In Their Opinion : Seventh Circuit Court of Appeals Commentary : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

JAY FRANCO & SONS v. FRANEK (August 11, 2010)

In the late 1980s, Clemens Franek sought and received trademark registration status for his "radical" round beach towel. Almost 20 years later, Franek brought suit under the Lanham Act against Jay Franco & Sons for its unauthorized sale of round beach towels. Franco counterclaimed to invalidate the mark. Judge Dow (N.D. Ill.) granted summary judgment to Franco. Franek appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Evans affirmed. The Court first noted that Franek's long continuous use of the mark made it "uncontestable" – so Franek did not have to show that the mark had acquired a secondary meaning. But the mark is still susceptible to challenge on whether it is merely functional. Patent law provides protection to functional designs -- trademark law does not. The Supreme Court defined functional in TrafFix Devices as "essential to the use or purpose of the device or when it affects the cost or quality of the device." One way of identifying whether a design is useful is with reference to existing utility patents. The Court noted that the round towel’s design was quite similar to a portion of a utility patent granted for a towel-bag. The existence of the patent, under TrafFix, is strong evidence of the functionality of a circular towel. In addition, the Court noted that the Franek's own advertisements focused on the functionality of the shape -- allowing sunbathers to change position without moving the towel. The Court also rejected Franek’s argument that the design was a fashion statement. In most instances, fashion is function. What Franek wants is the exclusive use of a basic round design for a beach towel. Although a distinctive, irregular design may qualify for trademark protection, the simple circle does not.

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SPECIALIZED SEATING v. GREENWICH INDUSTRIES (August 11, 2010)

Greenwich Industries has been manufacturing standard folding chairs for more than 80 years. In 1999, it applied for a trademark registration of one particular design. The Patent and Trademark Office issued its registration in 2004. Specialized Seating also manufactures folding chairs and has one model that is almost identical to Greenwich's trademarked chair. Specialized brought suit under the Lanham Act for a declaratory judgment that its chair did not violate Greenwich's rights -- Greenwich counterclaimed for injunctive relief. Judge Holderman (N.D. Ill.) ruled in favor of Specialized, concluding both that the chair's design was functional and that Greenwich had defrauded the Patent and Trademark Office. Greenwich appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Evans affirmed. The Court applied the clear error test to the district court's finding of functionality. Although functionality happened to be the ultimate issue in the case, it is still a fact specific conclusion subject to the clear error standard of review. The Court noted the difference between patent protection and trademark protection. A purely functional design such as Greenwich's chair can be, and in fact here was, protected for a time with a patent. When the patent expires, however, that protection cannot be extended through trademark application. It is true that certain functional products can receive trademark protection, but only when a nonfunctional aspect of its design creates a distinctive appearance. All of the aspects of Greenwich's chair design are functional -- none contribute to a distinctive appearance. Having affirmed the district court's finding of functionality, the Court did not address its finding of fraud.

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FM INDUSTRIES v. CITICORP CREDIT SERVICES (July 22, 2010)

FM Industries brought a copyright infringement suit against Citicorp Credit Services. Judge Conlon (N.D. Ill.) found material disputes with respect to FM’s prospective relief and Citicorp’s ongoing infringement and set the case for trial. FM's lawyer, Wayne Rhine, was late in his obligation to prepare a draft pretrial order. When he did so, it was "egregiously noncompliant." Despite extensions of time and cooperation from the defendants, Rhine never fixed the problem. Eventually, the court dismissed the case for want of prosecution. The district court awarded approximately $750,000 in attorneys’ fees to the defendants under the copyright statute. The court also found that Rhine and his co-counsel William McGrath had vexatiously multiplied the proceedings under § 1927 and imposed a joint and several sanction of $35,000. FM, Rhine, and McGrath appeal.

In their opinion, Chief Judge Easterbrook and Judges Wood and Tinder affirmed in part and reversed in part. The Court first noted that any argument on the merits was irrelevant. The only reason the case did not go to trial was the dismissal sanction. On that issue, the Court had no difficulty in finding it proper. The non-compliant pretrial order with was, in the Court's words, the "straw that broke the camel's back." The Court recited the delays, the warnings, the absurd damage demands, the missed time limits, the overreaching discovery demands -- the list went on. The dismissal sanctioned was permissible under Rule 16 and was proportionate to the conduct. With respect to the statutory award of fees, the Court stated that a prevailing defendant is presumed entitled to fees under the statute and FM presented no reason to reverse that presumption. Finally, with respect to § 1927 sanctions, the Court concluded that Rhine's litigation behavior was vexatious and deserving of sanctions. McGrath, however, presented a different story. Although he did file an appearance and signed five pleadings, he was not accused of any direct misdeeds. He cannot be sanctioned under § 1927 for the misdeeds of his co-counsel or even for his failure to prevent them. The Court reversed the award of sanctions against McGrath.

