This Document Contains Chapters 24 to 26 Chapter 24: Personal Property, Real Property, and Land Use Law OVERVIEW This chapter provides students with an overview of property law. It covers the categories and types of property, and then focuses on personal and real property (intellectual property is covered in Chapter 25). The chapter covers ownership rights, landlord-tenant relationships, and government regulation via zoning and eminent domain. KEY LEARNING OUTCOMES Outcome Accreditation Category Distinguish between tangible property and intellectual property and give examples of property used in business. Knowledge, Analysis Explain the concepts of title, bundle of rights and ownership by possession, and identify the individual rights that landowners have in real property. Knowledge List and give examples of the duties, rights, and remedies of landlords and tenants in an agreement to lease real property, as well explaining differences between legal protections for tenants in commercial leases versus residential leases. Knowledge, Analysis, Critical Thinking Articulate and give examples of laws that regulate the use of real property by its owners, including the government’s rights and limits when exercising eminent domain. Knowledge, Analysis TEACHING OUTLINE A. Definition and Categories of Property [P.657] Points to emphasize: • The term property in a legal sense is defined broadly as having a set of legal rights over others to use the property exclusively, and the law of property recognizes two distinct categories: tangible property and intellectual property. B. Tangible Property [P.657] Points to emphasize: • Tangible property is property that can be touched and physically possessed, including both personal property and real property. • Personal Property: Personal property is both tangible and movable and can be owned or leased. • Personal Property: Rights of Ownership and ownership by Possession: Property ownership (title) is fundamentally a bundle of rights whereby the titleholder has exclusive control, possession, and use of the property. o Found Articles: Finders of lose property obtain title to the good by possession, except against the actual owner. o Adverse Possession: The rule of adverse possession states that once the state statutory period has passed, the possessor of the goods is protected from any suit to recover the property except by its true owner. o Good Faith Purchasers: Sellers cannot convey better title than what they have; therefore, if a buyer purchases stolen goods the actual owner may still recover the property, irrespective of whether the buyer who purchased the goods did so in good faith and did not know they were stolen. o Bailments: Bailments are created when the bailor (owner of the property) entrusts a bailee to temporarily hold the property, usually for the parties’ mutual benefit. Case 24.1: Ziva Jewelry v. Car Wash Headquarters, 897 So.2d. 1011 (Al. 2004) [P. 659] Facts: In connection with his employment, Smith drove his own car to meet with potential customers and traveled with samples of expensive jewelry which he typically kept locked in the trunk. In August 2000, while returning from a trade show, Smith stopped to get his car washed at a car wash owned and operated by Car Wash Headquarters (“CWH”). Smith left his keys with a CWH employee, watched the car as it went through the tunnel, and observed an employee driving the car a short distance to the drying area. As Smith paid the cashier, someone jumped into Smith’s vehicle and drove off. The jewelry, valued at over $850,000, was gone and was never recovered. Issue: Does CWH, as bailee, have liability for the jewelry inside the car since they failed to exercise due care to safeguard and to return the bailed car and contents to Smith? Ruling: No. The court ruled that no bailment of the jewelry had been created. The court held that Ziva could not establish that CWH expressly or impliedly agreed to take responsibility for the jewelry hidden inside Smith’s trunk. Since Ziva acknowledged that the jewelry was not plainly visible, there was no reason for the employees to foresee that the trunk contained expensive jewelry. Case questions 1. If Smith’s car was never recovered, would CWH be liable as a bailee for the car? Answer: Likely yes. The court held that although a bailment was not created for the jewelry, the car was in their control and a bailment relationship existed. 2. When a bailee takes a car as part of a bailment relationship, aren’t they also assuming liability for what is inside? Answer: Not necessarily. The test is “reasonable foreseeability. No foreseeability can extend to every possible item in a car. Concept Summary: Personal Property [P.659] • Leased Personal Property: UCC Article 2A: Lease agreements are a form of personal property contract and are governed by the state statutory laws modeled after Article 2A of the UCC. • Real Property: Source of Law: Primarily state statutes, although some common law principles still exist, with the Uniform Residential Landlord-Tenant Act (URLTA) serving as the model statute governing the legal relationship between residential landlord and tenant. • Ownership Rights: To owner of a parcel of real property is said to have a bundle of rights associated with ownership, including land, any structures built upon it (improvements and fixtures), as well as plant life and vegetation. o Use and Enjoyment of the Land: Generally, landowners have the right to use and enjoy the use of their property without interference from others (nuisance). o Subsurface Rights: Landowners have rights to the soil, and to any mineral, oil, or natural gas among the soil. o Water Rights: Landowners have the right to reasonable use of any streams, lakes, and groundwater that are fully or partially part of their property. o Airspace Rights: The law contemplates ownership of airspace by drawing an imaginary line emanating from the borders of the property into the sky, with the exception that landowners may not use this right to prevent airplane flights over their property. Case 24.2 Fontainebleau Hotel v. Eden Roc, 114 So. 2d 357 (Fl. 1959) [P.662] Facts: Fontainebleau was in the process of constructing a 14-story addition to their resort hotel when Eden Roc Hotel, a competitor owning the adjoining property, filed suit asking the court to prohibit further construction of the addition, alleging that the shadow caused by the new addition would extend over the Eden Roc’s resort pool area. They argued that this interference with sunlight and air violated the Eden Roc’s air rights, was causing Eden Roc to lose profits because the resort was now less desirable for guest wishing to use the pool facilities, and that the construction plan was based on ill will between the owners of the resorts. Issue: Did Eden Roc’s airspace rights include solar rights as well? Ruling: No. There is no legal right to the flow of air or light, and there is no cause of action so long as the structure serves a legitimately useful purpose. Answers to case questions: 1. If the Eden Roc could prove that the addition was completely out of spite, would this additional fact affect the court’s decision? Answer: If Eden Roc could prove that this addition was completely out of spite, this would not be likely to affect the court’s decision by itself. The court noted that the universal rule still applies even though the addition causes injury to another by cutting off the light and air and interfering with the view that would otherwise be available over adjoining land in its natural state, regardless of the fact that the structure may have been erected partly for spite. Therefore, as long as Fontainebleau could counter with evidence that the addition serves a useful and beneficial purpose, regardless of whether or not Eden Roc could prove that this addition was completely out of spite, there would be no cause of action. 2. The court also notes that individuals could build as high or in any way that they wanted provided that it does not violate any laws, restrictions, or regulations. If the Fontainebleau was in violation of any code or regulation would the outcome of the case have been different? Why or why not? Answer: If Fontainebleau were in violation of any code or regulation then the outcome of the case may have been different. As long as Eden Hoc can show that Fontainebleau’s statutory violation would have an appreciable difference in the problem that is the subject of the controversy, then Fontainebleau’s violation would be actionable. The basis behind such reasoning is that these laws, restrictions, or regulations are implemented because public policy demands so, and a violation of any of these prohibitions goes against public policy as a whole. • Real Property: Forms of Ownership Interest: There are seven legally recognized interests--the four that are important to business owners and managers are (1) fee simple, (2) life estate, (3) leasehold estate, and (4) easements. o Fee Simple: Fee simple absolute is the highest level of ownership because it allows the titleholder unrestricted ownership rights, whereas fee simple defeasible is a fee simple right with certain restrictions, the violation of which results in property ownership reverting to the original owner. o Life Estate: An ownership interest that lasts for a lifetime of a particular person (a life tenant), who may not sell, pledge, or convey the building in any way during ownership (e.g. a business succession plan designed for the transition of ownership of a family owned business from one generation to the next). • A life estate defeasible is a life estate with a restriction attached in some way. o Leasehold Estate: An ownership interest that affords the least amount of rights because it grants only a qualified right to use the real estate in an exclusive manner for a limited period of time (e.g. the