typically, the ITC offers exclusion orders or cease and desist orders. Exclusion orders direct U.S. Customs and Border Protection to block infringing products at ports of entry, with two types available – general (applicable to all infringing products) and limited (specific to identified manufacturers or importers). Cease and desist orders prohibit respondents from selling infringing products already within the U.S.

Presidential Review and Appellate Processes

Given that the ITC is a government agency, the President reviews exclusion orders within 60 days of the FD’s issuance. If no action is taken during this period, the ITC’s decision becomes final. Subsequently, either party can launch an appeal to the United States Court of Appeals for the Federal Circuit.

Conclusion

The ITC is an important forum for startups to become familiar with due to the impact of an exclusion order. Patent infringement is a common issue that startups are dealing with, the ITC is an important venue to addressing infringement involving products imported into the U.S. For a recent example of the role of the ITC in patent disputes and the impact of an exclusion order, please see our next blog focused on the ITC dispute between Apple and Masimo.

The SEC – Impact Theory Settlement: Are NFTs Considered a Security?

Posted on Modified on by Lynn Dudinsky

The SEC announced last week that it had reached a settlement with Impact Theory following the SEC’s first enforcement action against the sale of Non-Fungible Tokens (“NFTs”) which the SEC charged were unlicensed securities. The first step in attempting to understand the SEC’s position on this matter is to go back to the beginning where Impact Theory sold the NFTs that are the subject of this enforcement action. Between October and December of 2021, Impact Theory, a Los Angeles based media and entertainment startup, raised approximately $30 million worth of Ethereum through the sale of NFTs that Impact Theory named “Founder’s Keys”. Impact theory made certain statements related to the Founder’s Keys offering and the use of funds. These statements included that Impact Theory would deliver “tremendous value” to NFT purchasers and that they would use the proceeds for “development,” “bringing on more team,” and “creating more projects.” The SEC determined that Impact Theory was offering and sold these NFTs as investment contracts, and therefore they should be deemed as securities, based on the Howey test (see explanation below).  Since the purchasers of these NFTs had a reasonable expectation of obtaining a future profit based on Impact Theory’s managerial and entrepreneurial efforts, they qualify as ‘securities’ under the Howey test.

Examples of statements that were made by Impact Theory in the run up to the sale of the NFTs include some of the following, which were selected by the SEC for inclusion in their public filing regarding the settlement of this matter:

  • Statement indicating that investors would profit from their purchases if Impact Theory was successful in their efforts
  • “If you’re paying 1.5 ETH, you’re going to get some massive amount more than that. So, no one is going to walk away saying, ‘Oh man, I don’t think I got value here.’ I’m freakishly bullish on that. I will do whatever it takes to make sure that this is true.”
  • “But yea, I will make sure that we do something that by any reasonable standard, people got a crushing, hilarious amount of value.”
  • “NFTs are the mechanism by which communities will be able to capture economic value from the growth of the company that they support.”

According to the SEC, the above statements, and others, led purchasers to believe that their purchases of the NFTs would enable the company to develop the various projects with the end result being the appreciation of value, over time, of their purchased NFTs. Ultimately, 13,921 NFTs were sold by Impact Theory to hundreds of investors, including investors in multiple US states. Additionally, these NFTs could be sold on the secondary market and Impact Theory would receive a 10% “royalty” on each secondary market sale. These secondary market sales generated nearly $1 million in royalty payments to Impact Theory.

Impact Theory entered into a settlement with the SEC that included approximately $6.1 million in disgorgement of profits and penalties, as well as the destruction of any NFTs in their possession and an update to the smart contract associated with the NFTs that would eliminate the 10% royalty on secondary market sales. While the facts of this case and the outcome are noteworthy due to it being the first time that the SEC has brought an enforcement action involving the sale of NFTs as unregistered securities, it is the potential impact of this action on the NFT market and the SEC’s broad interpretation of the Howey test that has the crypto community’s attention.

Under the Howey test, an ‘investment contract’ is any contract, transaction or scheme whereby a person (1) invests his/her money (2) in a common enterprise and (3) is led to expect profits (4) solely from the efforts of the promoter or a third party. Based on this definition, and its application to the Impact Theory NFTs, the logical conclusion is that many of NFTs being offered today would fall within the definition used to initiate an enforcement action against Impact Theory. A large percentage of NFTs purchased are not purchased for their collectible value but are instead purchased to provide some benefit to holders based on the efforts made by the company selling the NFTs. Those holder benefits are typically provided in the form of expectation of profits which can be derived from a multitude of options that are constantly changing.

