by Lee Gesmer | Sep 16, 2014 | Noncompete Agreements
Now that the Massachusetts legislature has abandoned (at least until next session) a bill to make employer/employee noncompete agreements unenforceable (or more difficult to enforce) in Massachusetts, we’re back to business as usual in Massachusetts, and how the courts handle these cases remains of interest. And, since the preliminary injunction stage of these cases is so critical, how the courts handle preliminary injunction motions in noncompete cases is of particular interest.
Of course, noncompete law (sometimes statutory, sometimes “judge-made” case law) varies from state-to-state. A recent case highlights the extent to which even the procedure for handling these cases can differ from state-to-state.
In Massachusetts, the trial courts — federal or state — have no obligation to hold an evidentiary hearing when resolving a preliminary injunction motion. Affidavits are usually enough, and its rare to see a hearing with witnesses and cross-examination.
However, this is not the case in the 11th Circuit, which covers federal cases in Alabama, Florida and Georgia. The 11th Circuit recently held, in a noncompete case involving a preliminary injunction motion, that while an evidentiary hearing is not always required before issuance of a preliminary injunction, ““[w]here the injunction turns on the resolution of bitterly disputed facts … an evidentiary hearing is normally required to decide credibility issues. … where much depends upon the accurate presentation of numerous facts, the trial court erred in not holding an evidentiary hearing to resolve these hotly contested issues.”
The case was remanded to the trial court for a hearing.
Moral of the story: if you think an evidentiary hearing will improve your chances on a noncompete preliminary injunction motion, ask for one. Just maybe, you’ll get it. If the appealing party in this case had not asked for an evidentiary hearing, it would have had no basis for complaining, on appeal, about the failure of the court to grant one, and would not have obtained the reversal. While an Eleventh Circuit decision is only persuasive (not binding) on courts outside the Eleventh Circuit, a particular judge in another state could find it very persuasive, and an evidentiary hearing may make a difference in the outcome in the trial court. It also creates the basis for a good faith argument on appeal.
Moon v. Medical Technology Assoc. (11th Cir. Aug. 18, 2014)
by Lee Gesmer | Sep 12, 2014 | Contracts
Online companies have often found it challenging to create enforceble terms of service (“TOS”), and the courts aren’t making it any easier. Perhaps the courts have concluded that, now that the Internet is an established commercial medium, they are not going to cut vendors any slack.
The latest decision illustrating this is the Ninth Circuit’s August 18, 2014 holding in Nguyen v. Barnes & Noble, holding that Barnes and Noble’s browsewrap agreement was not enforeable.
A website “browsewrap” agreement is where the online terms are posted on a site, typically via a link on the site’s homepage. By contrast, a “clickwrap” 
requires the website user to take some affirmative action before engaging in a transaction (such as an online purchase). Typically this amounts to clicking a box on the site indicating that the user agrees to the site’s terms and conditions.
Where the user is not asked to “check the box” and the website relies on the posting alone, things can get messy. Barnes & Noble tried to impose an arbitration clause on a consumer based on a browsewrap, but the Ninth Circuit held that B&N’s browsewrap was not enforceable. Here, as is often true in these cases, the issue came down to vague factors such as where the terms were presented, and whether “a reasonably prudent user” would be put on notice of the terms. In this case, B&N didn’t do enough:
In light of the lack of controlling authority on point, and in keeping with courts’ traditional reluctance to enforce browsewrap agreements against individual consumers, we therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice. … the onus must be on website owners to put users on notice of the terms to which they wish to bind consumers. Given the breadth of the range of technological savvy of online purchasers, consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.
It is far from clear what constitutes a “conspicuous hyperlink” that would satisfy the test in this decision, but online business should stick with clickwrap agreements, rather than push the envelope with browsewraps. For a similar case that I wrote about in 2012, see Online Agreements – Easy To Get Right, Easy To Get Wrong.
Nguyen v. Barnes Noble (9th Cir. Aug. 18, 2014).
by Lee Gesmer | Sep 10, 2014 | Copyright
It’s a sad reality that when the record companies want to get serious, they sue not only companies that they claim have infringed their copyrights, but the owners of those companies. Capitol Records pursuit of Michael Robertson, despite the bankruptcy of MP3tunes, is a classic example. MP3tunes declared bankruptcy and shuttered its service, but Capitol Records (part of UMG), pursued Robertson individually, and obtained a $41 million verdict against him personally.
