graphic of copyright sympbol

DMCA Safe Harbor: Protecting Yourself from Copyright Infringement

By: Jon Avidor

The Digital Millennium Copyright Act, 17 U.S.C. § 512, (“DMCA”) provides Internet communications service providers, including website operators, with immunity from copyright infringement liability for, among other things, infringing material posted on its sites by its users, provided the online service provider implements a procedure that allows copyright holders to report alleged infringement of its protected work on its website or through its service.

The type of “service provider” exempted from copyright infringement liability under the DMCA is defined as “an entity offering the transmission, routing, or providing of connections for digital online communications, between or among points specified by a user, of material of the user’s choosing, without modification to the content of the material as sent or received” or “a provider of online services or network access, or the operator of facilities therefor.” In practice, service providers are the conduits for transmitting digital online communications among users and include telecommunications companies or ISPs like Verizon or Comcast as well as the companies that provide online services and networks, including websites. It’s a broad definition.

To avoid liability for copyright infringement, a service provider must not have prior actual or constructive knowledge of the infringing material, not “receive a financial benefit directly attributable to the infringing activity,” have a notice and takedown procedure in place for reporting infringing material, and, where appropriate, terminate repeat infringers accessing the site or service. Here are general guidelines to remain protected by the DMCA safe harbor:

Before Posting Terms of Use or Terms of Service

  1. Review procedures for dealing with intellectual property infringement as set forth in the service or website’s terms of use or terms of service.
  2. Establish an email address to receive notices of claimed infringement and counter notifications, such as “copyright@yourdomain.com” or “IP@yourdomain.com,” and update the email address in the terms of use or terms of service.
  3. Choose someone within the company to receive notices of claimed infringement and register that person as a “designated agent” with the U.S. Copyright Office’s DMCA Designated Agent Directory. Agent designations expire after three years and service providers will have to re-register to remain current.

An Note on Designated Agents: The Copyright Office introduced an electronic directory of DMCA designated agents on December 1, 2016, and subsequently required any service provider with a designated agent prior to November 30, 2016 to re-register its agent through the new online system by December 31, 2017 to continue its protection under the DMCA safe harbor. For more on this change and its implications, see our Legal Alert for Online Service Providers.

Upon Receiving a Notice of Claimed Infringement

The DMCA’s safe harbor and notice and takedown procedures only apply to alleged copyright infringement, though comprehensive terms of use or terms of service will provide a similar mechanism for trademark or other intellectual property infringement allegations and complaints.

  1. Review the Notice of Claimed Infringement to determine whether it sets forth the formal requirements per the posted terms of use or terms of service.
  2. If the Notice of Claimed Infringement does not meet the formal requirements, the service provider may reject it and notify the reporting party that it must resubmit with the required information before it will consider taking action.
  3. If the Notice of Claimed Infringement does meet the formal requirements, the service provider should expeditiously remove or disable access to the material that is claimed to be infringing and then notify the user/poster that its material was removed and that they may choose to file a Counter Notification to reinstate the content according to the procedures set forth in the terms of use or terms of service.

Upon Receiving Counter Notification

  1. Review the Counter Notification to determine whether it sets forth the formal requirements per the posted terms of use or terms of service.
  2. If the Counter Notification is non-compliant, the service provider may reject it and notify the responding party that it must resubmit with the required information before you will consider reinstating their content.
  3. If the Counter Notification does comply with the formal requirements, the service provider should notify the reporting copyright holder and provide a copy of that Counter Notification.
  4. If a proper Counter Notification is provided and the complaining copyright holder does not file a lawsuit against the alleged infringer within ten to fourteen business days and notify the service provider that it has done so, the service provider may restore the removed material. However, even if an alleged infringer has complied fully with the Counter Notification procedure, a service provider is not necessarily obligated to restore the reported content. Comprehensive terms of use or terms of service will reserve a service provider’s right to terminate any user and prevent it from using or accessing the website and services after receiving even a single Notice of Claimed Infringement.

Unless a service provider has staff trained in evaluating and responding to notice and takedown requests, they should seriously consider involving legal counsel to make those determinations because, as discussed below, non-compliance or otherwise lackadaisical attention to claims of copyright infringement can cause service providers to blow their DMCA safe harbor protection and face costly claims of contributory copyright infringement.

Repeat Infringers

The DMCA safe harbor provisions require that service providers “adopt and reasonably implement” a policy for terminating the accounts of any “repeat infringers” where appropriate. What’s sometimes troublesome is that the DMCA does not define who is a “repeat infringer” and what the “appropriate circumstances” are that would require the service provider to terminate an infringer’s access, so service providers have some discretion in setting and implementing their own policies. For example, a service provider’s repeat infringer policy might be to notify and terminate any alleged infringer’s account or access if the service provider has received and acted on more than, let’s say, two DMCA-compliant Notices of Claimed Infringement concerning that user. Once a service provider receives a Notice of Claimed Infringement, the law considers the service provider to then have actual knowledge of multiple instances of infringing content on its site or through its service and, therefore, must act to remove it and prevent repeat offenders, or risk losing its DMCA protection from copyright infringement liability.

The risk of non-compliance with formal DMCA requirements can be costly. In December 2015, Cox Communication lost its DMCA immunity and was found guilty of willful contributory copyright infringement and ordered to pay a $25 million judgment to music publisher BMG for disregarding infringement notices and its repeat infringer policy against users who freely passed copyrighted music through its system. According to The Hollywood Reporter, “Although Rightscorp detected 1.847 million instances of infringement and collected more than 150,000 copies of copyrighted works downloaded directly from Cox subscribers, according to testimony presented at trial, there was 1,397 copyrighted works in contention in the lawsuit. That means that the $25 million verdict amounts to about $18,000 for each song infringed.” An appeal to the U.S. Court of Appeals for the Fourth Circuit is currently pending.

The Pitfall of Trademark Genericide: When Household Names and Brands Collide

By: Jon Avidor and Qualia C. Hendrickson

Escalator. Heroin. Dry Ice. Teleprompter. Laundromat. Each of these words or phrases were originally coined as trademarks, though have since lost their distinctive nature and exclusivity as they slowly became part of the American lexicon in the years since their introduction. They’ve fallen victim to genericide.

“Genericide” occurs when a once-distinctive trademark becomes the commonly used and understood word for a certain type of good or service, in general, and not in reference to any one particular product or manufacturer. Back to our initial list of genericided marks, when people take an escalator, all they know is that they’re hopping on a mechanically ascending or descending staircase and praying it won’t eat their shoelace. As early as 1950, the general public no longer associated the escalator with its 1891 inventor (and Lehigh graduate) Jesse Reno or the Otis Elevator Company, which trademarked “escalator” in 1900. See Haughton Elevator Co. v. Seeberger, 85 U.S.P.Q. (BNA) 80 (Apr. 3, 1950). A trademark can become generic either through the trademark owner’s improper policing of the mark against infringing uses or the public’s use of the mark as the general name for similar good and services. For example, in an October 2013 SEC filing, Twitter Inc. expressed concern that the term “‘Tweet’ could become so commonly used that it [could become] synonymous with any short comment posted publicly on the Internet.” Similar to Xerox, Band-Aid, Kleenex, and TABASCO, Twitter launched a public relations campaign as early as 2010 on how to properly use the word “Tweet,” which drew some vocal opposition, including from the cofounder, CEO, and editor-in-chief of Business Insider.