landlord-tenant agreement). o Easements: Privileges to use the real estate owned by another arising by (1) an express grant, (2) implication or necessity, or (3) prescription (e.g. the grant by property owners to utility companies for the privilege to install and maintain gas and water lines). • A license is permission to use the property, but is revocable at any time at the owner’s discretion. Self-Check: Ownership Interests: What is Swineburne’s ownership interest? [P.665] • Adverse Possession: Gaining title requires that the adverse possession must have been open, notorious, and visible; exclusive and actual; and continuous. o Open, Notorious, and Visible Possession: The true holder of title cannot be relieved of that title unless she could reasonably be expected to know that another person has taken possession of the real estate and that the adverse possessor intended to assert a claim to its ownership. o Exclusive and Actual Possession: The adverse possessor must show that she was in exclusive control of the property and did not share control or possession of the property with the true owner or the public generally. o Continuous Possession: The adverse possession of the property must be continuous (cannot abandon the property) for a period of time set down by state statute or common law. Case 24.3: 2 North Street Corporation v. Getty Saugerties Corporation, 68 A.D.3d 1392 (NY App. Div. 2009) [P.666] Facts: 2 North Street (2 North) is a corporation that owned a parcel of real estate used for a shopping center and a parking lot. Getty owned the adjacent lot and had operated a gas station. A fence runs close to the boundary line between the properties, but lies entirely on Getty’s property. A narrow 0.129-acre strip of land between the boundary line and the fence exists. 2 North maintained the strip of land from the time the company purchased the property including 23 years of maintenance plus 2 North planted vegetation, removed rubbish and debris, and deposited snow. Issue: Has 2 North acquired ownership rights in the strip of land through adverse possession? Ruling: Yes. The court ruled that 2 North had met their statutory burden of establishing that the character of the possession is hostile and under a claim of right, actual, open and notorious, exclusive and continuous for the statutory period of 10 years. Case Questions 1. Was 2 North’s use “notorious” given the fact that it is likely that Getty didn’t realize that the land strip was on their property? What does one have to do to use property in a “notorious” fashion? Answer: Notorious has more to do with displaying intent to own the land such as building a fence etc. Here they maintained and improved the property and used it to deposit snow from their lot. That is notorious enough. 2. Should Getty be compensated for the strip of land taken by adverse possession? Should there be an offset for all of the money invested by 2 North in maintenance? Answer: Typically, the notion s that the former owner abandoned the property by allowing others to care for it, so it had no value to the owner in the first place. C. Sale of Real Estate [P.667] Points to emphasize: • The most common way for commercial real estate to be transferred is through a sale, whereby the seller and the buyer will typically agree on essential terms about the purchase and enter into a written agreement of sale for the purchase of real estate. D. Laws Governing Landlord-Tenant Agreements [P.667] Points to emphasize: • A lease is an agreement between a landlord and a tenant for the rental of real estate and the sources of law governing leases range from state statutory protections of residential tenants to common law principles governing certain contracts. • The law tends to offer more protection to residential tenants than to commercial tenants because a certain level of business and legal acumen is imputed to business owners and managers. • Tenant Rights: Tenants have three basic rights: (1) possession (the tenant’s right to possess and occupy the property), (2) quiet enjoyment (tenant’s right to use the premises without interference from the landlord), and (3) habitability (the tenant’s right to have the leased space in a reasonable condition). • Tenant Remedies: In the case of a violation of the tenant’s right, the tenant may either terminate the lease and sue the landlord for damages, or continue the lease and recover damages. o If the tenant cannot feasibly use the premises for its intended use because of landlord neglect or inaction, the tenant may claim to have been constructively evicted and may vacate the premises and terminate the lease without any further liability to the landlord. • Tenant Duties: The duties of a tenant are to pay the rent and to act reasonably in care and use of the property (not disturbing other tenants and notifying the landlord of any needed repairs so that the property remains safe). • Landlord Rights and Remedies: In a case that a tenant violates her duties, the landlord may keep any security deposit held by the landlord, and/or evict (remove) the tenant from the premises. • Assignment and Subletting: Absent an agreement to the contrary, tenants may assign (for the full term of the original lease) or sublease (for any period of time less than the full term) their interests in a property. o Landlords may sell their property to a third party who must honor any current remaining lease agreements. Concept Summary: Landlord-Tenant Agreements [P.669] Solutions for Managers: Maximum Leverage in a Lease to Reach Business Objectives [P.671] E. Regulation of Commercial Land Use [P.670] Points to emphasize: • State and local governments frequently pass statutes and ordinances that impose regulation on how a landowner may use a particular parcel of real estate, including zoning ordinances and environmental regulations. • Zoning Ordinances: When a local government passes a zoning ordinance, it is exercising its police powers to advance legitimate objectives of the municipality as a whole. o Use Regulation: Municipalities are typically divided into zones, in each of which only certain use of the land is permitted (e.g. industrial, retail, and residential). o Enforcement and Appeals: A local administrative agent such as a zoning officer or building inspector employed by the municipality typically enforces local use ordinances, and a zoning board or commission is often appointed by the local government to handle appeals from decisions of the zoning officer and to consider applications for variances. o Limits on Zoning Regulations: Courts have ruled that the law sets limits on local government’s right to regulate private property usage through a variety of constitutional protections of property owners, including issues regarding eminent domain, procedural due process, and discrimination. • Environmental Regulation: Governments may impose environmentally based land use regulations so long as they advance some substantial and legitimate state interest. o Courts have generally held that wetlands and coastlands preservation ordinances that restrict the owner’s right to develop, fill, or dredge the land are a legal use of the government’s police powers. F. Eminent Domain [P.672] Points to emphasize: • The authority of the state and federal government to take private property is called the power of eminent domain, which is derived from the Fifth Amendment that provides “[N]or shall private property be taken for public use without just compensation.” • Procedure: Eminent domain is traditionally invoked using a condemnation proceeding, whereby once the government decides that certain real estate is necessary for public use, they begin to negotiate sales agreements with the private property owners of the areas to be taken. o If the negotiations fail, the government will formally institute a judicial proceeding to condemn the real estate and the court will be sure that procedural rights are being afforded to the property owner and will determine the fair market value of the real estate. • Public Use: The Supreme Court has construed the public use language very broadly for uses outside the traditional uses so long as the government can demonstrate that their actions were rationally related to some conceivable public purpose. Case 24.4 Kelo v. City of New London, 545 U.S. 469 (2005) [P.673] Facts: The City approved an economic development plan that was projected to create more than 1,000 jobs and increase taxes and other revenue by constructing a waterfront conference hotel; a marina; and various retail, commercial, and residential properties. The City’s development authority designated a large area composed of adjacent parcels of real estate to be condemned in order to redevelop the property consistent with the redevelopment plan, and the City’s agent brought condemnations via the power of eminent domain against nine unwilling owners. Although the City conceded that the condemned properties were not part of the blighted areas, they were condemned simply because of their location in the proposed development area. Issue: Does the City’s plan qualify as a public use within the meaning of the Takings Clause of the Fifth Amendment to the U.S. Constitution? Ruling: Yes. Even though some of the uses would be private in nature, the Court ruled that the standard to be used is the broader interpretation of the property being used for a public purpose. The Court found that the overall elimination of blight is a legitimate public purpose and held that the City’s plan was a valid exercise of their eminent domain power. Answers to case questions: 1. In dissenting opinions, members of the Court argued that this decision makes all private property vulnerable to being taken and transferred to another private owner (against established principles the Court mentioned earlier), so long as the property is upgraded in some way. Moreover, they argued that this decision is advantageous to large corporations or individuals with political power or connections, while those with few resources are disadvantaged. Do you agree? Why or why not? Answer: One could reasonably agree with the dissent in this case because given the Court’s broad interpretation, they essentially eliminated any distinction between private and public use of property and indirectly removed the words “for public use” from the Takings Clause of the Fifth Amendment. Here, a costly urban-renewal project whose stated purpose is a vague promise of new jobs and increased tax revenue is a stretch from the framer’s choice of words in “public use.” Moreover, the beneficiaries are likely to be those private citizens with disproportionate influence and power in the political process with the resources to lobby for these profitable “economic development” projects. Extending the concept of public purpose to encompass economically beneficial goals increases the odds that these losses will fall disproportionally on poor communities. Those communities are not only systematically less likely to put their lands to the highest and best social use, but are also the least politically powerful. 