Luke! Beware the power of the … Federal Administrative Agency?!?

By Matthew J. Booth and Michael J. Booth

With a nod to George Lucas and Stars Wars, one of the more vexing tasks we face as lawyers is trying to counsel clients on the meaning of federal regulations promulgated by federal administrative agencies like the U.S. Patent & Trademark Office, the EPA, and the Army Corps of Engineers. When the regulation was published and well written, this is an easy task. Other times it is more difficult because the regulation is either vague and/or ambiguous in one or more areas.

The U.S. Supreme Court has a case on its docket that will hopefully bring a little more clarity to this often-confusing area of the law in Kisor v. Wilkie, 18-15 (U.S.) Link. The Kisor case is about a Vietnam veteran who tried to get PTSD benefits from the Veterans Administration. Kisor first applied for these benefits in 1983 and was denied. He later re-applied for benefits in 2006 and the benefits were granted. The argument is under what sub-section of a regulation did the granting of the benefits occur. Under one sub-section, the benefits start as of the date of the 2006 proceeding. In another sub-section, the benefits begin retroactively back to the 1983 proceeding. With the possibility of 23 years’ worth of back benefits at stake, you can see why this case is before the Supreme Court. In the case below, the Federal Circuit found that this section of the VA’s regulations was ambiguous and that both Kisor and the VA had offered reasonable interpretations for two different sub-sections at issue in the case. But the Federal Circuit found that it was bound under an Auer deference to accept the VA’s interpretation of its regulation even though the first time the VA set out its understanding (of the vague regulation) was in its reply brief in the lower court.

In Administrative Law, there are several different types of judicial deference where the courts will defer to the Administrative Agency over a definitional interpretation. In the Kisor case, the kind of deference used by the Federal Circuit was an Auer deference which is a rule of judicial procedure wherein federal courts defer to an administrative agency in its interpretation of its own rules. This deference comes from two main cases by the Supreme Court in this area, Auer v. Robbins, 519 U.S. 452 (1997) Link, and Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945) Link.

Well-known problems of an Auer deference are that it does not necessarily depend on a public statement of an agency’s views. An Auer deference stands in stark contrast to the very open process for administrative rulemaking that starts with Congress enacting a law by statute that gives authority to an administrative agency to carry out the instructions mandated by Congress. The respective federal administrative agency then (should) follow the process outlined by the Federal Administrative Procedures Act (APA) for notice and public comment rulemaking through the Federal Register before promulgating a regulation. See generally 5 U.S.C. § 500 et seq.

In prior cases, the Supreme Court previously deferred to an agency’s interpretation in cases where that interpretation occurred in an internal memorandum, private letters, and internal litigation briefs. There are many other lower court examples where those courts seem to rely on an ad hoc, not so public, or private interpretation of their rules by various agencies.

One of the main problems of an Auer deference, however, is that its underlying legal foundation is historically not well grounded in either statutory or constitutional law. Instead, the Supreme Court came up with this type of deference in the first case, Seminole Rock, which occurred one year before the enactment of the APA and begged the question as to whether the case is valid given that Auer was silent on this issue.

In the Kisor case, Kisor is asking the Supreme Court to overrule Auer and Seminole Rock. The U.S. Solicitor General took the unusual position and agreed that there is a fundamental problem with an Auer deference because it lacks an apparent statutory or constitutional foundation. The Solicitor General recommends that the Supreme Court limit an Auer deference to a lighter version of an Auer deference, proposing a multistep analysis that seems to restate what a reviewing court is already doing. The fallback position by the Solicitor General is that the Supreme Court should not overrule Auer because of stare decisis due to all of the cases that rely on this type of deference. This may not be a good fallback position because the Supreme Court recently chose not to follow stare decisis and overturned 40 years of court jurisprudence in another case. See Franchise Tax Board of California v Hyatt, 17–1299 (U.S. 05/13/2019) Link.

The bottom line is that there is a good chance something is going to happen with the Auer deference. Hopefully, the Court, at a minimum, will require more notice to the regulated community and public.

The case is Kisor v. Wilkie, 18-15 (U.S.) Link

Matthew J. Booth is an Intellectual Property attorney in Austin, Texas.

Michael J. Booth is a Water and Environmental attorney in Austin, Texas.