Trademark owners often lose their exclusive right to use their respective trademarks or service marks due to genericide in two ways: (1) in trademark infringement litigation where a defendant successfully argues genericide as a defense resulting in the mark’s cancellation or (2) where a challenging brand, producer, or manufacturer seeks to cancel the trademark owner’s trademark registration. In deciding whether a trademark has become generic, courts use the primary significance test and ask “whether the primary significance of the term in the minds of the consuming public is now the product and not the producer.” Elliott v. Google, Inc., No. 15-15809 (9th Cir. May 16, 2017). What is relevant is not whether some small portion of the public considers the term an indicator of the source, but rather what the “entire consuming public” considers the term to indicate. Bayer Co. v. United Drug Co., 272 F. 505 (S.D.N.Y. 1921). Courts also consider whether declaring the mark generic will create a likelihood of confusion among the consuming public and induce consumers into buying a competitor’s product when they intended to purchase the one made by the original trademark owner.

The following cases illustrate the risks to trademarks posed by, first, a trademark’s owner improper policing and, second, the public’s appropriation of the mark in relation to the type of goods or services in general.

Improper Policing Against Infringement

Asprin
Bayer Co. v. United Drug Co., 272 F. 505 (S.D.N.Y. 1921).

Bayer once owned exclusive rights to call the drug acetylsalicylic acid “Asprin” but lost its trademark in one of the greatest examples of genericide. The pharmaceutical company tried to prove the strength of their mark by showing that pharmacists and chemists understood the term “Aspirin” as a reference specifically to Bayer’s drug, but ultimately lost on the basis that whether a mark is generic does not depend on whether a select section of the public understands the mark as a source identifier, but rather whether the public as a whole understands the mark to refer to the product and its single source.

Thermos
American Thermos Products Co. v. Aladdin Industries, Inc., 207 F. Supp. 9 (D. Conn. 1962).

Because it failed to stop others from using “thermos” in connection with insulated bottles and the like, the company that originally owned and produced the bottles under the trademark Thermos is now limited in its rights to its trademark. Additionally, the company failed to prevent generic uses of the term by non-trade publications or follow up with trade publications that agreed to discontinue their generic use but persisted. As a result, other insulated container manufacturers may use the term “thermos” as long as they eliminate the risk of confusion among consumers by preceding the term with their own name or brand and display the term “thermos” in all lowercase, same sized letters.

Public Appropriation of the Trademark

Cellophane
DuPont Cellophane Co. v. Waxed Products Co., 85 F.2d 75 (2d. Cir. 1936).

The original creator of “cellophane” lost his grounds for trademark protection because the mark was employed to describe the product with no other descriptive words, e.g., “Cellophane brand transparent wrapping.” Producers developing products that are the “first of their kind” in the marketplace should keep in mind what the term means to the buying public, which will be central to a court’s analysis. An inventor who does not provide the public with an alternate name and uses only the trademark to market the product will likely subject the trademark to genericide.

Beanie Baby
Ty Inc. v. Perryman, 306 F.3d 509 (7th Cir. 2002).

While Ty Inc. still holds its trademark for BEANIE BABY®, it failed to prove that the use of the term “beanies” for second-hand beanbag stuffed animals diluted the value of its trademark and misled the public regarding brand affiliation. Citing the difference between trademark dilution and fair use, the court noted descriptive or suggestive marks are better candidates for becoming generic than more distinctive marks. If a trademark is a more appealing term than its generic name—just as the term “beanies” is a more appealing name for “beanbag-stuffed animals”—the trademark owner may lose its trademark protection due to public appropriation as a convenient short-hand. Meanwhile, I’m still waiting for my Beanie Baby collection to be worth, like, a million bucks some day—the Millennial dream.

What we can learn from these cases is that trademarks are not well suited for “Set It and Forget It”®, but instead require attention. What trademark owners do with their marks—registered or not—can have significant consequences on the value of their brands as they gain greater market penetration and become household names.

Was Silicon Valley “Bro Culture” to Blame for Uber CEO’s Resignation?

By: Steve Masur and Cassidy Lopez

Ride-sharing giant Uber‘s Travis Kalanick has been forced to step down from his role as CEO of the company a week after taking an “indefinite leave of absence” amid growing backlash over his leadership and corporate culture at Uber. Uber has been rocked by what seems to be a never-ending series of scandals, PR crises, and staff departures (since the beginning of this year, the company has lost fourteen of its top executives), leaving investors to question whether Kalanick was fit to continue leading the company.

The company’s rough ride began on January 19th, when the Federal Trade Commission issued Uber a $20 million fine for misleading drivers about pay. A week later, a viral campaign to #DeleteUber was started after Uber turned off surge pricing at JFK airport in New York City to draw more customers during a taxi driver strike in response to President Trump’s travel ban. Kalanick also received backlash for joining Trump’s Strategic and Policy Forum, though a few days after unrelenting criticism on social media, Kalanick resigned from the economic advisory board. However, by February, the New York Times reported that almost 200,000 users had deleted the Uber app from their smartphones.

In mid-February, a former Uber software engineer published a powerful blog post alleging a culture of sexual harassment and gender bias at the company. An internal investigation into harassment and discrimination was launched, led by former U.S. Attorney General Eric Holder and Uber board member Ariana Huffington. The investigation has led to 20 firings so far. The firings were aimed at addressing deeply rooted cultural and managerial issues within the company, stemming from an inherent misogynistic culture within the Silicon Valley startup community. Holder issued a report in June recommending that the company reevaluate Kalanick’s leadership at the company as well as “enhance board oversight.” Many have criticized the “toxic bro culture” which exists in Silicon Valley. Investors have an affinity for favoring young, good-looking men, hustlers and go-getters, with an aggressive nature who will do what it takes to make sure the company takes off. “Bro” culture may have its perks in the beginning in leading start-ups to rapid growth and quick profits, but it also encourages ignoring the rules (or, at the very least, pushing boundaries beyond what’s traditionally acceptable) and doing whatever it takes to win no matter the circumstances. That attitude, which is what made Uber a $70 billion company, also, unfortunately, led to Kalanick’s downfall. Leslie Miley, a former software engineer at Slack, may have put it most precisely: “Maybe there’s no morality in money.”

Amid all of this scandal, Uber was also facing an intellectual property lawsuit by Alphabet Inc.’s self-driving car subsidiary Waymo and an investigation by the U.S. Department of Justice into software tools that were allegedly being used to deceive some law enforcement. UPDATE (2/9/2018): Waymo and Uber have reached a settlement their trade secret lawsuit over self-driving vehicle technology, in which Waymo will obtain 0.34% of Uber’s equity, valued at $245 million at a $72 billion valuation. In a statement, new Uber CEO Dara Khosrowshahi denied any allegations of unfair competition and trade secret misappropriation, but expressed “regret” over Uber’s actions and looked ahead to a cooperative partnership with Alphabet.

Kalanick’s “indefinite leave of absence” was not enough for some investors who were growing weary of the leadership at the head of a company they had pumped millions of dollars into. Five major shareholders, which include some of the tech industries top venture capital firms, notably Benchmark, LOWERCASE capital, Menlo Ventures, First Round Capital, and Fidelity Investments, and who together hold about 40 percent of Uber’s voting power, demanded Kalanick’s resignation. The shareholders are calling for a board-led search for a new Chief Executive Officer and are demanding that the company immediately hire an experienced Chief Financial Officer. In a day and age where venture capital funding has profoundly changed the U.S. economy, investors have a large influence over companies, as evidenced by the shareholder letter calling for the resignation of Kalanick. A 2015 Stanford University study found that 43% of all public companies founded since 1979 were backed by venture capital firms, and this number has only been on the rise two years later.