2. Would the case have been decided differently if the project built only a large industrial park? Why or why not? Answer: Although the court ruled that the standard to be used is the broader interpretation of “public purpose”, an industrial park alone would be outside the scope of this understanding. In Kelo, the court based their rational on the comprehensive character of the plan and how it served a public purpose in transferring a blighted area into a thriving example of urban renewal. A large industrial park by itself would be distinguishable because outside of evident increases in tax revenue, benefits would only be realized by private individuals or companies. In the Kelo decision, the court affirmed this principle that the government is not permitted to take one party’s private property for the sole purpose of transferring it to another private party and that is exactly what they would be doing if the project called for construction of only a large industrial park. END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P. 675] 1. RSI’s theory would be that the glue factory’s emission of noxious fumes is an unreasonable interference in the use and enjoyment of RSI’s land. This interference, called a nuisance, can be the basis for a imposing liability on the factory’s owner. Courts apply a reasonableness test that includes an examination as to the nature of the parcels at issue. In terms of a defense, if the parcels are heavy industrial and manufacturing facilities, the emissions may not qualify as a nuisance. [Ties to Ownership Rights]. 2. RSI is likely asserting that the glue factory has violated their air space rights. However, in Fontainebleau v. Eden Roc, the Florida supreme court held that air space rights did not include solar rights. Although RSI could try to distinguish this case by pointing out that the impact of the sun being blocked was a financial burden on RSI, the Florida court made clear that so long as the structure complies with zoning and other regulatory requirements, property owners do not have the right to free flow of light and air from the adjoining land. This is true even when the use impacts the economic success of the adjoining landowner. [Ties to Airspace Rights]. 3. The standards for adverse possession are that the property at issues must be used by an adverse party, and that the use must have been open, notorious and visible, exclusive and actual, and continuous. Here RSI’s use and maintenance of the driveway over a continuous period of time could qualify for title by adverse possession (most states have a minimum number of years required to constitute “continuous use”). [Ties to Adverse Possession]. 4. A life estate defeasible could be used to achieve the parties’ objectives. Under this agreement, upon Abel’s death, the property would be transferred to his spouse as life estate for her lifetime. Once Abel’s spouse dies, the property would then go to Abel Jr. in fee simple. [Ties to Life Estate]. 5. This law is an example of a zoning ordinance. Courts in most states allow zoning related to aesthetics so long as it is only one factor, not the sole factor, in a municipality’s decision. If the ordinance stands legal muster (not overreaching and procedural due process provided), RSI could challenge the ordinance in court on the theory that it is a “taking” under the Fifth Amendment. If they can demonstrate that the ordinance resulted in a loss of substantial economic value of the property, then they would be entitled to compensation from the government. [Ties to Zoning Ordinances]. Manager’s Challenge [P.676] Sample answers to all Manager’s Challenge exercises are provided in the student and instructor’s versions of this textbook’s Web site. Case Summary 24.1: Bailments: Singer Co. v. Stott & Davis Motor Express, Inc. [P.676] 1. Who prevails and why? Answer: Singer would likely prevail unless Stoda could offer evidence to show due care because Singer’s goods were destroyed in Stoda’s possession and a bailment relationship existed. 2. What is the standard that the bailee (Stoda) owes to the bailor (Singer)? Answer: The bailee (Stoda) owes a duty of care and a duty to act reasonably in protecting the bailor’s (Singer) property. Case Summary 24.2: Adverse Possession: Chaplin v. Sanders [P.676] 1. Are all of the elements for adverse possession met so that Sanders now has title to the disputed parcel? Why or why not? Answer: All the elements for adverse possession were met so that Sanders now has title to the disputed property. The possession of the property was open, notorious, and visible; exclusive and actual; and continuous for the requisite 10-year period. 2. What is the appropriate starting time from which to measure ownership in order to satisfy Washington’s statutory requirement for 10-years of possession? Answer: The appropriate starting time from which to measure the ownership in order to satisfy Washington’s statutory requirement for 10-years of possession would be from 1967, where there was no mention made of the encroachment or contract provision from the Hibbard-Gilbert sale. Case Summary 24.3: Assignment and Subleases: Dayenian v. American National Bank and Trust Co. of Chicago [P.677] 1. Is the transfer an assignment or a sublease? Why? Answer: The transfer is an assignment because the lessee transferred his interest for the entire remaining length of the term. 2. What do the courts look to in making this determination? Answer: Courts look to the duration of the transfer of interest in making this determination. If the transfer is for the entire remaining length of the term, this is called an assignment. If the tenant transfers anything less than the remaining term, this is known as a sublease. Case Summary 24.4: Landlord-Tenant Agreements: Amoco Oil Co. v. Jones [P.678] 1. Does Jones have an obligation to rebuild the gas station? Why or why not? Answer: Jones does not have an obligation to rebuild the gas station. Since the oil company drafted the lease, the lease was to be construed against the oil company and the oil company did not present any evidence to suggest the parties intended the individual to assume the risk of loss by fire. Rather, the plain language of the lease spoke of the individuals responsibility for “necessary upkeep and repairs,” including certain maintenance. 2. Why would Amoco terminate the lease? Answer: As a practical matter, Amoco would terminate the lease upon destruction of the premises to avoid any further liability. Case Summary 24.5: Constructive Eviction: Automobile Supply Co. v. Scene-In-Action [P.668] 1. Suppose that the landlord had made good faith efforts to fix the problem, but was unable to for a period of three months. Would that change the outcome of the case? Answer: If the landlord had made good faith efforts to fix the problem, but was unable to for a period of three months that would not be likely to change the outcome of the case. Once the landlord is put on notice of the problem, he may be given a reasonable amount of time to correct; however, three months is outside a reasonable time frame and sufficiently deprives the tenant of her right of quiet enjoyment and habitability of the property. 