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WISCONSIN ALUMNI RESEARCH FOUNDATION v. XENON PHARMACEUTICALS, INC. (January 5, 2010)
 

Scientists at the University of Wisconsin discovered that suppressing a certain enzyme in the body reduced cholesterol levels. They disclosed their discovery to the Wisconsin Alumni Research Foundation, which manages patents for the University. They assigned all their rights to the Foundation. Xenon Pharmaceuticals was very interested in the same effort. Xenon and the University entered into a series of agreements under which Xenon sponsored various research projects; Xenon and the Foundation entered into an agreement giving Xenon exclusive licensing rights in return for a percentage of fees received; and Xenon entered into a series of agreements directly with the individual researchers to undertake various projects. Xenon and the Foundation filed for and received a joint patent. The relationship soured. Xenon did some related work with a third party and with an individual University scientist with whom it had a consulting agreement. When it filed a patent application covering the results of that work, the Foundation objected. It also licensed the technology covered by both the joint patent and the related patent to Novartis. The Foundation demanded its contractual percentage -- Xenon refused. The Foundation brought suit, claiming that both the Novartis license and the related patent violated the party's agreement. Xenon counterclaimed. In a series of rulings, the court held that Xenon breached the agreement by granting the sublicense to Novartis and that Xenon owed licensing fees to the Foundation. The court refused the Foundation's request for a declaration that the work on the related patent belonged to it and concluded that the Foundation's argument that it had a right to terminate the contract was not developed sufficiently in its briefs. At trial on damages, the jury awarded $1 million, which was reduced on remittitur to $300,000. The parties cross-appealed.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Sykes affirmed in part, reversed in part and remanded. The Court first addressed Xenon's transfer to Novartis. The Court agreed with Xenon that each joint patent holder, under federal law, is allowed to use the patented technology without regard to the rights of the other. However, that right is subject to modification by agreement of the parties. Here, the Foundation conditioned Xenon's right to license the technology on its payment of a fee. Interpreting the terms of their agreement, the Court concluded that Xenon owed the contractual fee upon its receipt of its fee and its failure to remit it was a breach of the agreement. The Court then rejected Xenon's argument that the Foundation presented insufficient evidence to support its damages claim. With respect to the Foundation's right to terminate the agreement, the Court concluded that the lower court was in error when it held that the right to terminate was contingent upon a judicial finding of a breach. The agreement specifically gives the Foundation the right to terminate the agreement upon a breach by Xenon and a failure to remedy the breach within 90 days after written notice. The Foundation considered Xenon's conduct a breach and gave appropriate notice. Even though it filed suit prior to the expiration of the 90 days, it's right to terminate after a failure to cure remains. It need not await a judicial determination. The Court concluded that the Foundation properly terminated the agreement. Finally, the Court addressed the Foundation's claim for a declaration of its ownership of the related technology. The Court concluded that the contractual terms were clear and that the scientist's work, although partially sponsored by Xenon, was owned by the Foundation.  

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SCHROCK v. LEARNING CURVE INTERNATIONAL (November 5, 2009)

Learning Curve International ("LCI"), a producer and distributor of toys, has a license to market toys based on the "Thomas & Friends" properties. It hired Daniel Schrock to take photographs of those toys for use in promotional materials. LCI paid Schrock more than $400,000 for his effort. Although LCI stopped using Schrock's services in 2003, it continued to use some of his photos. Schrock registered the photos for copyright protection in 2004 and brought an infringement action against LCI and LCI’s licensor. The district court granted summary judgment to the defendants. It ruled that Schrock needed LCI's permission to copyright the photos, which he did not have. Schrock appeals.