Capitol is using the same strategy against Redigi (“the world’s first pre-owned digital marketplace”). I’ve written about Redigi several times (see here, here and here). The last of these, Federal Judge Tells Redigi to Shut it Down, posted April 2, 2013, describes the New York federal court’s decision holding that Redigi’s digital resale business is not protected by the first sale doctrine. In that post I noted that Redigi could face millions of dollars in damages, and that liability might not be limited to the company:
Capitol may seek leave of court to add as defendants the individual owners and employees of Redigi that exercised control over or benefited from the infringement. While Redigi could oppose such as motion as coming too late in the case, a decision would be at the discretion of the judge. As Capitol Records showed in its copyright suit against MP3tunes and Michael Robertson, Capitol is not above suing not only corporate infringers but their founders and owners. (See: The Record Labels Want My Minivan).* The philosophy of the record companies in many copyright cases may best be described as, “never kick a man when he’s down, unless that’s the only way to keep him there.” Capitol may be preparing to put on its steel toe boots in this case.
… According to the court decision Redigi consulted legal counsel before launching Redigi and engaging the recording industry in a test case. One can only hope that the attorneys Redigi consulted reminded Redigi of the Chinese proverb, “A piece of paper, blown by the wind into a law court, may in the end only be drawn out again by two oxen.”
It didn’t take long for Capitol to follow exactly that strategy. Five months later, on August 13, 2013, Capitol filed an amended complaint naming Redigi’s founding co-owners, John Ossenmacher (CEO) and Larry Rudolph (CTO) as individual defendants. Ossenmacher and Rudoph moved to dismiss, and the court denied their motion on September 2, 2014, holding that the amended complaint –
specifically alleges that the Individual Defendants were responsible both for the technology ReDigi used and for employing that technology through ReDigi’s business. It also alleges that each of ReDigi’s key activities was performed either at the behest of, or with the approval of, the two Individual Defendants. These are precisely the sorts of factual allegations that, if true, make a corporate officer personally liable for copyright infringement. … the rule is that a corporate officer is personally liable for the corporation’s infringement if he had the ability to supervise the activity and a financial interest in it, or if he personally engaged in the infringing activity.
This development just serves to thicken the plot in a case that many observers have been hoping will make it to the Second Circuit on appeal.
Will the judge’s refusal to dismiss Ossenmacher and Rudolph as defendants (albeit only on a motion to dismiss, which is by no means a final decision) now be enough to force Redigi to shut its doors? Would closure of Redigi be enough to settle the claims against the two individuals, or is Capitol out to make an example in this this case?
On the other hand, it’s possible that the founders of Redigi were well-advised before starting this company, and that they put their personal assets beyond the reach of creditors. Redigi made much of the fact that its technology was vetted and approved by a legal team before they released their service. Hopefully, this included a strategy to frustrate Capitol’s attempt to reach their personal assets.
Capitol Records v. Redigi – First Amended Complaint
September 2, 2014 Order Denying Motion to Dismiss Ossenmacher and Rudolph
by Lee Gesmer | Sep 6, 2014 | Copyright
Oracle faces a tough call following the Ninth Circuit’s August 29, 2014 decision in Oracle Corp. v. SAP AG. Should Oracle accept the $ 356.7 million in copyright damages the Ninth Circuit authorized on appeal, or roll the dice for a new trial, gambling that it can do better?
I’ve written about this case before (see Oracle and SAP Avoid a Retrial, Go Directly to Appeal, in the Other “Tech Trial of the Century”). As I discussed in that September 2012 post, in 2010 Oracle won a record $1.3 billion copyright infringement jury verdict against SAP. However, the trial judge held that the jury’s “hypothetical-license” damages award was based on undue speculation, and ordered remittitur, reducing the judgment to $272 million, and giving Oracle the choice of accepting that amount or retrying its damages case. Oracle and SAP then entered into a complex stipulation that allowed the parties to avoid an immediate retrial and permitted Oracle to appeal the district court remittitur order. The terms of the stipulation were as follows:
- The district court entered final judgment for $272 million. (This did not include interest or the $120 million in attorney’s fees that Oracle had already been paid by SAP).
- However, Oracle agreed not enforce the judgment until all appeals are concluded.
Now, assuming Oracle does not appeal to the Supreme Court, decision day has arrived for Oracle. The Ninth Circuit rejected Oracle’s appeal that it reinstate the $1.3 billion, but did up the amount the district court had arrived at on remittitur ($272 million) by $84.7 million to $356.7 giving Oracle the choice of accepting that amount to end the case, or proceed with a new damages trial.
The heart of the Ninth Circuit’s decision is its holding that while a plaintiff in a copyright infringement case is not required to show that it would have 
licensed the infringed material to recover on a hypothetical license theory (an argument pressed by SAP, since it was undisputed that Oracle would never have licensed the work at issue to SAP), Oracle had failed to present sufficient non-speculative evidence to support the jury’s award of $1.3 billion. This left Oracle with the maximum amount the evidence established based on an alternative damages theory — Oracle’s lost profits plus SAP’s illegal profits — an amount the Ninth Circuit concluded was not $272 million, but $356.7 million.