2. The court noted that tenants have a reasonable time to vacate the premises. What would you consider to be a reasonable time period in this case? Do multiple complaints to a landlord and not vacating the premises eviscerate any claims of constructive eviction? Answer: What is such reasonable time is usually a question of fact, though under the circumstances of a particular case it may become a question of law. In this case, a reasonable time period of a few weeks from Scene’s last unheeded complaint to Auto. Quick Assessment Questions (QAQs) 1. Which of the following rights is included in the ownership of real estate? a. Use and enjoyment of the land b. Subsurface rights c. Water rights d. Airspace rights e. All of the above Answer: e 2. Which of the following is the highest level of ownership because it allows the titleholder unrestricted ownership rights? a. Eminent domain b. Fee simple absolute c. Fee simple defeasible d. Life estate defeasible e. Leasehold estate Answer: b 3. What power derived from the Fifth Amendment gives the state and federal government the authority to take private property? a. Eminent domain b. Condemnation clause c. Public use d. Easement clause e. None of the above Answer: a 4. If a tenant wishes to transfer their interests to a third party for the entire remaining length of the term, this is known as a sublease. Answer: False 5. The law tends to offer more protection to residential tenants than to commercial tenants because a certain level of business and legal acumen is imputed to business owners and mangers. Answer: True 6. The buyer of a stolen good acquires valid title so long as the buyer had no reason to know the good was stolen. Answer: False Chapter 25: Intellectual Property OVERVIEW This chapter provides a broad overview of intellectual property and focuses on issues that help business owners and managers make informed decisions on how best to protect their own intellectual property and prevent infringing upon the rights of others. Coverage begins with the fundamentals of trade secrets and business information. The chapter then focuses on legal requirements and statutory protections for trademarks (and service marks), trade dress, copyrights, and patents. This coverage includes explanations on infringement theories and defense to claims of infringement. KEY LEARNING OUTCOMES Outcome Accreditation Category Define a trade secret and other protectable business information and articulate the various legal implications for misappropriation of that information. Knowledge, Analysis Explain the requirements for trademark protection and classify trademarks marks based on their level of distinctiveness. Knowledge, Analysis Identify, gives examples, and understand the impact of trademark infringement and dilution. Knowledge, Analysis Articulate the fundamental requirements for copyright protection and the legal ramifications of copyright infringement and the impact of technology on copyright law, and give examples of the fair use defense. Knowledge, Analysis Understand the process for obtaining and maintaining a patent and articulate the basic requirements for an invention to have patent protection, and give examples patent infringement and defenses. Knowledge, Analysis TEACHING OUTLINE A. Trade Secrets and Protection of Business Information [P.681] Points to emphasize: • Businesses from across the spectrum of sectors turn to trade secret protection laws to protect some or all of their valuable technical and business information material including customer lists, designs, instructional methods, manufacturing processes, product formulas, and document-tracking processes. • Courts use several factors under the common law to determine whether certain material constitutes a trade secret: (1) the extent to which the information is known outside the claimant’s business; (2) measures taken by the claimant to keep the information confidential (both internally and externally); (3) the value of the information to competitors; and (4) the amount invested in developing the information. B. Trade Secret Protections [P.682] Points to emphasize: • Trade secret protections are provided by state statutes and/or state common law and the Uniform Trade Secret Act (UTSA) defines trade secrets as information or articles that are to be kept secret because of its particular value. • Misappropriation: Defined in the UTSA as the acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means, or any disclosure or use of a trade secret of another without express or implied consent. • Criminal Sanctions: The Economic Espionage Act is a federal statute passed in 1996 providing criminal penalties for domestic and foreign theft of trade secrets. • Exclusive Rights for Unlimited Duration: A trade secret owner ahs the right to keep others from misappropriating and using the trade secret for the duration of the firm’s existence. • Trade secret protection endures so long as the requirements for protection continue to be met and the owner takes reasonable steps to keep the information secret. • Trade secret owners have recourse only against misappropriation, discovery of protected information through independent research or reverse engineering is not misappropriation. Self-Check: Trade Secrets: Which of the following may be protectable as a trade secret? [P.683] C. Trademarks, Service Marks, and Trade Dress [P.683] Points to emphasize: • A trademark is a word, symbol, or phrase used to identify a particular seller’s products and distinguish them from other products (e.g. the word Nike and the Nike “swoosh” symbol). • When such marks are used to identify services rather than products they are known as service marks (e.g. Greyhound Lines). • Trade Dress: Increasingly the U.S. Patent and Trademark Office (PTO) and courts have granted trademark protection for such trade dress-related characteristics to product shapes, colors, and scents so long as a company can prove an exclusive link to the source product in the consumer’s mind (e.g. the two-dimensional iPod symbol and the cobranded “Made for iPod” symbol). • Figure 25.1: Apple iPod Trademark Registration [P.684] • Trademarks as a Business Asset: Business owners often invest significant resources into their trademark design, advertisement, and protection because it makes it easier for consumers to quickly identify the sources of a given good, builds brand loyalty, and ensures that competitors cannot have a free ride on a popular brand name. • Trademarks serve as an inventive for business owners to invest in the quality of their goods or services, while trademark law provides consumer protection by regulating the use of trademarks and prohibiting the use of a mark where consumer confusion may result. • Classifications of Trademarks: Marks can be grouped into three categories based on the mark’s distinctive relationship to the underlying product. o Arbitrary or Fanciful: A category of trademarks that are highly distinctive and afforded a relatively high level of protection because they bear no logical relationship to the underlying products or services (e.g. Google). o Suggestive: A category of trademarks that tend to be highly distinctive and are given a high level of protection because though the marks themselves evoke images of characteristics of the underlying product, some exercise of imagination or knowledge of a particular field may be necessary to make this connection (e.g. Under Armour). o Descriptive: A category of trademarks in which the marks directly describe, rather than suggests, a characteristic of the underlying products or services in terms of color, function, and so forth, and thus are not inherently distinct and may only gain trademark protection if they have acquired a secondary meaning. • Standards for Secondary Meaning: A secondary meaning is created when the consuming public primarily associates a mark with a particular product rather than any alternate meaning. Teaching Tip: Trademarks These categories can be very tricky for students (and instructors) primarily because of the overlap between suggestive and descriptive. I ask students to try to come with some famous trademarks for products they buy and write them on the board. For the next class, I ask them to categorize the mark and write a sentence or two justifying the classification. It allows students to connect the material with their everyday lives. Case 25.1 Custom Vehicles v. Forest River, 476 F.3d 481 (7th Cir. 2007) [P.686] Facts: Custom registered the trademark “Work-N-Play” for their van designed to be both a mobile office and, upon conversion, a camper. Later, Forest River manufactured a van with a ramp door from the rear cargo section that had space fitted for a snowmobile, motorcycle, or ATV, and they named the van “Work and Play” (without registering it as a trademark). Custom filed suit for trademark infringement, but the district court held that no infringement had taken place. Issue: Did Custom acquire secondary meaning for “Work-N-Play” necessary to gain trademark protection? Ruling: No. Sales of Custom’s product were relatively small, and there was no evidence that the mark would have any brand recognition, thus the mark was not sufficiently “famous” so as to be afforded trademark protection. Answers to case questions: 1. Should Custom have waited until they sold more of this product before they registered Work-N-Play as a trademark? Answer: Custom should have waited until they sold more of this product before they registered Work-N-Play as a trademark because descriptive marks qualify for protection and can be registered only after they have acquired secondary meaning. Therefore, by registering the trademark before it was sufficiently “famous” Custom essentially accomplished nothing because even with registration, their mark failed to qualify for protection. 2. Why must a descriptive mark acquire a secondary meaning in order to have protection? Answer: Descriptive marks must acquire a secondary meaning in order to have trademark protection because these are frequently common terms that are connected to the product, but may also have alternate meanings in a different context. Forbidding others to use these common alternative meanings would be unjust and result in overly burdensome litigation. Legal Implications in Cyberspace: Domain Names, Trademarks and Cybersquatting [P.688] • The Anticybersquatting Consumer Protection Act (ACPA) gave specific statutory remedies to trademark owners to recover trademark-related domain names from users that acted in bad faith. • The bad faith requirement is typically satisfied when the registrant has no legitimate reason for the use of a domain name or the registrant is using the domain name to profit or confuse consumers. Case 25.2 People for the Ethical Treatment of Animals v. Doughney, 113 F.Supp. 2d 915 (E.D. Va. 2000) [P.687] Facts: People for the Ethical Treatment of Animals (PETA) is the high-profile nonprofit organization devoted to educating the public at large and attempting to prevent the abuse of animals for corporate gain. Doughney registered PETA.org, claiming he was head of an organization called People Eating Tasty Animals, and his Web site contained links to furriers and others that would be in direct conflict with PETA’s mission. PETA filed suit against Doughney alleging his use of PETA.org violated the ACPA. Issue: Did Doughney act with the requisite bad faith in order for PETA to recover under the ACPA? Ruling: Yes. The court pointed out nine examples of bad faith action taken by Doughney, including the facts that he had no legitimate reasons for the use of the domain name and he was using the domain name to confuse consumers. Answers to case questions: 1. Was there any indication that Doughney was “cybersquatting”? Answer: There was an indication that Doughney was “cybersquatting” as is evidenced in his bad faith intent to profit from using the domain name. Because Doughney had no legitimate reason for the domain name and because he used the domain name to confuse consumers who were searching for PETA’s website, he could have only intended to profit from the organization. 