In their opinion, Judges Flaum, Williams and Sykes reversed and remanded. The Court first noted that the copying element of an infringement action was not disputed – only whether Schrock had a valid copyright. Then, the Court briefly discussed the subject of derivative works but ended up assuming without deciding that each photo qualified as a derivative work. Next, the Court concluded that the photos met the requisite threshold of originality for copyright protection. That threshold is rather low – and the Court specifically rejected LCI’s argument that the threshold is higher for derivative works. If photographs are distinguishable from the underlying works, they qualify for derivative-work copyright. Schrock’s are and therefore do. In order to be copyrightable, a derivative work must itself not be infringing – that is, the owner of the copyright in the underlying work must have given permission to make the derivative work. The owner need not, however, have given actual permission to copyright the derivative work. The Court specifically rejected dicta in Gracen that suggested otherwise. Although Schrock’s right to copyright his work therefore arises by operation of law without the need for permission, Schrock is entitled to contract away his rights. The Court concluded that the record was insufficient to determine the merits of defendants’ arguments that he did just that. It remanded for further development of the record.

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SCHERING-PLOUGH HEALTHCARE PRODUCTS v. SCHWARZ PHARMA (October 29, 2009)

Schering-Plough makes an over-the-counter oral laxative which it sells under the trade name "MiraLAX." Its chemical name is polyethylene glycol 3350. Four other companies sell polyethylene glycol 3350 as a generic, prescription medication. The FDA requires a warning on the over-the-counter version that it should not be used for more than seven days. The FDA also requires that a generic drug be labeled the same as the original drug and be bioequivalent to the original drug. Schering-Plough brought a Lanham Act action against the defendants. It alleges that the defendants' labels stating that the drug is sold by prescription only are false, in violation of the Act. Meanwhile, the FDA is conducting proceedings to determine whether the defendants' products are mislabeled. The district court dismissed Schering-Plough's suit without prejudice, noting that it could be refiled, if appropriate, after the conclusion of the FDA proceedings. Schering-Plough appeals. The defendants cross appeal, seeking a dismissal with prejudice.

In their opinion, Judges Posner, Flaum and Rovner affirmed. The Court first addressed its jurisdiction, given that the suit was dismissed without prejudice below. The Court recognized some decisions in the past that have suggested that a dismissal without prejudice is not appealable unless the plaintiff is unable to bring a later suit. Focusing on the actual holdings in those cases as well as other authority, the Court concluded that a dismissal without prejudice is appealable unless the defect is immediately curable. On the merits, the Court looked to the provisions of the Lanham Act and the Food, Drug, and Cosmetic Act. It noted that the statutes should be read so as not to conflict with each other and to be given as much effect as possible. For example, the FD&C Act should not be read to prohibit a disclaimer that would correct a misinterpretation on which a Lanham Act claim is based. The record in the case did not make it clear, however, what the Lanham Act remedy should be. Schering-Plough was not very helpful in its suggestions. In addition, the Court believed that any change in labeling adopted by the defendants would have to be approved by the FDA. The Court therefore agreed with the district court that the FDA should be allowed to consider the misbranding issue before the Lanham Act suit is allowed to proceed. Although the Court affirmed the lower court's dismissal without prejudice, it also commented briefly on the viability of the Lanham Act claim. It questioned whether Schering-Plough's reliance on the "literal falsity" doctrine was proper in the context of the case.
 

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JANKY v. LAKE COUNTY CONVENTION AND VISITORS BUREAU (August 3, 2009)

Cheryl Janky and Henry Farag were members of the musical group Stormy Weather. They learned that the Lake County Convention and Visitors Bureau (Bureau) was looking for a song to use in marketing the county’s resources. Janky wrote the music and lyrics for a song and obtained a copyright for it. Her band-mate Farag made several specific recommendations regarding the song’s lyrics. Janky adopted the recommendations and filed for a new copyright listing Farag as the co-author of the song. The Bureau liked the song and began using it in its promotions. Farag issued a non-exclusive license to the Bureau. Some time later, Janky filed yet another copyright registration to correct what she termed a mistake in listing Farag as a co-author. Janky notified the Bureau that she was the exclusive owner of the song. The Bureau, however, did not stop using the song. Janky filed suit. The court entered partial summary judgment in her favor and a jury awarded her $100,000. The Bureau appeals.

In their opinion, Judges Bauer, Ripple (dissenting) and Evans reversed and remanded. The principal issue before the Court was whether Janky held the copyright by herself or whether she shared it with Farag. The legal standard is that individuals are co-authors when they intend to create a joint work and both contribute independently copyrightable material. The majority elaborated on the intent prong by stating that it does not focus on the party's intent to recognize each other as co-authors but on their intent to create a single product together. The majority concluded that the evidence supported a finding that Farag and Janky intended to create a joint work. They relied significantly on Janky's original copyright registration. The majority also found the independently copyrightable prong met in this case. They noted that the changes, although only 10% of the final lyrics, were significant not only to the sound but to the commercial viability of the song. The Court remanded for partial summary judgment to be entered for the Bureau.