Years ago, when profit driven NFTs began to be introduced into the market, those expectations of profits were through the marketing efforts of the NFT issuing company to continually drive up the value of the NFTs as well as collaborations that would provide NFT holders with access to partner NFTs for free or at a reduced price that would yield additional profits through the sale of those partner NFTs. The NFT and Crypto landscapes adapt extremely fast as one value driver trend peaks followed closely by the next value driver trend. Today, expectations of profit take the form of dividends from investment projects where the NFT sales are used to fund investment vehicles operated by entity selling the NFTs and each NFT represents a certain percentage of trading profits. Expectations of profit also take the form of higher yields from staking the NFT (as well as the connected cryptocurrency) where an NFT holder may receive 10% Annual Percentage Yield (“APY”) while the non-NFT holder is able to stake either underlying cryptocurrency for 5% APY. There are endless mechanisms through which current NFT issuers entice individuals to buy their NFTs based on the reputation or historical performance of the team selling the NFTs and these mechanisms change far faster than what is possible for the SEC to keep up with. A quick review of projects on Telegram or Discord will show the variety of mechanisms through which projects with no funding launch the sale of NFTs to fund the development of the project, which could range from creating a trading robot to launching a full video game, where there investor is taking the risk of early investment for the sole purpose of realizing profits in the future.

These issues are why two of the SEC Commissioners dissented to the application of the Howey test to the Impact Theory NFT sales. These Commissioners outlined 9 pending questions that they believe the SEC should have addressed and offered guidance long ago when NFTs started proliferating. A discussion of those 9 questions will be discussed in a later blog, but at a high level they address questions that go to the core of the SEC’s view of NFTs with the goal being for the SEC to issue guidance rather than enforce without guidance. While it is unlikely that a decentralized ecosystem with participants around the globe will adhere to the guidance provided by the SEC, projects that seek to raise millions through a US registered entity will greatly benefit from such a guidance. These projects that seek to adhere to rules and regulations will drive the next wave of blockchain innovation and it is imperative that the SEC provide a framework for this innovation to occur.

The Supreme Court’s Decision in Warhol v. Goldsmith: Interpreting Copyright Fair Use

Posted on Modified on by Lynn Dudinsky

There have been many conflicting opinions regarding the impact of the Supreme Court’s decision in Andy Warhol Foundation for the Visual Arts v. Goldsmith, with some circles claiming that the decision “Changed the Future of Art” and others applauding the Court for providing clarity on fair use in copyright. Given the varied opinions on the outcome, the purpose of this article is to highlight the changes and the potential impact of the decision. In order to do that, it is important to first explain the fair use framework before diving into the details of the Court’s decision.

Fair use in copyrights enables someone other than the copyright owner to copy, perform, transmit, distribute copies, or display a copyrighted work under certain circumstances without it being considered infringement. The concept of fair use as a limitation on the exclusive rights of a copyright holders is codified in the Copyright Act, 17 U.S. Code Section 107, which describes fair use for purposes such as criticism, comment, news reporting, teaching, scholarship or research is not infringement and lays out a four factor test to assist in the determination of whether a use is protected as fair use. That four factor test includes the following factors to be considered:

  1. The purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educations purposes;
  2. The nature of the copyright work,
  3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole, and
  4. The effect of the use upon the potential market for or value of the copyrighted work.

The first factor has traditionally been the primary focus of the fair use analysis and is commonly referred to as the transformative use test. This test was first established in a case between the rap group, 2 Live Crew, which used portions of the song “Oh, Pretty Woman” in the opening of one of their songs. The Court in that decision ruled that 2 Live Crew’s use of the portion of “Oh, Pretty Woman” was transformative because it was a parody of the original. Similar examples of transformative use of copyrighted materials typically involve use of copyrighted material for educational or commentary purposes but also extends to libraries making digital copies of books for the purpose of 1) preservation, 2) full-text search and 3) electronic access for disabled patrons who cannot read print versions which the court determined was transformative use.

Stepping back to the Supreme Court’s Warhol decision while keeping the transformative use in mind, we can go into the relevant details of the Warhol case. The case involved two artists, Andy Warhol and Lynn Goldsmith. Lynn Goldsmith specialized in rock-and-roll photography and had her work published in magazines including Life, Time, Rolling Stone and People. Andy Warhol was a visual/pop artist with works appearing in museums around the world. In 1984, Lynn Goldsmith licensed one of her photographs of the artist Prince to Vanity Fair for use as an artist’s reference. This reference photograph was then used by Andy Warhol to make a silkscreen which was featured in Vanity Fair. Lynn Goldsmith was credited as the owner of the source photograph and was paid $400. The license between Lynn Goldsmith and Vanity Fair in 1984 under the condition that the photo be used for one time only.