About those seven dirty words…

By Matthew J. Booth

The title of my blog is a tip of the hat to one of my favorite routines from the late comic, George Carlin, about the seven dirty words that you could not say on TV. Those seven dirty words ended up at the U.S. Supreme Court in 1978 in a case regarding the authority of the FCC to limit or control the use of the content on broadcast television. At that time, the Supreme Court ruled that the FCC did not violate the First Amendment in banning the use of the words in TV and radio broadcasts. This decision essentially established indecency regulation in American broadcasting.

Dirty words are again at the U.S. Supreme Court, but this time it’s whether the U.S. Patent & Trademark Office can prohibit the registration of marks that are “immoral” or “scandalous” in light of the Free Speech Clause of the First Amendment.

In this case, Brunetti, the Respondent, applied to register the mark FUCT for a line of clothing. The USPTO rejected the application based on § 2(a) of the Lanham Act, which prohibits protection for “immoral, deceptive, or scandalous” trademarks. For some context about the age of the language, the Lanham Act was passed in 1946 and replaced the Trademark Act of 1905 which superseded the Trademark Acts of 1881 and 1882.

Brunetti appealed to the U.S. Court of Appeals for the Federal Circuit. The Federal Circuit stayed the appeal pending the Supreme Court’s decision in Matal v. Tam, 15-1293 (U.S. 2017) Link, which addressed the “disparagement” provision of § 2(a). Tam was about a case that involved the band, The Slants, where all of the members were of oriental descent. The USPTO denied the application under the “disparagement” clause. On appeal, the Supreme Court found that provisions of the Lanham Act prohibiting the registration of trademarks that “disparage” persons, institutions or beliefs were unconstitutional under the First Amendment’s Free Speech Clause. After the Supreme Court’s Tam decision, the Federal Circuit found that the “scandalous” provision of § 2(a) was also an unconstitutional content-based restriction on speech for the same reasons the “disparagement” provision was found unconstitutional.

A summary of the government arguments in favor of the ban are: (1) the viewpoint is neutral, (2) it does not restrict speech but imposes a condition of availability of the trademark, and (3) it is reasonably related to legitimate government interests and does not reach outside the trademark registration program. Another argument by the government that hides and floats in along with the others is that the respondent can still use the trademark in commerce, that is, the government is not banning the use in commerce of the trademark by not granting a federal trademark registration.

Over the years, most of my practice is representing individuals and small companies. Getting a federal trademark registration is a powerful economic advantage in protecting a brand from both large and small competitors. Quite honestly, if a potential client does not have a federal trademark registration (or the ability to get one), then the chances of winning an infringement case are problematic. Given my experience, I am hopeful that the U.S. Supreme Court finds this section unconstitutional to keep the USPTO from engaging in a content-based review of trademark applications.

The case is Iancu v. Brunetti, No. 18-302 (U.S.) Link. Oral Arguments were on 04/15/2019.

Another Drumroll…the Supreme Court said you need a copyright registration to file that copyright lawsuit

By Matthew J. Booth

A couple of weeks ago I wrote about the timing of filing a copyright infringement lawsuit. The U.S. Supreme Court answered this question in Fourth Estate Public Benefit Corp. v. Wall-Street.com with a short, unanimous opinion by Justice Ginsburg. The answer is you need to have received a copyright registration before you can file the lawsuit. See Fourth Estate Public Benefit Corp. v. Wall-Street.com, No. 17-571 (US 2019). Link to opinion.

The Court went with the “registration approach” that I discussed in my earlier blog. This approach follows the plain language reading of the first part of section 411(a) (“…no civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title”). See 17 USC 411(a). In reaching its decision, the Court said that the registration approach reflects the only satisfactory reading of the text of 17 USC 411(a).

Now that the Supreme Court has resolved the split between the Federal Courts of Appeal, it’s time to rethink copyright protection. The first step in any future strategy starts with the adage “file early, file often.” In industries such as media, music, and video games, one option is to use preregistration to put a marker down before filing the actual copyright application. I think that a “pre-registration” filing is the functional equivalent to the “application approach,” I discussed in my previous blog but it does have a basis in the statutory language. Another option is to use the expedited registration process at the Copyright Office which has a higher fee than a normal application ($800 per work versus $55 per work for normal processing) and which will result in a copyright registration within about one week. I suspect that because of this case, the Copyright Office will have an uptick in expedited registration requests and that the processing time will increase exponentially.