The venture capitalists funded Travis Kalanick to do exactly what he did, which is to ignore the rules, eat for lunch anyone who got in Uber’s way, and build an enormous amount of value. It was truly amazing how Uber was able to bust the national and world-wide monopolistic trusts of taxi and limousine authorities. However, Uber’s mistake was not transitioning sooner to a more upright American corporate culture the way other Silicon Valley startups have done. So the question now remains: who will be the new head of Uber? Kalanick will remain a part of Uber since he still owns a majority of Uber’s voting shares, but shareholders and board members are surely on the hunt for someone experienced, professional, and ready to get the company back on track and back in the good graces of millions of users around the world.

Trademark Case Roundup

By: Jon Avidor and Qualia C. Hendrickson

As we recently reported in our blog post Disparaging Trademark or Reclaimed Slur? The Supreme Court Weighs In, the high court ruled 8-0 in Matal v. Tam that the Lanham Act’s ban on disparaging marks was an unconstitutional violation of the First Amendment and allowed Simon Tam to move forward with his trademark application for his Asian-American dance-rock band The Slants. This case will certainly open the door to registering many other marks previously rejected or cancelled by the United States Patent and Trademark Office on the basis of their offensiveness, including the polarizing Washington Redskins’ recently cancelled trademark.

In this post, we will review other recent trademark cases that may have implications on businesses in the media, technology, and consumer products and services spaces.

Elliott v. Google, Inc., No. 15-15809 (9th Cir. May 16, 2017).

Issue: Whether the GOOGLE trademark lost its trademark protection on the basis that the word “Google” had become a generic name for the act of searching the Internet. “Genericide” occurs when a trademark has lost its value as a distinctive brand-identifier when “the public appropriates a trademark” and uses the mark to refer generally to a type or class of goods or services without regard to any particular brand or source, and “the primary significance of the term in the minds of the consuming public is now the product and not the producer.”

Decision: The Ninth Circuit Court of Appeals decided in favor of Google, holding that a claim of genericide must relate to a particular type of good or service and that the use of a trademark as a verb does not automatically constitute generic use. GOOGLE is still a protected trademark even if it is used as a verb, as in “I Googled current trademark cases,” because the primary significance of the term in the minds of the public is a single internet search engine, Google, not of search engines in general.

Belmora LLC. v. Bayer Consumer Care AG, 819 F.3d 697 (4th Cir. 2016), cert. denied, 580 U.S. __ (2017).

Issue: Whether a foreign corporation may sue under the Lanham Act—the American federal trademark act—over the unauthorized use of a foreign trademark that has never been used in the United States of America or been registered with the United States Patent and Trademark Office.

Decision: The Fourth Circuit Court of Appeals reversed the lower district court’s holding in favor of an American trademark holder and ruled that a Mexican trademark holder could sue under the Lanham Act. Section 43(a) of the Lanham Act “does not require that a plaintiff possess or have used a trademark in U.S. commerce as an element of the cause of action” for unfair competition, such as for false association and false advertising. The law only requires that a plaintiff be “likely to be damaged” and show its prospective injury is in the “zone of interest” of the Lanham Act, i.e., the deceptive and misleading use of a trademark. Belmora petitioned the Supreme Court to reconsider the Fourth Circuit’s ruling and the Court denied certiorari on February 27, 2017.

Tiffany & Co. v. Costco Wholesale Corp., 127 F. Supp. 3d 241 (S.D.N.Y. 2015).

Issue: Whether “Tiffany” had become a generic term for a style of diamond ring setting, and whether punitive damages were available for clear evidence of infringement.

Decision: The New York district court denied Costco’s claim that using the term “Tiffany” in a generic manner to describe a style of jewelry was covered under the fair use exception to trademark infringement. In light of the evidence of Costco’s clear intention to imitate Tiffany & Co.’s mark and to confuse consumers, Tiffany & Co. sought punitive damages for the infringement. Although the Lanham Act (specifically, 15 U.S.C. §1117(a)) does not allow courts to grant punitive damages in trademark infringement cases, N.Y. General Business Law § 360-M (for registered marks) and New York case law (for all marks) permit punitive damages where an infringer uses another’s trademark to sell a competing product in bad faith, what the court called “wanton or willful fraud or other morally culpable conduct to an extreme degree.”

Princeton Vanguard, LLC v. Frito-Lay North America, Inc., 786 F.3d 960 (Fed. Cir. 2015).

Issue: Whether a trademark that is a compound term (two or more words strung together) should be evaluated for distinctiveness on the strength of the individual words or the strength of the mark in its entirety.

Decision: The Federal Circuit Court of Appeals held there is only one legal standard for genericness, regardless of whether the mark is a compound term or a phrase: (1) identifying the genus of goods or services at issue and (2) assessing whether the public understands the mark, as a whole, to refer to that genus. In evaluating the mark PRETZEL CRISPS, the Trademark Trial and Appeals Board was incorrect in analyzing genericness by the meaning of the individual words instead of the compound mark as a whole.

Couture v. Playdom, Inc., 778 F.3d 1379 (Fed. Cir. 2015).

Issue: Whether offering a service, but not actually providing the service, is sufficient to constitute “use in commerce” to support the mark’s registration as a protectable trademark.

Decision: A mark is “used in commerce” in connection with services, and therefore protectable, when it is (1) used or displayed in the sale or advertising of services and (2) the services are rendered in commerce, which requires a “bona fide use of the mark in the ordinary course of trade,” and at a bare minimum, in an open and notorious public offering or advertisement. Such advertisements must relate to an existing service—a service mark cannot be deemed “used” in commerce when the service has been advertised to the public, but no service has yet been rendered.

Disparaging Trademark or Reclaimed Slur? The Supreme Court Weighs In Matal v. Tam

By: Jon Avidor and Qualia Hendrickson

In a unanimous decision in Matal v. Tam, 582 U.S. __ (2017), the U.S. Supreme Court ruled that federal law prohibiting the registration of disparaging trademarks or service marks was unconstitutional under the First Amendment and that the United States Patent and Trademark Office (“USPTO”) may no longer reject applications to register trademarks deemed potentially offensive.

The “Disparagement” Clause of the Lanham Act

At issue in this case was Section 2(a) of the Lanham Act, which refused federal registration to trademarks and service marks that consist or comprise of “immoral, deceptive, or scandalous matter; or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute . . . .” 15 U.S.C. § 1052(a). According to the Trademark Manual of Examining Procedure, in determining whether a proposed mark was disparaging, trademark examiners would look at “the likely meaning of the matter in question” based on the dictionary definition and other elements of the mark and how the mark is used, and “whether that meaning may be disparaging to a substantial composite”—not necessarily a majority—of the referenced, identifiable persons, groups, institutions, beliefs, or national symbols based on contemporary attitudes.

This prohibition—and case—only applied to registration of trademarks on the Federal Register (either the Principal Register or Supplemental Register). Federal registration provides substantial benefits to the trademark owner, including among other things, a legal presumption of nationwide ownership of a valid trademark, constructive notice to all other persons of the owner’s exclusive right to use the mark in commerce (plus the right to use the ® symbol), and greater monetary remedies in infringement lawsuits. However, prior to this case, potentially disparaging marks that would have otherwise been ineligible for federal registration could nevertheless develop common law trademark rights based on continued use in commerce.