Unbeknownst to Lynn Goldsmith, Andy Warhol not only created the one silkscreen for Vanity Fair, he also derived 15 additional works of Prince using the reference photo. One of those additional works was later licensed by the Andy Warhol Foundation for the Visual Arts to Conde Nast for $10,000. Importantly, the purpose of this license to Conde Nast was to publish an article on the artist Prince, the same purpose as the original license with Vanity Fair. When Lynn Goldsmith approached the Andy Warhol Foundation expressing her belief that their use of her photograph and the resulting work that was licensed to Conde Nast infringed her copyright, the Andy Warhol Foundation sued Lynn Goldsmith for declaratory judgement that the works were non-infringing or, in the alternative, that they made fair use of Lynn Goldsmith’s photograph.

The District Court granted summary judgement for the Andy Warhol Foundation, focusing on the first factor and determining that the use was transformative because looking at the works of Andy Warhol and the reference photograph side-by-side, the court opined that they have difference character and give a new expression to Lynn Goldsmith’s photograph. It is important to see the side-by-side, which is copied below, because speaking as someone who is not artistic it is easy to argue that adding what appears to mostly be an orange background does not transform the photo from a picture of Prince to something more, but that is the difficulty with a test that can oftentimes hinge on subjective interpretation of artistic expression that is not typically in the wheelhouse of the average attorney or judge. The District Court believed the Warhol silkscreen on the right transformed the Prince depicted on the left from a vulnerable, uncomfortable person to an iconic, larger-than-life figure and that the picture on the right is immediately recognizable as a Warhol rather than a photograph of Prince.

The Court of Appeals, perhaps being less knowledgeable about artist expression or perhaps viewing the works from a more objective perspective that both images are clearly Prince, reversed and remanded after holding that all four fair use factors favored Lynn Goldsmith. Focusing on the first factor, the Court of Appeals rejected the lower court’s argument that transformative is met when any new aesthetic or new expression is added to source material. The Court of Appeals focused on whether the work’s (orange Warhol on the right above) use of its source material (Lynn Goldsmith photo on left) is in service of a fundamentally different and new artistic purpose and character, adding that the transformative purpose must be something more than the imposition of another artist’s style on the primary work. The opinion also made clear that the lower court’s belief that the work was transformative because it is immediately recognizable as a Warhol was wrong and would only create a celebrity-plagiarist privilege.

The Supreme Court granted certiorari and summarized the issue fairly succinctly by describing the first factor purpose test for fair use in this case as portraits of Prince used to depict Prince in magazine stories about Prince, the original photograph and the Andy Warhol Foundation’s copying use of it share substantially the same purpose and that purpose was commercial in nature. The last part of that summary by the Court is important because the preamble to the fair use defense to copyright infringement lays out a number of examples that reflect the sorts of copying that courts and Congress have found to be fair use such as criticism, comment, news report, teaching, scholarship or research. Each of these uses serve “a manifestly different purpose from the work itself.” When viewed together, the commercial use of a portrait of Prince to depict Prince in articles about Prince, based off of a reference photo that has been licensed for commercial use on its own to depict Prince in magazine stories about Prince, is not transformative use simply because it was created by Andy Warhol.

The Court rightly refocused the test, in this specific instance, away from the subjective review of the level of transformation by one artist of another artist’s work and directly to the purpose of the use in determining whether fair use is a viable defense to copyright infringement. The 2 Live Crew example described above was not a case where 2 Live Crew used the full lyrics and simply sang it differently to make it recognizable as 2 Live Crew, instead, it was a parody that used an immaterial amount of the source material to mimic the original. The Court provides an additional and pointed example referencing Andy Warhol’s use of the Campbell’s Soup can and logo to create his Soup Can series. Andy Warhol’s Soup Can series depicts Campbell’s copyrighted logo that it uses for advertising purposes; however, Andy Warhol’s purpose in creating the Soup Can series was not to advertise and increase sales on behalf of Campbell’s but was for the purpose of artistic commentary on consumerism. The fact that Campbell’s benefitted from the purpose behind Andy Warhol’s series and sold more soup cans had no bearing on the purpose being commentary which is directly implicated in the preamble to the fair use exemption.

Dissenting opinions by the Court and substantial commentary by artists and others who have relied on fair use paint a picture that would have one believe that the fair use exemption has been forever changed and that under this new approach, no amount of artistic creativity will provide a fair use defense for commercial works. In my opinion, those concerns are overblown due to Supreme Court’s narrow ruling in this cases that benefited from a very specific set of facts which the Court highlighted when describing the purpose of the allegedly infringing use of portraits of Prince used to depict Prince in magazine stories about Prince. This is further narrowed by the original license that restricted the use of the source photograph to one time use by Vanity Fair. With those limitations in mind, the narrow ruling by the Supreme Court aligns with the purpose of the original copyright act and the balance that must be met between creative freedom and protecting original works of authorship.