Copyright cases have a 3-year statute of limitations within which to file the lawsuit after the infringement occurs. See 17 USC § 507(b). If you feel that you can hold off filing the lawsuit while you wait the 8 to 9 months it is currently taking to receive the registration, then you can follow the normal “non-expedited” processing path.

Consulting with copyright counsel can help determine what filing strategy is best.

Can Bankruptcy terminate a licensee’s rights in a trademark license?

By Matthew J. Booth

The Supreme Court has on its docket this term a very important case that affects trademark licensees if the owner (licensor) of the trademark goes into bankruptcy. Here’s the scenario, the owner of the trademark (licensor) or Company A enters into licensing agreement for intellectual property with Company B. The licensing can include different types of intellectual property such as trademarks, trade secrets, patents, and/or copyrights. These types of licenses occur with big and small companies and can be seen everywhere. One example is a national brand doing business in a town where the brand is being operated by a small business that includes the tag “locally owned and operated”.

So, what happens in a typical bankruptcy? When a company enters into bankruptcy, the trustee or debtor (we will just refer to either as the debtor), has the option to reject executory contracts so the other party to the contract is left with a damages claim for the breach of contract, but not the ability to compel further performance. This other party ends up with an unsecured claim and is tossed in with other unsecured creditors and may settle for a reduced amount on the breach of contract claim as part of the bankruptcy.

But what happens with an intellectual property license in bankruptcy? First a little background, in 1985, the Federal Court of Appeals for the 4th Circuit, held that a debtor (and licensor) could use bankruptcy to unilaterally revoke the rights of the licensee of a patent license. See Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The revocation also meant that licensee did not even have an unsecured claim in bankruptcy. The revocation basically meant that the license was obliterated and simply disappeared, a very harsh result.

Soon after that case, Congress moved to overrule that result and added into the Bankruptcy Code a new provision that gives the licensee of an intellectual property license the option to either treat the license as terminated and have a claim as an unsecured creditor or retain the intellectual property rights under the original license and continue the license. See 11 USC 365(n). To support this new section, Congress also added new definitions to the Bankruptcy Code and specifically defined “intellectual property” to include trade secrets, patents, and copyrights to mention a few. See 11 USC 101(35A). But Congress did not specifically mention trademarks in this new definition section. Rather, Congress said it needed more time to study trademark licenses. Mind you, this was in 1988 and Congress still has not revisited this issue, leaving trademark licenses unprotected by the same protections given to other forms of intellectual property.

Since 1988, various bankruptcy courts have gone in different directions on whether a trademark license is an intellectual property license as defined in section 365(n) of the Bankruptcy Code. The Third Circuit looked at this issue in 2010, and while it decided that case on different grounds, a concurring opinion disagreed with Lubrizol on trademark licenses. See In re Exide Technologies, 607 F.3d 957, 966–67 (3d Cir. 2010) (Ambro, J., concurring) (concluding that 365(n) neither codifies nor disapproves Lubrizol as applied to trademarks).

In 2012, the Seventh Circuit Court of Appeals looked at Lubrizol and determined that it did not apply to trademark licenses. See Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012). The Fifth Circuit (where I live) like some other circuits, has not yet weighed in on this issue. And finally, the First Circuit last year weighed in and rejected Sunbeam, followed Lubrizol, and found that a trademark license does not survive bankruptcy and can be terminated. See Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir., 2018).

Since Congress has never revisited this issue in over 20 years, there is still lingering uncertainty. In the Fourth and First Circuits, licensees are out of luck if the licensor goes into bankruptcy. In the Seventh Circuit, licensees have protection and have a choice of how to proceed. In other circuits, like the Fifth Circuit, who knows what will happen. Hopefully, the Supreme Court will provide guidance on this issue since Congress never got around to it.

The case is Mission Product Holdings, Inc. v. Tempnology, LLC, nka Old Cold LLC, No. 17-1657 (US). Link to the case. Oral arguments on the case were heard on Wednesday, February 20, 2019.

Lawful Use in Commerce for Wine

By Matthew J. Booth

As I was thinking about celebrating Texas Independence Day (March 2), I saw a story about Trademarks and Texas Wines that caught my eye.