2. Could Doughney have avoided liability by making changes to his Web site or business model? What changes may help shield him from liability? Answer: Though it would be unlikely under the circumstances, Doughney could have avoided liability by making changes to his Web site and business model that would have shielded him from liability. In order to do so, he would have to establish a legitimate reason for using PETA.org and align his Web site so that there could be no confusion between his own interests and the interests of PETA. Business Ethics Perspective: Name for a King’s Ransom [P.687] C. Acquiring Rights for Trademark Protection [P.688] Points to emphasize: • Rights to a trademark can be acquired by either being the first to use the mark in commerce, or by being the first to register the mark with the PTO. • Unlike the use of a mark in commerce, registration of a mark with the PTO gives a party the right to use the mark nationwide (limited to the extent that others are already using the mark within a specific geographic area). Solutions for Managers: Advantages of Trademark Registration [P.689] • Applications and the PTO: The PTO may reject a registration on any number of grounds, however, rejection of the mark does not necessarily mean that it is not entitled to trademark protection. • Preserving Trademark Protection: Managers should focus special attention to policing their firm’s mark, that is, having a policy in place and taking steps to prevent others from using the mark, otherwise the mark may be lost through abandonment or genericity. o Abandonment occurs when its use is discontinued with intent not to resume its use and genericity occurs when, in the minds of a substantial majority of the public, the word denotes a broad genus or type of product and not a specific source or manufacturer. • Trademark Infringement: In order for a trademark holder to prevent another from using the holder’s mark, the holder must prove that the use of the mark by another will be likely to cause consumer confusion as to the source of the good, as determined by the eight-factor Polaroid test. • Trademark Dilution: The Federal Trademark Dilution Act permits mark holders unable to establish consumer confusion to recover damages and prevent another from “dilution” of distinctive trademarks either through “blurring” or “tarnishment.” o Blurring occurs when the power of the mark is weakened through its identification with dissimilar goods, whereas tarnishment occurs when the mark is cast in an unflattering light, typically through its association with inferior or unseemly products or services. Case 25.3 Mattel v. MCA Records, 296 F.3d 894 (9th Cir. 2002) Facts: Mattel has invested significant resources into the world-wide marketing and development of the doll and it has used the ‘Barbie’ trademark on a variety of accessories for decades. This included development of a Ken doll. In 1997, the Danish band Aqua produced a song called Barbie Girl in which one band member impersonates Barbie by singing in a high-pitch, doll-like voice in a musical conversation with another band member called Ken. Issue: Did MCA, Aqua’s record label, infringe on Mattel’s Barbie mark? Ruling: No. Ruling in favor of MCA, the court distinguished between uses of a mark on a product versus use of a mark in a song title and explained that though consumers frequently look to the title of a work to determine what it is about, they do not regard titles of artistic works in the same way as the names of ordinary commercial products. The court adopted a rule that literary titles do not violate the Lanham Act unless the title has no artistic relevance to the underlying work whatsoever, or, if it has some artistic relevance, unless the title explicitly misleads as to the source or the content of the work. Case questions 1. Given the rule adopted by the court, can you think of an example when a literary title would violate the Lanham Act? Answer: It would have to be a mark which refers to a product in an attempt to mislead the consumer. One example may be if a start up publication of a political newsmagazine using Time’s logo and the title “Time: Capitol Edition.” 2. Why did the court distinguish between use of a mark on a product and use of a mark in a song title? Answer: Because although consumers frequently look to the title of a work to determine what it is about, they do not regard titles of artistic works in the same way as the names of ordinary commercial products. Concept Summary: Trademarks [P.691] F. Copyright Law: Protections of Original Expressions [P.692] Points to emphasize: • Copyright protection is an intangible right granted by the Copyright Act to the author or originator of an original literary or artistic production, where the artist is invested, for a specified period, with the sole and exclusive privilege of multiplying copies of the work along with the right to profit by publication and sale (Table 25.1: Copyright Protection Periods [P.693]). • Protected works include literary works, musical works, dramatic works, choreographic works, motion pictures, sound recordings, and pictorial or graphical works. • In order to gain copyright protection, a work must meet a three-part test: (1) originality, (2) some degree of creativity, and (3) fixed in a durable medium. • Originality and Creativity Requirements: An original work of authorship is a work that is original to the author; meaning, the author must use her own creative capabilities to create the work or medium. • Durable Medium: The work must be more than just an idea or thought process, the work must be in a tangible form such as in writing, digital, video, and so forth. • Copyright protections extend automatically to a word once created; however, registration with the U.S. Copyright Office is a prerequisite to actually enforcing the holder’s rights in court. G. Copyright Infringement [P.693] Points to emphasize: • There are three theories of infringement: direct, indirect (also known as contributory), or vicarious infringement. • Direct Infringement: Occurs when the copyright owner can prove legal ownership of the work in question and that the infringer copied the work without permission. o A copyright holder need only prove that the infringer copied plots, structures, and/or organizations that made the infringing work substantially similar to the copyrighted work. • Indirect Infringement: Holds the facilitator of the infringement liable if the facilitator has knowledge (direct or imputed) of the infringement and/or contributes to the infringement in some material way. • Vicarious Infringement: Based on agency law, in which the infringing party (the agent) is acting on behalf of or to the benefit of another party (the principal), the principal party is vicariously liable. o The No Electronic Theft Act (NET Act) of 1997 provides for criminal liability for anyone infringing on a copyright by making a reproduction or distribution, including by electronic means, of one or more copies of a copyrighted work. • Defenses to Infringement Claims: Fair Use: In Universal Studios v. Sony, the Court made clear that Congress did not give absolute control over all uses of copyrighted materials, some uses were permitted. o Fair use has been codified in the Copyright Act with four specific (though nonexclusive) guideposts: the purpose and nature of the use, the nature of the work itself, the amount and substantiality of the material used, and the effect of the use on the market. o Purpose and Nature of the Use: If the use of the work is to further education of scholarship, courts are more likely to be sympathetic to an assertion of fair use. o Nature of the Work: If the copyrighted material has not yet been put into public domain, fair use is a difficult defense. o Amount and Substantiality Used: Courts analyze the totality of the circumstances regarding the amount of copyrighted material used compared to the entire work at issue. o Market Effect: Courts are reluctant to allow fair use as a defense if a copyright holder demonstrates that the value of a copyrighted work will be diminished in allowing its use. Self-Check: Fair Use: Which of these situations would constitute fair use? [P.696] • RIAA Lawsuits: In addition to aggressively pursuing file-sharing services such as Napster and Grokster, the RIAA has invested substantial resources in tracking down and recovering damages from individual infringers. Legal Implications in Cyberspace: Copyrights in the Digital Age [P.696] • Computer Software: Congress amended the Copyright Act with the Computer Software Copyright Act in 1980, which specifically defined computer software programs as a literary work and, thus, entitled to protection. • Evolution of Copyright Law and Technology: In the past, the average consumer was limited in what he could copy and distribute, thus, copyright holders had little fear that day-to-day consumer infringement would impact their revenue stream from sales of the original. • Audio Home Recording Act: A 1992 amendment to the Copyright Act, which