The Slants

Matal v. Tam concerned the Asian-American dance-rock band The Slants, or as their new EP cleverly refers to themselves, “The Band Who Must Not Be Named.” The band applied to register THE SLANTS trademark with the USPTO twice, first in March 2010 and again in November 2011, in Class 41 for use in connection with “Entertainment in the nature of live performances by a musical band.” The USPTO issued an office action denying the application under Section 2(a) of the Lanham Act because the likely meaning of “SLANTS” was a negative term used in reference to the shape of certain Asian people’s eyes “in a disparaging manner because it is an inherently offensive term that has a long history of being used to deride and mock a physical feature of those individuals.” On appeal, the refusal was affirmed by the Trademark Trial and Appeal Board.

Lead singer of the rock band and named appellant Simon Tam argued he named his group The Slants to “reclaim” and erode the Asian stereotype and slur and to empower other Asians to “be proud of their cultural heritage, and not be offended by stereotypical descriptions.” Through their songs and performances, The Slants “weigh in on cultural and political discussions about race and society,” which Tam argued are at the heart of the First Amendment’s protection of free speech and expression. The U.S. Court of Appeals for the Federal Circuit agreed with Tam in a 10-2 ruling, writing, “Whatever our personal feelings about the mark at issue here, or other disparaging marks, the First Amendment forbids government regulators to deny registration because they find the speech likely to offend others. Even when speech ‘inflict[s] great pain,’ our Constitution protects it ‘to ensure that we do not stifle public debate.'” The government appealed the ruling to the Supreme Court.

Appeal to the Supreme Court

The Supreme Court heard arguments on January 18, 2017 (prior to Justice Gorsuch’s appointment) and decided the case on June 19, 2017, holding 8-0 in favor of Tam and The Slants. Justice Alito delivered the opinion of the Court, and Justices Kennedy and Thomas filed concurring opinions. The high court upheld the Federal Circuit’s decision and struck down the disparagement clause of the Lanham Act as a facial violation of the First Amendment to the Constitution, agreeing that the Lanham Act’s provision prohibiting the registration of trademarks that may “disparage . . . or bring . . . into contemp[t] or disrepute” any “persons, living or dead” could not withstand legal scrutiny of laws that discriminate on the viewpoint of the speaker.

While the government may constitutionally regulate or prohibit certain types of speech, these restrictions are narrowed exceptions to the “fundamental principle of the First Amendment that the government may not punish or suppress speech based on disapproval of the ideas or perspectives the speech conveys.” Governmental restrictions on one’s speech based its the content, i.e., either the subject matter or viewpoint of the speech, must meet strict scrutiny, meaning the burden is on the government to prove that the content-based restriction is necessary to protect a compelling governmental interest and is narrowly tailored to serve that interest. The Lanham Act, as well as the Trademark Manual of Examining Procedures, generally establishes viewpoint-neutral guidelines for trademark examiners to determine whether to grant an applied-for mark based on factors such as the mark’s distinctiveness to the consuming public, its similarity to other existing marks in the marketplace, and the mark’s likelihood to confuse consumers, among others. However, the Court ruled that the disparagement clause at issue in this case provides the USPTO with broad discretion to reject trademark applications on the basis that the content could offend particular persons, groups, institutions, beliefs, cultures, or ideologies, and unconstitutionally placed the burden on the applicant to prove the mark was not disparaging—a burden Tam and The Slants could not overcome in their first appeal. While the Government argued that trademarks primarily serve to identify the source of good or services, and are therefore commercial speech entitled to lessor scrutiny than expressive speech, the Court held that allowing the government to approve or disapprove of a trademark’s expressive elements was a violation of applicants’ constitutional free speech rights, and that as a fundamental principle of the First Amendment, “Speech may not be banned on the ground that it expresses ideas that offend.”

In a concurring opinion, Justice Kennedy focused only on the disparagement clause’s viewpoint-based discrimination and how the government could not carve out a subset of language it did not approve of and disguise their viewpoint discrimination as censorship, writing, “By mandating positivity, the law here might silence dissent and distort the marketplace of ideas.” For that reason, the challenged provision of Section 2(a) of the Lanham Act could not pass rigorous scrutiny. He and Justices Ginsburg, Sotomayor, and Kagan found further discussion of the other arguments presented unnecessary.

In a separate concurring opinion, Justice Alito addressed the government’s other arguments, including the “government-speech” doctrine that the USPTO used to defend its right to express its own viewpoint, warning that the argument is susceptible to dangerous misuse. He distinguished this case from a 2015 case, Walker v. Sons of Confederate Veterans, 576 US __ (2015), in which the Court allowed Texas to refuse to print the confederate flag on specialty license plates because license plates are government speech. Justice Alito wrote, “Trademark is private, not government, speech,” and that to allow trademarks, which are created by private individuals or businesses, to be passed off as government speech by virtue of a government seal and registration to it would be to permit the government to limit and silence speech the government found offensive and infringe on individuals’ rights.

Implications on Future Trademarks

The Court’s decision in Matal v. Tam eliminating the disparagement clause of the Lanham Act will certainly open the door to registering trademarks that have been rejected or cancelled under the disparagement clause. Interestingly, Reuters found that, since 2014, the Supreme Court often disagrees with specialized intellectual property courts and has upheld only 2 of 16 cases decided by the Federal Circuit court of appeals, which hears appeals from the administrative Trademark Trial and Appeals Board and Patent Trial and Appeal Board.

Perhaps the most widely known and hotly debated case of a refusal of trademark protection occurred in 2015 when a judge in the U.S. District Court for the Eastern District of Virginia affirmed a 2014 ruling by the Trademark Trial and Appeal Board declaring that the Washington Redskins’ name was offensive to Native Americans, cancelling six of the football team’s trademark registrations. An appeal was on hold in the Court of Appeals for the Fourth Circuit pending the outcome of Matal v. Tam, though in light of the Supreme Court’s decision, the team, which has used the Redskins name since 1932 amid both wide support from fans and vocal criticism from Native American advocacy groups and in the media, believes their dispute with the government will resolve in their favor. The court of public opinion is an entirely different beast, however, so the future of Redskins brand remains to be seen, though in the meantime, owner Dan Snyder says he is “thrilled” with the ruling.

 

*We would like to thank our intern Qualia C. Hendrickson for her contribution to this article.

History of Marijuana Treatment in the United States

By: Sarah Siegel and Danika Johnson

Marijuana use in the United States has been a topic of debate for decades. From being accepted to highly regulated and criminalized, marijuana use has gained significant importance and credibility in the modern age.

While the cannabis plant can be used for various reasons, for example, hemp for fabrics, the use of marijuana for the body dates to the 1850s. In the 1850s, marijuana was available in pharmacies for the medical treatment of nausea, pain, and other ailments. Marijuana was a popular ingredient used in medicines and tinctures. At the turn of the 19th century, government regulation of marijuana began. The Pure Food and Drug Act in 1906 made the labeling of any cannabis in over-the-counter remedies a requirement.

Only a few years after the passage of the Pure Food and Drug Act and as a result of the Mexican Revolution of 1910, the United States saw an influx of Mexican immigrants into the U.S. Mexican immigrants brought with them the marijuana plant and introduced recreational use, and by the 1930s, it became popular throughout the U.S. In 1913, California was the first state to outlaw cannabis, followed by Utah in 1914. Following the Alcohol Prohibition Era, marijuana was seen as the readily available and inexpensive alternative to alcohol, making it even more popular in America.