This case was a Concurrent Use proceeding at the U.S. Trademark Trial and Appeal Board for the concurrent use of a trademark between a Texas vineyard and a California vineyard. What intrigued me about this case was that it was both a concurrent use application and the case turned on the concept of “lawful use in commerce.” However, as you read on, you will see that I end up somewhere different.

I am throwing around a lot of trademark terms so first a little trademark background information. A concurrent use trademark registration is a type of registered trademark that splits the country into different geographic areas; one company has rights to the trademark in one area and another company has rights in a different geographic area. In today’s system of commerce, I think it is going to become harder and harder to make a case for a concurrent use trademark where there is no likelihood of confusion between the different owners in the different geographic areas but that is a topic for another time. The term “lawful use in commerce” comes about because the language for use for concurrent use trademarks is slightly different than for a regular federal trademark registration. In the case of a regular federal trademark, the term is “use in commerce”. See 15 USC 1051 (Application for registration), 15 USC 1052 (Trademarks registrable on principal register; concurrent registration), and 15 USC 1127 (Definitions).

To legally sell wine in this country, you need to have a Certificate of Label Approval (“COLA”) so that a label can be applied to the wine bottle. A COLA is obtained from the U.S. Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau. The Texas vineyard failed to obtain a COLA in a timely fashion and the U.S. Trademark Trial and Appeal Board (TTAB) held that that failure meant its use of the mark did not satisfy the “lawful use in commerce” requirement for a concurrent trademark registration. Therefore, the Texas vineyard did not obtain a trademark registration. See Scott Stawski v. John Gregory Lawson, Proceeding No. 94002621 (TTAB 12/21/2018).

From the records in the case it looks like the Texas vineyard had pre-sales activity that actually predated the use date of the California vineyard, but the Texas vineyard did not successfully take the next step in achieving use in commerce to properly establish its trademark rights. In the interim, the California Vineyard applied for and received a federal trademark registration. Instead of adopting a different trademark in light of the prior registration, the Texas Vineyard attempted to perfect a flawed trademark application through the concurrent use trademark process. Unfortunately, the use criteria for concurrent use is slightly different and this is when “lawful use in commerce” rears its ugly head. Because the Texas vineyard did not receive its COLA until after the California vineyard received its federal registration, the TTAB discounted all of the Texas vineyard’s pre-sale activity because all of that activity occurred before the issuance of a COLA so it was not lawful use in commerce.

I started out thinking this was a case about wine and concurrent use, however, what really hit home with me was something I hadn’t expected. To me this case is really a cautionary tale about the importance of trademark professionals and their role in branding and marketing. The Texas vineyard did not engage trademark counsel at any point through this process. Trademark counsel could have sat down with the vineyard at the beginning of the process and devised a strategy for pursuing trademark protection. I think a solid strategy would have been for the vineyard to file an Intent to Use (ITU) trademark application as soon as they picked a trademark so as to preserve their trademark rights. After receiving a Notice of Allowance on the ITU application, an Applicant has up to 36 months to begin using the trademark in commerce (there are caveats here so consult your trademark counsel). This would have given them time to work on a “use in commerce” strategy. This is especially critical for vineyards because the actual production and sale of wine make take up to or even more than 3 years. Options could have included entering into an agreement to sell products made by a contract manufacturer so as to establish sales under the trademark such as using the private label option. The private label option has another vineyard produce the wine and then the applicant company puts its own label on the bottle (which by the way, still needs a COLA so that the wine is now “lawfully in commerce”). Had the Texas vineyard followed the above steps, they could have filed a trademark application before the California vineyard, and received the registration first. If that had happened there would have been no need for the concurrent use proceeding.

Being a business owner myself, I know the necessity of keeping an eye on the bottom line. However, in this case, I think the dollars would have been well spent on a trademark professional because at the end of the day, the Texas vineyard would have had a registered trademark. They could have avoided the lengthy and ultimately unsuccessful legal proceedings and concentrated on their passion, producing wine. The vineyard’s job is wine. A trademark professional’s job is trademarks. No offense to my friends that practice trademark law, but when my wife sends me out for a good bottle of wine to celebrate Texas Independence Day, I am going to rely on a vineyard to have produced that bottle, not a trademark attorney.