Judge Ripple, dissenting, agreed with the majority's statement of the standard and, in fact, agreed with the majority that the district court improperly granted summary judgment to Janky. He disagreed, however, with the majority’s conclusion to enter partial summary judgment in favor of the Bureau. Particularly with respect to the evidence of intent, Judge Ripple concluded that the record did not support entry of judgment for either party.

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GABBANELLI ACCORDIONS & IMPORTS, L. L. C. v. DITTA GABBANELLI UBALDO DI ELIO GABBANELLI (July 30, 2009)

Gabbenelli Accordions & Imports ("American Gabbenelli") used to be the American distributor for a predecessor of defendant Ditta Gabbenelli Ubaldo Di Elio Gabbenelli ("Italian Gabbenelli"). Disputes arose between the two companies in the 1990s. In 1999, the two companies entered into an agreement under which American Gabbenelli retained the exclusive right to use the Gabbenelli mark in North America and Italian Gabbenelli retained the exclusive right to use it in Italy. The parties further agreed that future disputes would be resolved by arbitration. Notwithstanding the arbitration agreement, Italian Gabbenelli sued American Gabbenelli in an Italian court and American Gabbenelli filed this suit in the United States. American Gabbenelli charged Italian Gabbenelli with trademark infringement. The district court first rejected Italian Gabbenelli's contention that the arbitration agreement deprived the court of jurisdiction. Nevertheless, the court stayed proceedings pending the outcome of the Italian litigation. When no decision was rendered within a few years, the court lifted the stay. American Gabbenelli served Italian Gabbenelli with requests for admissions in May of 2005. Italian Gabbenelli finally appeared through counsel in October of 2005 but did not respond to the requests for admissions. Italian Gabbenelli filed an opposition to American Gabbenelli's motion for summary judgment in June of 2007, and also asked for leave to deny the requests for admissions, which had since been deemed admitted. The court denied that request and granted American Gabbenelli's motion for summary judgment. Italian Gabbenelli appeals.

In their opinion, Judges Posner, Flaum and Wood affirmed in part, reversed in part and remanded. The Court rejected Italian Gabbenelli's appeal on liability. First, it agreed with the district court that the arbitration agreement did not deprive the court of jurisdiction. Second, it concluded that the Italian judgment (since rendered) was irrelevant because it was rendered after the district court judgment. Third, the Court concluded that the district court was within its rights in not allowing Italian Gabbenelli to reopen the requests for admissions after ignoring them for several years. The Court did reverse, however, with respect to damages. The district court awarded damages for lost profits plus statutory damages of $500 for each infringing accordion. The Lanham Act allows statutory damages only for violations on which compensatory damages are not awarded. The district court's award of lost profits and statutory damages with respect to the same accordions was improper. The Court also criticized the district court for awarding statutory damages on each individual item sold. The Act allows statutory damages on each "type of goods," not on individual goods. The Court remanded for a redetermination of damages.

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BROOKS-NGWENYA v. INDIANAPOLIS PUBLIC SCHOOLS (April 15, 2009)

While a classroom assistant in the Indianapolis Public School system ("IPS"), Angela Brooks-Ngwenya developed a program she called Transitioning Into Responsible Students (“TIRS”). When IPS did not offer Brooks-Ngwenya a permanent job, she brought suit for race discrimination. She and IPS settled the suit in 2004. She later brought a second suit, alleging that IPS infringed her copyright in TIRS, to which she added a claim for employment discrimination. The district court granted summary judgment to IPS. Brooks-Ngwenya appeals.

In their opinion, Judges Posner, Williams and Tinder affirmed. The Court first addressed the issue of copyright registration. The district court granted summary judgment to IPS because the Copyright Office had rejected Brooks-Ngwenya's application for trademark registration. Federal law requires a rejected applicant to notify the Register of Copyrights when suing for infringement. Brooks-Ngwenya presented no evidence that she had given such notice. The Court concluded that the notice requirement was, although not jurisdictional, a prerequisite to suit. Given that the Register was aware of the suit, the Court concluded that no purpose would be served by insisting on notification and proceeded to the merits. The Court held that Brooks-Ngwenya’s copyright claim must fail because she could not show that IPS used any of her words or materials, only possibly her idea. As for the discrimination claim, the Court had no difficulty in affirming the district court. The party’s earlier dismissal barred the claim. 

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