Since marijuana was used mostly in the Mexican and Black communities, marijuana became the next target for xenophobic fears. Massive unemployment increased public resentment and fear of Mexican immigrants. Journalists, newspapers, and the media all contributed to the negative treatment of marijuana in American culture at the time. By 1931, 29 states outlawed marijuana. The Federal Bureau of Narcotics Commissioner then started a propaganda campaign throughout the U.S. claiming that marijuana caused insanity, reckless and criminal behavior, and death. This effort was made to encourage the remaining states to adopt the Uniform State Narcotic Drug Act.

The adoption of the Uniform State Narcotic Drug Act was not enough. A national propaganda campaign against the “evil weed” pushed for the growing concern Americans had about marijuana. An example includes Reefer Madness, a 1936 film renamed “Tell Your Children,” which showcases a group of students committing crimes after smoking marijuana. The FBN Commissioner published in the American magazine, Marijuana, Assassin of Youth, to continue lobby efforts for the adoption of federal legislation. In 1937, the Marijuana Tax Act was passed by Congress, imposing federal taxes on transfers of the drug and requiring persons dealing in marijuana register their names and places of business with the IRS.

Not everyone in the United States gave in to the national propaganda campaigns. The New York Academy of Medicine issued the LaGuardia Committee Report in 1944, laying out the results of a five-year comprehensive study. They found that marijuana did not lead to the use of morphine, heroin, or cocaine, was not the determining factor in the commission of crime, and the overall publicity regarding its catastrophic effects was unfounded. By the 1950s through the 1960s and 1970s, attitudes towards cannabis use began to shift, increasing marijuana uses acceptance, especially among youth.

While American culture began to shift to acceptance, the federal government continued to criminalize marijuana. In 1970, the Controlled Substances Act was passed, labeling marijuana a Schedule I substance. This imposed many restrictions, some of which are still prevalent today. While states have moved towards legalizing or decriminalizing marijuana, and many individuals have created new businesses, federal legislation prevents those businesses from fully participating in the financial industry.

As states to continue to pass measures to legalize or decriminalize and remove harsh restrictions on marijuana, the hope is that the federal government will follow suit.  Significant campaigns throughout the nation and general acceptance for its use will encourage federal legislation to decriminalize marijuana and allow this industry to expand and develop further.

Benefit Corporations and Purpose-Driven Commerce

By: Jon Avidor

“Brands and consumers will continue to come together to form a more cohesive and fluid business ecosystem….The new era of business is about creating enterprises that work together in tandem to drive commerce that matters.”

– Billee Howard, We-Commerce

Entrepreneurs who seek to harness the power of business and innovation to address and implement solutions to critical social, cultural, and environmental issues are increasingly looking to social enterprise business structures, such as benefit corporations. In her book, We-Commerce: How to Create, Collaborate, and Succeed in the Sharing Economy, creative marketing consultant Billee Howard posits an economy of “we” built on “socialization, sharing, trust, purpose, passion, creativity, and collaboration,” and points to a shift in consumerism as the catalyst for this shift towards purpose-driven commerce. A growing number of innovative businesspeople and founders are foregoing traditional entities like partnerships, business corporations, and limited liability companies, and even not-for-profit corporations, in favor of new models that are designed for socially conscious businesses to commit to more than corporate philanthropy and for charities to pursue commercial activities with fewer restraints.

This article will discuss benefit corporations primarily, as well as social purpose corporations and low-profit limited liability companies, how they are different from traditional business corporations and not-for-profit corporations, and the meaning of the “certified B-Corp” distinction.

Benefit Corporations

A benefit corporation is a for-profit corporate entity, which according to model benefit corporation legislation commentary, “offers entrepreneurs and investors the option to build, and invest in, a business that operates with a corporate purpose broader than maximizing shareholder value and that consciously undertakes a responsibility to maximize the benefits of its operations for all stakeholders, not just shareholders.” Basically, a benefit corporation is a profit generating company that must also consider the impact of its decisions and business practices on its societal stakeholders and the environment, and not solely on its bottom line—referred to as the triple bottom line. Benefit corporations have a stated purpose of creating “general public benefit” and, at its shareholders’ election, one or more specific public benefits as identified in its articles of incorporation. This is a stark contrast from corporations, which exist to maximize shareholder value and whose board of directors could be liable to shareholders for pursuing courses of action that do not enhance corporate profits. See American Law Institute, Principles of Corporate Governance (1994).

Under New York corporate law, a general public benefit is an overall “material positive impact on society and the environment” created by a business and its operations. N.Y. Bus. Corp. § 1702(b). A benefit corporation may also set forth specific public benefits in its Certificate of Incorporation, including, but not limited to, providing goods or services to low-income or underserved individuals or communities, promoting economic opportunity beyond just job creation, protecting the environment, improving health and human services, promoting the arts, sciences, or education, and supporting other benefit corporations. N.Y. Bus. Corp. § 1702(e). California’s first benefit corporation, sustainable outdoor clothier Patagonia, Inc., included six specific benefit purposes in its Articles of Incorporation:

Patagonia Beneficial Purposes
Source:  Patagonia, Inc., Annual Benefit Corporation Report (2016)

For benefit corporations, meeting these public benefit commitments become part of the corporate management’s fiduciary duties and one way in which it’s held accountable. For example, under the model benefit corporation legislation, in addition to its regular obligations to shareholders under business corporation law, officers and directors must consider the effects of any action or inaction upon stakeholders, such as employees, subsidiaries, suppliers, customers, the community, and local and global government, as well as the sort and long term interests of the company, in meeting and best serving its beneficial commitments.

On the board of directors of a benefit corporation, a designated “benefit director” ensures compliance with the corporation’s beneficial purposes and preparing the annual compliance statement to shareholders. While a benefit corporation does not have to be accredited or certified under the model benefit corporation legislation, it must publish an annual benefit report to offer transparency between the corporation, its shareholders, and public beneficiaries, which is sent to shareholders, made available on its website, and sent to the Secretary of State of its state of incorporation. These annual reports must include a description of how the company pursued general public benefit and its specific public benefits and whether these benefits materialized or were hindered in some way, the third-party standard by which it defined and evaluated its social and environmental performance and the results of that overall assessment, and information about its directors, including the benefit director, and benefit officer, if any.

A Note on Certified B Corporations™

B Lab is a nonprofit organization that provides all business, not just corporations, with the resources and community to build socially-conscious ventures that create value for all stakeholders, not just shareholders. “Certified B Corp” designation is similar to Fair Trade USA’s “Fair Trade Certified” label that signals to consumers that the producer was audited and certified as complaint with international Fair Trade standards by this third-party nonprofit organization. “Certified B Corp” status is not a requirement for benefit corporations to secure or maintain benefit corporation status, but rather is B Lab’s endorsement of quality. A business becomes a “Certified B Corp” by meeting certain performance standards relating to governance and transparency, employee compensation and support, community engagement, and environmental sustainability on B Lab’s B Impact Assessment, as well as certain legal entity structure requirements regarding choice of entity and state of incorporation. If accepted for B Lab certification, the company must sign B Lab’s B Corp Declaration of Independence and B Corp Agreement, and pay an annual fee indexed to the business’ annual sales. Here is how benefit corporations relate to Certified B Corporations:

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Source: B Labs, Certified B Corps and Benefit Corporations

Benefit Corporations Compared to Not-for-Profit Entities

A benefit corporation straddles the profit generating goals of a traditional business corporation and the socially beneficial mission and objectives of a not-for-profit corporation, though a benefit corporation is an entity all its own. A not-for-profit entity dedicates its assets, and uses surplus revenue generated from its activities, to further the organization’s mission and objectives, and not for the pecuniary benefit of its members or management. This is distinctly different from a benefit corporation, which is owned by shareholders who receive economic value from their ownership interests, such as dividends and distributions upon dissolution. For that reason, benefit corporations are taxed under the Internal Revenue Code as business corporations—as either C corporations or S corporations—and are not exempted from paying income tax under Section 501 as are many (but not all) nonprofits, such as the well-known 501(c)(3) charitable organization.