responded to the rapidly advancing technology by forcing manufacturers of CD-Writers to pay royalties (2 percent of their sales), and required the producers of digital audio recording devises to include a Serial Copy Management System that prevents copies from copies to be made. • Digital Millennium Copyright Act: Passed in 1998 in an attempt to modernize copyright law to deal with the new challenges that had emerged in the digital age. • File Sharing: Even after the Ninth Circuit Court of Appeals effectively shut down Napster as a peer-to-peer (P2P) provider, other Napster-like services were thriving under a business model whereby the P2P provider could not have any actual knowledge of copyright infringement. Landmark Case 25.4 Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 545 U.S. 913 (2005) [P.697] Facts: Grokster, a P2P provider, used a business model whereby it would be impossible for Grokster to know if the files being shared were an infringing use; thus, they argued that no Napster-like imputed liability could attach and so no contributor infringement existed. Grokster alleged that this is the same business that Sony was in when selling the Betamax and they were entitled to the same type of fair use exception of “capable of substantial non-infringing uses” as the Supreme Court articulated in the Sony case. When MGM studios sued Grokster both the federal trial court and the federal court of appeals agreed with Grokster and allowed Grokster to use the Sony exception in their ruling against MGM. Issue: Is Grokster entitled the same type of fair use exception as the Supreme Court articulated in the Sony case? Ruling: No. Anyone who distributes a device with the intent to promote its use to infringe copyright is liable for the resulting acts of infringement (contributory) by third parties. This case is distinguished from Sony because here, there was ample evidence that Grokster had acted with intent to cause copyright infringement via the use of their software. Answers to case questions: 1. Why was the Court so concerned about the Open Nap program offered by StreamCast and Grokster? Answer: The Court was so concerned about the Open Nap program offered by StreamCast and Grokster because with its advent, digital distribution of copyrighted materials threatens copyright holders as never before. 2. Why do you think the Court refused to apply the Sony exception in this case? Answer: The Court refused to apply the Sony exception in this case because P2P networks, like the ones employed here, are inherently distinguishable from Sony’s selling the Betamax. Here, StreamCast and Grokster distributed the software with the principal, if not exclusive, objective of promoting its use to infringe copyright. The distributors’ profit from advertisers clearly depended on high-volume use, which was known to be infringing. Still, they made no attempt to develop filtering tools or mechanisms to diminish infringing activity. Their intent is further evidenced in their actions to target former users of similar services, which was being challenged in court for facilitating copyright infringement. StreamCast and Grokster were simply altering a business model, known for promoting infringement, in order to technically avoid liability. Concept Summary: Copyrights [P. 698] H. Patents: Legal Protection of Inventions and Processes [P.698] Points to emphasize: • A patent is a government-sanctioned monopoly right that allows an inventor the exclusive entitlement to make, use, license, and sell her invention for a limited period of time. • In order to obtain a patent, the idea or invention must meet stringent criteria set down federal statutes and the application procedure is often very expensive. • Even if one is successful in obtaining a patent, enforcing the patent via an infringement suit is an even more expensive undertaking. Solutions for Managers: Avoiding Intellectual Property Liability: Landmines on the Web [P.699] I. Fundamentals of Patent Law [P.698] Points to emphasize: • A patent for inventions or processes (“utility” and “business method patents”) lasts for a period of 20 years from the date of filing the application with the PTO; a “design” patent lasts for 14 years. • In order to obtain a patent, the invention or method must be novel, nonobvious, and of proper subject matter. • Novelty Standard: An invention or process must be unique and original, and a patent applicant must show that no other identical invention or process exists. Landmark Case 25.5 Dunlop Holdings Ltd. V. RAM Golf Corporation, 524 F.2d 33 (7th Cir. 1975) [P.701] Facts: Wagner was in the business of selling re-covered golf balls and developed a chemical called Surlyn (original discovered by DuPont) as a golf ball cover. Subsequently, Dunlop obtained a patent for Surlyn covered balls and sued RAM for infringement when RAM began to produce the same type of golf balls. RAM defended their use by challenging Dunlop’s patent as invalid because Wagner made the invention 10 years earlier via his sale of many Surlyn covered balls to a group of regular customers. Dunlop countered that Wager had concealed an important ingredient and, thus, had concealed the actual invention from the public. Issue: Does Dunlop’s product meet the novelty standard necessary to obtain a valid patent? Ruling: No. Wagner’s golf balls that were coated with the Surlyn-based invention were in public use because Wagner had marketed and sold the items as best he could as a sole proprietor. Answers to case questions: 1. What factors did the court consider in ruling that Wagner’s use was public? Answer: In ruling that Wagner’s use was public, the court considered first whether Wagner successfully placed the Surlyn covered balls in public use. They then considered Wagner’s marketing efforts and the amount of items that he sold in relation to his status as a sole proprietor. They also considered the promptness and the effectiveness of his attempt to make the benefits of his discovery available to the public. 2. What is Dunlop’s theory as to why Wagner’s conduct did not make the prior use public? Answer: Dunlop’s theory as to why Wagner’s conduct did not make the prior use public was that Wagner had concealed an important ingredient and, thus, had concealed the actual invention from the public. In other words, Dunlop claimed that though the actual golf balls were in public use, Wagner’s specific invention was not. The court ruled this theory irrelevant because it establishes only that Wagner failed to act diligently to establish his own right to a patent. • Nonobviousness Standard: Requires that an invention must be something more than that which would be obvious, in light of publicly available knowledge, to one who is skilled in the relevant field. • Patentable Subject Matter Standard: Bars laws of nature, natural phenomena, and abstract ideas from being patentable. o Business Method Patents: Business methods may be patentable so long as they accomplish something practically useful in a novel and nonobvious way. o Design Patents: Patent laws protect inventors of any new original, and ornamental design for an article of manufacturer so long as they are novel and nonobvious and the design is primarily ornamental (shape of the Coca-Cola bottle). J. Infringement, Notice, and Remedies [P.702] Points to emphasize: • Infringement may occur through either literal means or through equivalence. • Literal Infringement: Occurs under either the rule of exactness, when the infringer makes, uses, or sells an invention that is exactly the same as the claims made in the patent application, or under the rule of addition, when the infringing device does more than is described in the patent application of the protected invention. o Under the rule of omission, when the alleged infringing invention lacks an essential element of the patent holder’s claims in the patent application, infringement has not occurred. • Equivalence: The doctrine of equivalence allows courts to find patent infringement if the invention performs substantially the same function in substantially the same way to achieve the same result. o The Patent Act sets forth appropriate measures that must be taken to properly inform users that an article is patented in order to collect damages. o Patent infringers are subject to actual damages, prejudgment interests, and in some cases attorney’s fees. Legal Implications in Cyberspace: Computer Software and Internet Business Methods [P.703] • Computer Programs: If the computer programs were accompanied by some physical transformation, then they were patentable. • Internet Business Method Patents: In the famous Internet business method patents case Amazon.com v. Barnesandnoble.com, the court signaled that Internet business methods, so long as they fit the requirements for other utility and method patents, were protectable. • In some cases though, courts have been reluctant to enforce business method patents in the technology sector when the process described in the patent is too narrow due to the lack of technology at the time of the patent. Concept Summary: Patents [P.704] Table 25.2: Intellectual Property Protections [P.704] END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P.706] 1. The processes are very likely protectable as trade secrets. Given the facts, the quality assurance process would qualify as a trade secret if WidgetCo. developed methods to maintain confidentiality of the process because it has independent economic value as business information. The training manual and videos are potentially protectable under copyright laws. Processes are not protectable under copyright laws.[Ties to Trade Secrets]. 