My prediction: fast and furious negotiations will commence, and the case will settle. Oracle’s chances of recovering materially more than $356.7 million on retrial, given the Ninth Circuit opinion, are negligible, given that Oracle probably put on the best “lost profits/illegal profits” case it could at the first trial. However, Oracle’s chances on improving on that number are not zero, so Oracle will probably be able to obtain more than $356.7 million in a negotiated settlement, but not a great deal more. The settlement is likely to be private, so we may never know the precise amount.
Caveat: Larry Ellison gets to make the call on this for Oracle, and he might be more likely to roll the dice on a retrial than your average CEO.
Oracle Corp. v. SAP AG (9th Cir. August 29, 2014)
[Update, November 18, 2014. As predicted, the case has settled, reportedly for $359 million, just a hair more than the $356.7 million ordered by the Ninth Circuit].
by Lee Gesmer | Sep 3, 2014 | Copyright, Patents, Trademark
[As initially published in the September 1, 2014 issue of Massachusetts Lawyers Weekly]
A lot has changed in the realm of intellectual property law following the record-breaking ten intellectual property cases decided by the U.S. Supreme Court in its 2013 term. Highlights of the six unanimously decided patent cases include suits in which the Court narrowed the scope of patent protection for inventions implemented on computers, made it easier to invalidate a patent for indefiniteness, and made it easier for the district courts to shift attorneys’ fees to prevailing defendants.
The Court issued two copyright decisions, including an important ruling that may have implications for cloud computing. And, one of the Court’s two Lanham Act opinions established a new doctrine for standing in false advertising cases.
Patent
Medtronic v. Mirowski Family Ventures (Jan. 22, 2014) was the first of five decisions overruling the Federal Circuit outright. The Court held that in a declaratory judgment action for non-infringement brought by a patent licensee, the burden of proving infringement lies with the licensor/patent holder, not the licensee. Medtronic can be seen as an extension of the Court’s 2007 decision in MedImmune, Inc. v. Genentech, holding that patent licensees have standing to bring declaratory judgment actions for non-infringement or invalidity, even as they continue to make royalty payments for the product in controversy.
By placing the burden of proving infringement on patent owners, the Court has made it easier for patent licensees to challenge a patent during the license term.
Octane Fitness v. ICON Health and Fitness (April 29, 2014), may have important consequences for attorneys’ fee awards in patent cases. The case was a challenge to the Federal Circuit’s “exceptional case” standard for awarding attorneys’ fees in patent litigation under 35 U.S.C. §285. That standard required a party seeking fees to show by “clear and convincing evidence” that the case was “objectively baseless” and brought in “subjective bad faith.”
Overruling, the Court held that an “exceptional case” is “one that stands out from others with respect to the substantive strength of a party’s litigating position (both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated … considering the totality of the circumstances.” The Court also changed the standard of proof to a preponderance of the evidence.
While the fee-shifting statute applies to both parties, Octane should make it easier for patent defendants to force losing plaintiffs to pay attorneys’ fees.
Highmark v. Allcare Health Management System (April 29, 2014), a companion case to Octane, held that the standard established in Octane should be left to the discretion of the district courts rather than, as the Federal Circuit had held, be subject to de novo review on appeal.
Octane and Highmark give the district courts substantial leeway within which to decide fee awards and may impact the debate over the reform of the patent laws to curb abusive lawsuits. An important component of proposed reform legislation has been to encourage judicial fee shifting, until now a rarity. These cases may be a significant step in that direction.
That said, until the lower courts demonstrate how aggressively they will apply Octane’s fee-shifting standard, the full impact of these cases will be unclear. Adding to this uncertainty is the risk that the standard will be applied unevenly in different districts (and even from judge to judge), with little authority left to the Federal Circuit, under Highmark, to intervene and shape uniform national application.
In Nautilus v. Biosig (June 2, 2014), the Court addressed the patent statute’s requirement that patent “claims particularly point[] out and distinctly claim[] the subject matter which the inventor or a joint inventor regards as the invention.” 35 U.S.C. §112(b).
The Federal Circuit had held that a patent claim passed that threshold so long as the claim was “amenable to construction” and the claim, as construed, was not “insolubly ambiguous.” Reversing the Federal Circuit for the fourth time, the Court held that “a patent is invalid for indefiniteness if its claims, read in light of the specification delineating the patent, and the prosecution history, fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention” at the time the patent was filed.
While making it easier to challenge a patent based on indefiniteness, the Court left it to the district courts to interpret and apply the standard. Nevertheless, the decision also appears to be consistent with the Court’s trend during the term: to pull in the reins on a patent system widely perceived to be out of control.
The last two cases stand out as the most complex and likely most important patent decisions of the term.