Not-for-profit entities are restricted, both by corporate law and tax law, from engaging in certain activities that depart from its mission and, if applicable, its tax-exempt purpose, and often rely on external funding sources, such as patron donations, fundraising, and foundation or government grants. Benefit corporations are not restricted in that way and can pursue diverse revenue streams like a traditional business, but when appropriate, dedicate resources and funds and give consideration to social, charitable, environmental, educational, sustainable, and other public causes and issues like not-for-profits. It’s this balance that has popularized the benefit corporation among socially conscious businesses, and led many well-known and well-respected brands of varying corporate structure to become Certified B Corporations, including Kickstarter, Warby Parker, Ben and Jerry’s, and Etsy.

Other Social Enterprise Business Structures

There are new business models in addition to the benefit corporation, such as the social purpose corporation and the low-profit limited liability company (abbreviated as L3C), that allow founders and shareholders to use profit-generating activities to support chosen social causes. While many states have introduced or enacted benefit corporation legislation, fewer states have adopted the social purpose corporation and low-profit limited liability company entity structures.

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Source (State-by-State Status): Social Enterprise Law Tracker

Converting to a Benefit Corporation

The model benefit corporation legislation provides a statutory mechanism for converting between a business corporation and a benefit corporation structure since both are typically governed by a common set of corporate laws. This conversion typically involves an amendment to the corporation’s articles of incorporation to include the requisite commitment to a publicly beneficial corporate purpose. Both New York and Delaware have such conversion statutes.

However, it’s often not as easy to convert between a not-for-profit corporation and benefit corporation structure since states typically govern not-for-profits under a set of not-for-profit corporate laws distinct from business corporation law. In New York, not-for-profit corporations are not eligible for conversion because they are incorporated under the Not-for-Profit Corporation Law, and not the Business Corporation Law, so in order to make the transition, the not-for-profit would have to dissolve and reincorporate as a benefit corporation under the Business Corporation Law. So this entity change is certainly possible with just a few more steps.

What’s the Point of New York’s LLC Publication Requirement?

By: Steve Masur, Amanda Chiarello and Luca Turchini

Every new limited liability company (LLC) organized under the laws of the State of New York must announce its formation by publishing a notice in two newspapers for a period of six weeks, which could cost the LLC up to $2,000 depending on where in New York it principally conducts its business. Despite the continuous and loud outrage of lawyers, investors, and others that the cost of publication hinders new startups to do business in New York, and the fact that for some reason the same requirement does not apply to corporations, the New York State Legislature has consistently reaffirmed the requirement. Until lawmakers discontinue the publication requirement, it’s up to law firms to work with new ventures to dispel confusion and help our clients’ businesses succeed in New York.

The LLC Publication Requirement

Section 206 of the New York Limited Liability Company Law requires every limited liability company to give public notice its formation in two newspapers in the county in which the LLC is located, one newspaper of daily circulation and the other of weekly circulation, for a period of six consecutive weeks. Despite the information being readily available on the New York Department of State’s corporation and business entity database, the LLC must generally include in the notice its name, formation date, address of its principal place of business, registered agent’s name and address (if any), the date or event that would trigger its dissolution (if not perpetually existent), and business purpose. The county clerk of the LLC’s home county typically designates the two newspapers in which the new LLC must publish. Once completed, the newspapers will provide the LLC with affidavits of publication, which the LLC files with the Secretary of State along with a Certificate of Publication.

The most significant problem with the publication requirement is the cost of running the notices in the two newspapers, and since the county clerk typically assigns the newspapers from a (sometimes secret) master list instead of allowing the LLC to choose the two newspapers that charge the least, costs can vary wildly, especially in New York City counties. Depending on the county in which the LLC is located, and the periodicals specified by the county clerk, the total cost hovers between $1,500 and $2,000.

Many LLCs see no immediate utility in publishing an expensive announcement that no one reads and simply ignore the requirement, allocating this money to more pressing areas of their new businesses. However, an LLC that does not comply with the publication requirement within 120 days of filing its articles of organization with the State forfeits its right “to carry on, conduct or transact any business” in New York. Practically, this means that the LLC loses standing to bring a lawsuit in New York, for example, to enforce a contract against a non-paying customer or supplier, and that the LLC would not be able to obtain a perfect Certificate of Status (also referred to as a Certificate of Good Standing or Certificate of Existence), which could be required to register in other states and even obtain a loan. However, noncompliance does not prevent an LLC from entering into valid contracts or forfeit the liability shield of its members, managers, or agents to the extent such liability may be limited by law. An LLC may reinstate its authority to carry on, conduct, or transact business in good status by completing the publication requirement as if it were just organized in New York. Thus, a noncompliant LLC wishing to sue, for example, would simply publish, file its Certificate of Publication with the State, and then file its complaint in court, or publish simultaneously with initiating its lawsuit and come into compliance prior to opposing counsel’s motion to dismiss for lack of standing.

The practical effect of the penalty language is seemingly nothing more than intimidation since there have been no visible enforcement actions against LLCs that lack the legal authority to do business in New York. Based on the Department of State’s inaction, it seems unlikely (but not impossible) that the Secretary of State maintains a record of noncompliant LLCs, further reducing any real liability for failing to publish. Today, LLCs still face the possibility of sudden enforcement of this requirement, and therefore, risk-averse attorneys would advise new ventures intent on an LLC structure to either comply with the publication requirement or simply organize elsewhere.

Intent versus Impact

In a 2006 letter to Governor George Pataki and legislative leadership, the New York County Lawyers Association cited consumer protectionism as the original legislative intent of the “antiquated” publication requirement, observing, “publication of the notice of formation ostensibly serves to put the public on notice that an entity has been formed to do business…within a corporate structure that shields its owners from personal liability for the debts, obligations and liabilities of the business entity.” But if this is the true purpose of the requirement, then it’s surely a holdover from a prior age, given the public’s easy ability to obtain the same information from Department of State’s corporation and business entity database for free. Furthermore, the commitment to print media and averseness to a more accessible and less expensive electronic format gives further pause. It is unlikely the statute achieved its stated goal of causing more LLCs to publish their existence. Instead, it seems clear that well-advised new businesses will use a different entity structure in New York, or will organize in a different state, as long as it can avoid filing an Application For Authority required for a foreign LLC to properly do business in New York.

So Why Have the LLC Publication Requirement at All?

Given the clear discrepancy between the stated purpose and actual consequences of the publication requirement, there must be some valid reason the New York State Legislature continues to preserve this requirement. It’s long been suspected and alleged that the powerful newspaper and print industries, which benefit from being on the short list of newspapers kept by county clerks across the State, have a vested interest in requiring the thousands of LLCs that form each year in New York to publish their notices.