2. The major advantage of trade secret protection is that the duration is unlimited so long as the secret continues to meet the qualification tests. Disadvantage: The trade secret is only protectable if continues to have independent economic value, so the uncertainty level is high. The major advantage of copyright protection is that, once registered, it can prevent others from using it or, alternatively, charge others for using it. Disadvantage: The copyright will eventually expire. [Ties to Trade Secrets and Copyrights]. 3. The process could probably qualify as a trade secret, but only if WidgetCo. takes steps to maintain the secrecy of the information (such as using non-disclosure agreements etc) and if a competitor would find information valuable to their business practices. [Ties to Trade Secrets]. 4. Most cases of misappropriation occur when employees depart and a company and take their former trade secrets for use in a new start up business or for a new employer. To prevent this, WidgetCo. should ask employees who have access to the information to sign non-disclosure agreements that make clear that the processes is confidential and proprietary to WidgetCo. WidgetCo. could also take steps to limit which employees have access to the information and documenting who has access at any given time. [Ties to Misappropriation]. 5. WidgetCo.’s owns the copyright (work for hire) for the manuals and the video from the time they were created. However, in order to enforce those rights against any infringers, they must register the copyright with the U.S. Copyright Office. If the manual is just a compilation of facts, does not qualify for copyright protection. The work must be original and the result of the author’s own creative capabilities. [Ties to Copyright Law]. Manager’s Challenge [P.706] Sample answers to all Manager’s Challenge exercises are provided in the student and instructor’s versions of this textbook’s Web site. Case Summary 25.1: Trade Secret: Bennett v. Shidler [P.707] 1. Does the swim-float-swim qualify as a trade secret? Answer: The swim-float-swim program could qualify as a trade secret because taken together, it is a program that is to be kept secret under the circumstances because it derives independent economic value. 2. What factors would the court use to assess whether the technique is a trade secret? Discuss. Answer: The court would use several factors to assess whether the technique is a trade secret: the extent to which the information is known outside Bennett’s business; measures taken by Bennett to guard the confidentiality of the information; the value of the information to competitors; the amount invested (in terms of time and money) in developing the information; and the efforts to maintain trade secret confidentiality among Bennett’s employees. Case Summary 25.2: Trademarks/Service Marks: In re Reed Elsevier, Inc. [P.707] 1. Is the mark too generic for protection? Answer: The mark “lawyers.com” would likely be too generic for protection because lawyer is a common term that has many alternative meanings other than the one used by Reed. 2. If the court determines the mark is primarily descriptive, what further obstacle must Reed overcome in order to obtain protection for the mark? Answer: A If the court determines the mark is primarily descriptive, Reed would have to acquire a secondary meaning in order to obtain protection for the mark. Case Summary 25.3: Patents: KSR International v. Teleflex [P.707] 1. What do you think Telefex’s specific theory of infringement was? Answer: Telefex’s specific theory of infringement was literal infringement under the rule of addition because the infringing device does more than is described in the patent application of the protected invention. 2. Which element of patentability does KSR claim Teleflex is missing in the combined device? Answer: KSR claims that Teleflex is missing the nonobviousness standard of patentability because the invention was a minimal improvement that was relatively obvious to those skilled in the field. Case Summary 25.4: Copyright: Darden v. Peters [P.708] 1. Determine whether Darden’s compilation is protectable using the Feist doctrine. Answer: Darden’s compilation is not protectable using the Feist doctrine. Although compilations of facts could be copyrightable, there has to be some creative element used that made the compilation an original work. A derivative work that consists of the addition of color, shading and labels to preexisting black and white Census maps lack even the minimal level of creativity required for copyright protection. 2. Does Darden’s idea contain the necessary elements for copyright protection? Discuss. Answer: Darden’s idea does not contain the necessary elements for copyright protection. Each of the changes to the existing Census maps was in the nature of shading, coloring, or font changes and this would be analogous to the White Pages of a telephone directory. In both instances, the creativity requirement is not met. In the White Pages case, preexisting data was simply arranged alphabetically. In Darden’s case, preexisting data was simply colored and minimally enhanced. Quick Assessment Questions (QAQs) 1. According to the Supreme Court in MGM v. Grokster, which of the following is true? a. Anyone who distributes a device with the intent to promote its use to infringe copyright is liable for contributory infringement. b. A peer-to-peer provider is held liable only if they had imputed knowledge of the copyright infringement. c. Grokster is not liable for contributory infringement because their program could still be used for “substantial non-infringing uses.” d. Grokster is liable for contributory infringement by virtue of the Digital Millennium Copyright Act of 1998. e. None of the above Answer: a 2. “Google” is an example of what form of intellectual property? a. Trade secret b. Trademark c. Copyright d. Patent e. None of the above Answer: b 3. In order to obtain a patent which of the following elements must be met? a. Novel b. Proper subject matter c. Nonobvious d. a and c e. All of the above Answer: e 4. Two different parties can have trademark protection simultaneously. Answer: True 5. In order to recover under the Anticybersquatting Consumer Protection Act, the defendant must have acted in bad faith. Answer: True 6. In order for a trade secret holder to prevent another from using the trade secret, the holder must prove that the use of the mark by another will be likely to cause consumer confusion. Answer: False Chapter 26: International Law and Global Commerce OVERVIEW This chapter gives broad-based coverage to the fundamentals of international law with a focus on the law of global commerce. Students are first introduced to definition and sources of international law and methods of international dispute resolution. Recognizing that the global marketplace has expanded rapidly over the last several decades because of technology, this chapter also devotes significant coverage to commercial law and intellectual property regulation in an international context. KEY LEARNING OUTCOMES Outcome Accreditation Category Distinguish between international public law and international private law and give examples of the various sources that are the body of international law. Knowledge, Analysis Name and explain the role and limitation of international courts, and give examples of dispute resolution methods in an international context. Knowledge, Analysis List the different categories of national legal systems used in the world and give an example of a country in each category. Knowledge, Analysis Articulate several specific laws that regulate international commercial law and give examples of methods used to enforce the rights of intellectual property holders in foreign countries. Knowledge, Analysis TEACHING OUTLINE A. Definition, Sources, and Systems of International Law [P.710] Points to emphasize: • International law has traditionally been defined in very broad terms influenced by a combination of law, religious tenets, and diplomatic relations between nations. • International law is a body of rules and principles of action binding on countries, international organizations, and individuals in their relations with one another. • Public Law versus Private Law: Public international law primarily addresses relations between individual countries and international organizations, whereas private international law focuses on regulations of private individuals and business entities. • Sources of International Law: The three primary sources of international law are treaties, customs, and judicial decisions. o Treaties: A treaty is any agreement between two or more nations to cooperate in a certain manner, and the Vienna Convention on the Law of Treaties, effective 1980, has become one of the standards used by courts and other tribunals when interpreting treaty law. o Customs: Customary law follows the basic principle of international law that individual conduct is permitted unless expressly forbidden; therefore, prohibitions as well as affirmative practices must be proven by the state relying on them. o Judicial Decisions: Comity is the general notion that nations will defer to and give effect to the laws and court decisions of other nations, rooted in the idea that reciprocal treatment is a necessary element of international relations. Case 26.1 Yahoo! v. La Ligue Contre Le Racisme et L’Antisemitisme, 169 F.Supp. 2d 1181 (N.D. Cal. 2001) [P.713] Facts: Yahoo! monitors the transactions in their global auction site through limited regulation prohibiting particular items being sold and informs auction sellers that they must comply with Yahoo!’s policies and may not offer items to buyers in jurisdictions in which the sale of such items violates the jurisdiction’s applicable laws. Yahoo! does not actively regulate the content of each posting and individuals have posted highly offensive memorabilia, including Nazi objects. LICRA and French Citizens, organizations dedicated to eliminating anti-Semitism, filed suit against Yahoo! in France