 

 

 

The MetaBirkin NFT Project: When the First Amendment Meets Trademark Law

Posted on Modified on by Lynn Dudinsky

Major brands such as Nike, Tiffany, Gucci and Lacoste have embraced the emerging market provided by blockchain based technologies such as NFTs and the metaverse. As these markets grow, so do instances of potential trademark infringement by entities and creators looking to carve out their niche in this new market and profit from their early adoption. This dynamic led to the case of Hermes International v. Rothschild (U.S. District Court for the Southern District of New York, Case No. 1:22-cv-00384), where Hermes accused Mason Rothschild, whose legal name is Sonny Estival, of trademark infringement, dilution and cybersquatting with the launch of Rothschild’s MetaBirkin NFT project. The MetaBirkin project featured the release of 100 NFTS depicting fur-covered Birkin handbags which were sold for over $1.1 million ($45,000 from the initial sale and approximately $1 million in secondary sales) with Rothschild receiving a portion of initial sales as well as 7.5% of every re-sale of a MetaBirkin NFT.

As a bit of a primer for those who are not aware of the Hermes Birkin line of handbags, these handbags are prices from $9,000 to $50,000 and have received much higher prices at auctions while also generating over $1 billion in sales for Hermes. Hermes owns the trademark rights in the “Birkin” mark related to the name of the handbag as well as trade dress rights in the design of the Birkin handbag. Hermes is not one of the brands mentioned above that have entered into the NFT/blockchain market but there have been reports that Hermes has intentions of entering this space either in the form of NFTs or, more likely, embracing blockchain technology to verify authenticity and ownership via proof of ownership NFTs.

With that out of the way, we return to the case where the MetaBirkin NFT project produced 100 NFTs, each featuring a fur-covered Birkin bag. Mr. Rothschild claimed that this project was an artistic expression and commentary on the use of fur and other animal based materials by luxury brands such as Hermes. Hermes claimed that the use of the Birkin mark and the look of the MegaBirkin handbag infringed upon Hermes’ trademarks. This dispute pins First Amendment artistic expression against Federal Trademark law with the evaluation of which public policy wins to be determined under the speech-protective test set forth in Rogers v. Grimaldi. This test effectively states that an artistic work is not entitled to First Amendment protection if the plaintiff can show that either (1) the use of its trademark in the expressive work was not artistically relevant to the underlying work or (2) the trademark is used to explicitly mislead the public as to the source or content of the underlying work.

Evidence in this case suggested that the purpose behind the use of the Birkin mark was to make a connection to and leverage the Birkin brand to drive sales of the MetaBirkin NFTs.  Mr. Rothschild’s use of the Birkin mark in the project name, on the project website and the handbag bearing a close resemblance to a Birkin bag, albeit covered in fur, illustrates the desired connection to the Hermes mark. Moreover, studies showed close to 20% of people surveyed believed there to be a connection and multiple publications stated there was a connection. While Mr. Rothschild sought corrections in those publications through his publicists, those requests for corrections occurred after receipt of a cease and desist letter from Hermes.

It is important to take a step back at this point and remember the purpose of trademarks. As explained by the court in this case, Trademark law is concerned with preventing consumer confusion and making it easier for consumers to make informed decisions about products on the market. More specifically, the reason that trademark law protects a mark holder’s rights in certain symbols, elements, or devices used to identify a product in the marketplace is so that consumers can reliably determine the producer or origin of a particular good. It is this concept that makes the second factor of the Rogers test the important test in this case because even if there is a finding that the use of the trademark bears some artistic relevance to the underlying work, the First Amendment does not protect such use if it explicitly misleads as to the source or content of the work.

The instructions to the jury further explained the policy weighting between First Amendment protection and Trademark law in saying that Mr. Rothschild is protected from liability on any of Hermes’ claims unless Hermes proves by a preponderance of the evidence that the use of Birkin mark was not just likely to confuse potential consumers but was intentionally designed to mislead potential customers into believing that Hermes was associated with the MetaBirkin project, thereby waiving any First Amendment protection. With this instruction in mind, the jury found in favor of Hermes on Trademark Infringement, Trademark Dilution and cybersquatting. The damages for Trademark Infringement/Dilution are based on the profits earned from the infringement and/or dilution and awarded net profit damages of $110,000. Cybersquatting damages are based on statutory damages where the jury may award damages not less than $1,000 and not more than $100,000 with the jury setting the statutory damages at $23,000.

Hermes v. Rothschild presents an early example of what we can expect will be a growing area of trademark litigation as the market for NFTs and other blockchain innovations lowers the barrier of entry for content creators to monetize their creations. Given the abundance and ease of creating NFTs, leveraging established brands to stand out and increase profits is one strategy that must be done with extreme caution and with a full understanding of the limitations of First Amendment protections. Moreover, the anonymity that is oftentimes enabled by blockchain technologies creates an additional hurdle for brands seeking to police their marks in an space where the identify of the alleged infringer is unknown.

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