Section 206 has strict requirements for publishing the notice in print, and not electronically. In addition, the county clerks maintain a short list of newspapers that fit the statute’s strict circulation and publication frequency requirements, and these approved newspapers can charge a premium for publishing the notices of formation. In Kings County (Brooklyn), the county clerk will not even release the full list to the public, further adding to the mystery of the cabal. Consequently, the publication requirement forces an LLC choosing to do business in New York to pay what amounts to a state mandated formation tax to a private publication, of an amount arbitrarily set by that publication. Like a Mario Puzo novel, an LLC wanting to do business in New York is given “an offer it can’t refuse” since its only other option is to willfully ignore the law. Some have even argued that the statute’s formatting requirements are “quasi-judicial” and will create a controlled market that is likely to further increase this premium.

An examination of the 2006 legislative history adds credence to this theory. The original Chapter 767 amendment scaled the publication period back to four weeks, but at the eleventh hour, the period was increased back up to six weeks. Two more weeks does not meaningfully increase the public’s chance of becoming aware of an LLC. The public already enjoys unfettered, 24-hour access to a database containing information about every New York business. The only beneficiaries are the periodicals that New York LLCs must pay to publish a fourteen-line ad, which get two more weeks of revenue.

New York or Bust

Many new LLCs avoid organizing in New York to bypass the publication requirement, or make the judgment to either not comply or chose another form. Section 206 additionally applies to foreign LLCs with sufficient contacts in New York to warrant filing for authority to do business within the State. Yet New York is the crossroads of the world, a global hub for business, technology, innovation, media, and culture. It’s unlikely that LLCs can avoid doing business in New York, so what are they to do?

Almost any business starting in New York would wish to spend its money more strategically and avoid the risk of having the LLC be declared invalid. As long as the New York State Senate and Assembly continue to overlook the negative effect that the publication requirement has on new ventures and the larger industries integral to business innovation and growth, businesses with a choice will form LLCs elsewhere, while those with no choice will choose a different form or buckle to the extortion.

Attorneys Counseling Their Clients

Responsible attorneys should counsel their clients to either form a corporation, or when forming an LLC, to comply with the publication requirement to remain in good standing within New York. However, since the penalty does not revoke the right to contract, clients may be made aware that the only direct penalty for not complying with the law is the loss of the right to bring lawsuits within the State. As a result, if a noncompliant LLC should ever need to file suit in New York, it must account for the time required to comply with the publication requirement before initiating its claim.

A Virtual Reality Check – Oculus v. ZeniMax: Applying Copyright Law to VR

By: Steve Masur and Sarah Siegel

On February 1, 2017, a Texas jury found Facebook subsidiary Oculus VR, Inc. liable for $500 million in damages in its dispute with ZeniMax over Oculus Rift, a virtual reality technology acquired by Facebook in 2014. The jury found Oculus infringed upon ZeniMax’s copyrighted computer code and misrepresented the origin of its VR technology, and that its co-founder violated a non-disclosure agreement he had signed with ZeniMax. However, the jury found Oculus had not misappropriated ZeniMax’s trade secrets when creating Oculus Rift.

Many eyes were fixed on this case, especially from companies such as Google, Samsung, and Sony, which have all recently launched their own virtual reality headsets. With new emerging technology comes a legal landscape that is still developing and taking shape. This case, which dealt with the fundamentals of intellectual property law, provides an example of how copyright law is uniquely applied to virtual reality technology.

Background 

Like many start-up stories, this too starts in a 17-year-old’s parent’s garage with a video game enthusiast who wanted to improve and create a better technology experience. This particular 17-year-old was Palmer Luckey, and the technology in this story is the Oculus Rift virtual reality headset.

Oculus Rift was an idea that came from Luckey’s frustration with the existing virtual reality headsets on the market—the displays were poor quality, bulky, had a low field of view, and carried expensive price tags. He began working on his own design to improve upon these inadequacies, and created what would later be known as the Oculus Rift. In its early days, the Oculus Rift was created using duct tape, ski goggles, and wires. As Luckey made improvements and developments to the headset, he posted updates to a virtual reality online forum. John Carmack, a fellow VR enthusiast, kept up-to-date on Luckey’s forum posts and eventually requested a prototype from Luckey. At the time, Carmack worked at id Software, a software development company owned by ZeniMax, and was a notable video game developer for such series as Doom. At that time, ZeniMax had also been investing millions of dollars into researching and developing virtual reality technology. Luckey sent Carmack one of his two prototypes, and Carmack began making his own improvements, including writing code for the headset. With Luckey’s permission, Carmack demonstrated the Oculus Rift at a 2012 video game trade show by using the Oculus Rift headset with his new game, Doom 3. One year later, Carmack resigned from id Software for a new position as chief technology officer at Oculus Rift.

In March 2014, Facebook announced its acquisition of Oculus VR for $2 billion, and two months later, ZeniMax announced its intent to sue Oculus and Facebook over the Oculus Rift and its code.

Misappropriation of a Trade Secret

A trade secret is proprietary information that carries with it economic value solely by virtue of it not generally known or readily discernible by people who can benefit from it, and is the subject of reasonable efforts to maintain its secrecy. A misappropriation of a trade secret is the improper disclosure or acquisition of that secret.

In this lawsuit, ZeniMax argued that Carmack took company secrets with him when he left id Software for Oculus. Carmack never denied that he worked on the code for the Oculus Rift prior to his employment at Oculus, but he contended that this work was done in his free time, and not while he was on the clock at ZeniMax. ZeniMax, however, claimed that Carmack’s integral work and research for Oculus Rift was not done during his free time, but rather done during his employment at ZeniMax, using ZeniMax’s resources, computer, offices, and employees. The jury did not agree with ZeniMax and did not deem the work Carmack brought to Oculus as a misappropriation of a ZeniMax trade secret, meaning that ZeniMax trade secrets were not contributed to Oculus and its headset.

Copyright Infringement of Virtual Reality

Virtual reality source code is protected by copyright law, not patent law, as an original expression once fixed in a tangible medium, and therefore, any infringement on VR software is governed by the rules of copyright. Under copyright law, an affirmative defense to a claim of infringement is fair use, which allows parts of a copyrightable work to be used in a new work, so long as the new work is transformative, that the nature and objective of the underlying copyrighted work is different than the new work, the new work does not substantially and qualitatively use the original work, and that the intended market for the work is different than the old work.

In this case, Oculus’ fair use defense did not hold up because the jury found that the computer code Carmack took was “non-literally” copied when it was integrated in the Oculus technology, meaning that Carmack changed aspects of the code he developed at ZeniMax to create a different code and used that to create Oculus, which is a similar program with similar functions. Additionally, the market for the new code used in Oculus was the same as the code ZeniMax would use for its virtual reality headset which was in development. Ultimately, the jury found Oculus infringed upon ZeniMax’s copyright in its VR code.

The Implications for Virtual Reality

The gray area of this decision is how to apply and interpret it. How different must copyrighted computer code be in order not to constitute a copyright infringement of prior existing code? Since the code used in Oculus was different than ZeniMax’s code, but used for a similar product, does ZeniMax possess the copyright on all code for virtual reality headsets? Evidently, these are just two of many unanswered questions that have been left in this decision’s path, and which have ramifications on legal and business affairs decisions, including how to structure and present documents governing technology development relationships, and even outcomes of disputes.