In Limelight Networks v. Akamai Technologies (June 2, 2014), the issue was whether patent infringement could occur when separate entities perform the steps of a method patent, so-called “divided infringement.”
In a controversial decision, the Federal Circuit ruled that a defendant could be liable if it “induced” several parties to jointly carry out the steps necessary for infringement, whether or not the defendant performed any of the steps itself. Reversing again, the Supreme Court held that a defendant cannot be held liable for inducing patent infringement in the absence of direct infringement, which requires that all steps of a patent be performed by a single actor. The Court was not persuaded by the argument that its holding might enable defendants to evade liability by dividing performance among multiple actors.
However, the Court noted that its ruling was based on a 2008 Federal Circuit decision establishing the single actor rule for direct infringement. The Court assumed, without deciding, that that holding was correct, implying that there might be some room for the Federal Circuit (or the Supreme Court) to modify the single actor rule on which the holding in Akamai is based. In the meantime, a divided infringement defense will be a potential loophole for defendants in industries with distributed activities.
The last and most highly awaited patent case in the 2013 term was Alice Corp. v. CLS Bank Int’l (June 19, 2014). At issue was whether claims directed to a computer-implemented financial process were patent-eligible subject matter.
While many in the patent community feared (or hoped) that the decision would render software and business method inventions unpatentable, the Court was careful to avoid that outcome. Rather, it held that, like laws of nature and natural phenomena, “abstract ideas” — such as the business practice in Alice — must contain a sufficient “inventive concept” to “transform” the idea into a patent-eligible application. However, that cannot be achieved solely with a generic computer implementation. In Alice, the claims amounted to “‘nothing significantly more’ than an instruction to apply the abstract idea,” using some “unspecified, generic computer.” That was “not ‘enough’ to transform an abstract idea into a patent-eligible invention.”
While Alice did not create a per se exclusion for software and business processes, these categories will face heightened scrutiny in both prosecution and enforcement. But application of Alice will be complicated by minimal guidance on what constitutes an “abstract idea.” While using a general purpose computer to implement an abstract idea will not achieve patent-eligibility, software that improves a physical process or the functioning of the computer itself may provide the “something more” identified by the Court as a requirement to transform an abstract concept into patent-eligible subject matter.
However, those distinctions were left to the lower courts to resolve on a case-by-case basis.
Copyright
In Petrella v. Metro-Goldwyn-Mayer, the first of two copyright cases decided in the 2013 term (May 19, 2014), a 6-3 Court reversed the 9th Circuit, holding that the copyright statute’s three-year “rolling” statute of limitations (17 U.S.C. §507) could not be shortened by the common law doctrine of laches. However, an unreasonable, prejudicial delay in filing suit may be relevant to awarding equitable relief and damages based on the infringer’s profits, making it less likely that the ruling will spark a flood of hitherto dormant copyright suits.
The second copyright ruling, ABC v. Aereo (June 25, 2014), involved the legality of Aereo’s system of using micro-antennas and individual digital copies to stream over-the-air TV on the Internet. Reversing the 2nd Circuit, a unanimous Court held that Aereo’s streaming service violated the copyright statute’s public performance right. The Court rejected Aereo’s argument that it was legally indistinguishable from a TV antenna/DVR supplier, holding instead that Aereo transmitted a public performance through “multiple, discrete transmissions,” and that Aereo was substantially similar to cable TV companies, which are required to pay royalties to retransmit TV broadcasts.
The impact of the decision on cloud computing remains to be seen, as does the accuracy of the three-justice dissent’s warning that the rationale of the case will “sow confusion for years to come.”
Lanham Act
In Lexmark Int’l v. Static Control (March 25, 2014) the Court unanimously reversed the 6th Circuit’s holding that Static Control could not proceed with a false advertising counterclaim against Lexmark under §43(a) of the Lanham Act because the parties were not direct competitors. The Court announced a new, two-part test: (1) Is the claim within the “zone of interests” protected by the Lanham Act? (2) Did the alleged conduct proximately cause the alleged injury? To meet the second part of the test, a plaintiff must plead “economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising,” and that the deception causes consumers to withhold business from the plaintiff.
The ruling eliminates circuit conflicts and liberalizes standing under federal false advertising law.
In POM Wonderful v. Coca-Cola (June 12, 2014), another false advertising case, POM complained that the label for Coca-Cola’s “pomegranate blueberry” juice blend was deceptive and misleading, in violation of the Lanham Act.
The 9th Circuit held that POM’s claim was precluded by the Food, Drug and Cosmetic Act, which regulates the misbranding of food by means of false labeling. The Court reversed, holding that the federal law was not a safe harbor from the Lanham Act, and, therefore, food and drink labels are subject to competitor claims under the act.
The extent to which the ruling will lead to an increase in false advertising lawsuits over food and drink labeling remains to be seen.