After the case was decided, ZeniMax filed an injunction against Facebook to stop the sale of the Oculus Rift and its development kits. Facebook intends to appeal the court’s decision. The continuing shake-out of this case and its implications for virtual reality will be closely followed as it unfolds.

*We would like to thank our intern Sarah Siegel for her contribution to this article.

“Cannabusiness” in the U.S.

By: Steve Masur and Amanda Chiarello

What’s Kosher, What’s Crowded, and What Will Get Crushed?

As public opinion continues to shift in favor of legalizing marijuana and state legislatures respond accordingly, many people, including investment firms and financial analysts, believe that legalized cannabis and cannabis-related products will become the next big market. We’ve been advising an increasing number of entrepreneurs with cannabis-related products—from a high-end chocolatier to an investment fund to a mobile app that directs the user to dispensaries based on the strains carried. This article addresses some questions that often arise when entrepreneurs consider getting into a cannabis-related product business, or “cannabusiness.”

A Patchwork of Laws

One of the biggest issues entrepreneurs encounter when venturing into the cannabis industry is the inconsistency at the federal and state levels, and among the states, regarding the legal status of marijuana.

Although numerous states have legalized marijuana, the drug remains illegal at the federal level. The Controlled Substances Act (CSA) (21 U.S.C. § 801 et seq.) classifies marijuana as a Schedule I controlled substance, which the CSA defines as a drug or substance with a high potential for abuse and without currently accepted medical use and accepted safety controls.

As of the date of this post, twenty-six states and the District of Columbia have reformed their marijuana laws in some form, whether to legalize for medicinal or recreational use or to decriminalize. Legalization refers to repealing the prohibition on cultivating, possessing, and using cannabis, sometimes only for a specific purpose (e.g., medicinal use), whereas decriminalization just lessons enforcement measures and associated penalties, often depending on the amount of marijuana. Often, both legalization and decriminalization measures are limited by restrictions relating to public usage, age, driving under the influence, licensure, and other public safety issues. Even in states where marijuana is legal, cannabusinesses still face significant issues when attempting to operate legitimate commercial enterprises.

Taxation and Finance

Since marijuana is illegal at the federal level, cannabusinesses often run into difficulties when filing their federal income tax returns. While Section 61 of the Internal Revenue Code does not differentiate between income derived from legal and illegal sources, cannabusinesses remain obligated to pay tax on its taxable income, though Section 280E bars medical and recreational marijuana businesses, which may be operating legally in their home states, from certain benefits afforded to other “legal” businesses under federal tax law, such as taking tax deductions. This means cannabusinesses are taxed on their gross income without any deductions for business expenses, which according to a 2015 New York Times article, leads to these businesses paying as much as 70% of its profits in federal income taxes, which many entrepreneurs cannot sustain. The IRS has put out a memorandum on this topic. Cannabusinesses are also responsible for state income taxes, sales taxes, and, in many cases, excise taxes as well.

In addition to the high tax burden, cannabusinesses also face banking obstacles. Even though the Department of the Treasury issued a guidance on how banking institutions might serve marijuana related businesses, many banks remain reluctant to take on clients in the marijuana industry for fear of legal repercussions, such as government seizure by the Federal Deposit Insurance Corporation (FDIC) or charter forfeiture. This forces some cannabusinesses to operate on an all-cash basis, making it harder to track revenue and pay taxes.

Intellectual Property

While trademark rights arise from use in commerce and do not depend on registration, filing for and obtaining a federal trademark registration from the United States Patent and Trademark Office (USPTO) affords the owner a powerful tool in its brand protection arsenal. While the USPTO will not necessarily reject an application simply because the words “marijuana” or “cannabis” or a graphic of a cannabis leaf is part of the applied-for mark, the USPTO will reject a mark if the class description in its application contains goods or services that are illegal at the federal level. The Trademark Manual of Examining Procedure requires that, to be valid for registration, “the use of the mark has to be lawful,” and if it is not, “the use of the mark fails to create any rights that can be recognized by a federal registration.” Section 907 specifically calls out goods or services involved in the sale or transportation of a controlled substance or drug paraphernalia in violation of the Controlled Substances Act as the basis for refusing registration, regardless of state law. The USPTO has granted trademarks for goods and services that do not pertain to the sale or transportation of the Schedule I drug, for example, LEAFLY, for a website that provides visitors with cannabis recommendations, dispensary locations, and cannabis events, and WEEDMAPS, for a website that finds local dispensaries and delivery services. This is not to say that cannabusinesses are not afforded any trademark rights in states where their businesses are legal, as state trademark statutes and common law unfair competition law continue to apply.

Federal copyright law has proved more lenient, and the Copyright Act of 1976 (17 U.S.C. § 101 et seq.) provides very few prohibitions on the subject matter or nature of a work eligible for copyright protection. In an article written for the American Bar Association’s magazine Landslide, one former USPTO examining attorney pointed to cannabis grow guides and cookbooks as an example of how federal copyright law can protect cannabis-related products and further stated, “For cannabis brands, federal copyright protection is available to protect the text and artwork on logos, labels, product tags, product packaging, instructional materials, and the ornamental product design, as long as the foregoing contain sufficiently original and creative content to be copyrightable.” Case in point are High Times and Snoop Dogg’s cannabis lifestyle media platform, Merry Jane.

Making and Enforcing Contracts

Contracts made for an illegal purpose, or where the purported consideration or object of the contract itself is illegal, are void and unenforceable. This can present cannabusinesses with significant problems in carrying on a successful business considering the federal prohibition and interstate inconsistencies, especially with out-of-state suppliers, merchants, retailers, and consumers and on nationwide e-commerce platforms. However, various trial courts in states where marijuana is legalized have upheld the enforceability of certain cannabusiness contracts since contract law is largely a matter of state law and, therefore, their legality or illegality would depend on the underlying state law, and not on federal law.

For example, in Green Earth Wellness Center, LLC v. Atain Specialty Insurance Co., 63 F. Supp. 3d 821 (D. Colo. 2016), a federal district court judge in Colorado ruled that an insurance company could not void its commercial liability policy and deny coverage to a medical marijuana business following wildfire damage to its plants and theft of its plants. The judge rejected the insurance provider’s argument that the federal prohibition on marijuana required the policy be void on public policy grounds since medical marijuana is legal under Colorado law and the company willingly, knowingly, and intelligently entered into the contract to insure the medical marijuana dispensary.

The Future of the Market

In a 2016 report titled The Green Gold Rush, M&A advisory and financing firm Ackrell Capital, which launched a venture fund to target the cannabis industry, forecasted that the legal cannabis market for recreational and medicinal use will rise to approximately $9.5 billion by 2019, $50 billion by 2023, and $100 billion by 2029, though these projections assume marijuana prohibition ends by 2020. As we approach the 100-year anniversary of alcohol prohibition in the United States, we may be on the cusp of a watershed moment in public policy, yet exactly when, or how, remains difficult to predict for entrepreneurs and investors.

For such time as marijuana remains illegal at the federal level and in about half of the states, a cannabusiness could be shut down at any time, and as a result, everything from finding investors to creating good business practices for manufacturing products to working out legal lines of distribution will remain difficult. Still, as we have seen time and time again, the biggest and greatest entrepreneurial opportunities are rarely to be found where everyone else is looking, or without risk—and that is what funds like Ackrell Capital are betting on. Entrepreneurs must decide for themselves whether the risks are worth the possible huge rewards.

*We would like to thank our intern Amanda Chiarello for her contribution to this article.