based on a French law banning the sale of Nazi and Third-Reich-related goods through auction services. Though the French court concluded that the Yahoo.com auction site violated French Criminal Code, Yahoo! contends that such a ban would infringe impermissibly upon its right under the First Amendment of the U.S. Constitution and filed a lawsuit in a U.S. federal court seeking a declaratory judgment that the French court’s orders are neither cognizable nor enforceable under the laws of the U.S. Issue: Is the French Court’s judgment enforceable in the U.S.? Ruling: No. U.S. courts are not bound by judgments of foreign courts when the judgment is inconsistent with the Constitution and laws of the U.S. Answers to case questions: 1. Why did Yahoo! choose to obtain a declaratory judgment from a U.S. court rather than appeal the ruling in the French courts? Answer: Yahoo! chose to obtain a declaratory judgment from a U.S. court rather than appeal the ruling in the French courts essentially because they would have lost on an appeal in the French courts because the auction site clearly violated the French Criminal Code. As an American corporation, the judgment issued by the French Courts against Yahoo! was ultimately to be enforced in the U.S. Therefore, rather than pursue an appeal, they sought an immediate declaratory judgment in the country in which the judgment was to be enforced. In other words, Yahoo! would likely have stipulated that they were in violation of the French Criminal Code, what they are asking for in a declaratory judgment is the U.S. federal court to declare their Constitutional rights given the facts. 2. In effect, isn’t the U.S. court ruling that the U.S. Constitution protects American companies even when they do business in a foreign country that does not recognize the concepts embodied by the First Amendment? Answer: In effect, the U.S. court is ruling that no legal judgment has any effect, of its own force, beyond the limits of the sovereignty from which its authority is deprived. Therefore, the U.S. Constitution protects American companies even when they do business in a foreign country that does not recognize the concepts embodied in the First Amendment, but only in America. Although U.S. courts will give full faith and credit to foreign judgments, they will not honor the judicial decrees of foreign countries if they deprive the American company of a Constitutional right. B. International Organizations [P.712] Points to emphasize: • The United Nations (U.N.) was created after World War II to facilitate common international concerns on defense, trade, protection of human rights, and other matters. • Other important international organizations include the World Trade Organization (WTO), the International Monetary Fund (IMF), and the Organization for Economic Cooperation and Development (OEDC). C. International Courts [P.714] Points to emphasize: • International courts play a role in the development and interpretation of international law, but their power to enforce a ruling on sovereign nations can be tenuous and their jurisdiction may be limited. • The International Court of Justice (also known as the World Court) based in the Netherlands is the judicial branch of the U.N. charged with settling disputes submitted to it by member states and giving advisory opinions on legal questions submitted to it by duly authorized international organs, agencies, and the U.N. General Assembly. • The International Criminal Court has global jurisdiction over criminal aspects of international treaties. • The European Court of Justice sits in Luxembourg and is the final arbiter of the codes governing European Union (EU) member states. • Sovereign Immunity: Long-standing doctrine of international law that stands for the proposition that, with some exceptions, foreign nations are exempt from jurisdiction by U.S. courts (and vice versa). o The Foreign Sovereign Immunities Act (FSIA) is a federal statute that incorporates this concept in explicitly prohibiting U.S. courts from rendering judicial actions against foreign nations or their government officials unless the foreign nation has waived its immunity, is engaged in some commercial enterprise on U.S. soil, or when its actions have a direct effect on U.S. interests. Case 26.2 Butters v. Vance International, Inc., 225 F.3d 462 (4th Cir. 2000) [P.716] Facts: Vance, a U.S. security company, was hired to augment the security provided for a member of the Saudi royal family while she was in California, whereby the Saudi military was responsible for all protection and Saudi officers supervised all security. Vance recommended to the Saudis that Butters, a woman employed by Vance, be promoted to serving a full rotation in the command post; however, the Saudi authorities rejected that recommendation based on the contention that the appointment of a woman for that post was unacceptable under Islamic law. Butters brought suit against Vance for gender discrimination in the loss of the promotion, Vance asserted immunity under the FSIA because they were carrying out orders of the Saudi government, and Butters countered that Vance fell under one of the exceptions to the FSIA because the company was engaged in a commercial activity. Issue: Are U.S. businesses subject to FSIA immunity from employment discrimination claims if they are carrying out their contractual obligations to a foreign government? Ruling: Yes. U.S. businesses are entitled to immunity from suit under the FSIA when their foreign client was responsible for the plaintiff not being promoted. Answers to case questions: 1. How far does the FSIA immunity go? If one of Vance’s employees were ordered by Saudi officials to physically detain Butters and she was injured, would Vance still be protected by the FSIA against any liability resulting from Butters’ injury? Answer: FSIA immunity is not without limitations and it serves only to provide a tolerance for the sovereign decisions of other countries that are different from our own legal norms. In this case, the immunity was extended to Vance because they were carrying out the decision of the Saudi government even though that decision went against our native views of equal employment. However, if one of Vance’s employees were ordered by Saudi officials to physically detain Butters and she was injured, it would not be likely that Vance would still be protected by the FSIA against any liability resulting from Butters’ injury. In this case, the act of physically detaining Butters would not be quintessentially an act peculiar to sovereigns. Vance remains liable for the actions of their employees acting within the scope of their employment. 2. When the court states that the “FSIA immunity presupposes a tolerance for the sovereign decisions of other countries that may reflect legal norms and cultural values quite different from our own,” what legal norms and cultural values is it referring to? Answer: When the court states that the “FSIA immunity presupposes a tolerance for the sovereign decisions of other countries that may reflect legal norms and cultural values quite different from our own,” they are referring to our views on employment and employment law. In the U.S., under a common law system, we have come to stand for equal employment and would not domestically tolerate discrimination on the basis of gender for a promotion. The Kingdom of Saudi Arabia, under a mixed legal system, takes a much different view in that an appointment of a woman for such a task was unacceptable under Islamic law. The court is stating that under the FSIA immunity, we should be tolerant and respect the Saudi’s Islamic law even though it goes directly against American norms. D. Legal Systems of Nations [P.715] Points to emphasize: • Legal systems of the world fall into one of the following broad categories: civil law, common law, religious-based law, and mixed law systems. • Civil Law Systems: Systems of law drawn largely from the Roman law heritage that use written law as the highest source and opt for a systematic codification of general law principles. • Common Law Systems: Systems of law technically based on English common law concepts and legal organizational methods that strongly favor use of case law, as opposed to legislation, as the ordinary means of expressions of general law. • Religious-Based Legal Systems: Systems of law that employ legal doctrines and guidelines directly based on certain religious tenets. • Mixed Legal Systems: Systems of law including political entities where two or more systems apply cumulatively or interactively, but also entities where there is a combination of systems as a result of more or less clearly defined fields of application. E. International Dispute Resolution [P.717] Points to emphasize: • Many countries, recognizing that different considerations apply to international disputes, have provided for a separate legal regime to govern international dispute resolution. • Arbitration: Considered international if the parties to the arbitration are of different nationalities or the subject matter of the dispute involves a state other than the country in which the parties are nationals. o The Convention on the Recognition and Enforcement of Foreign Arbitral Awards allows for the enforcement of arbitration awards in many major countries, provided that the arbitration is international. • International Arbitration Forums: Prominent bodies that administer arbitrations include the International Chamber of Commerce (ICC) International Court of Arbitration in Paris, the London Court of International Arbitration (LCIA), and the American Arbitration Association (AAA). o All of the institutional rules govern the commencement of the arbitration, exchange of arbitration pleadings, appointment and removal of arbitrators, and hearing and interim measures of protection, among other rules. o In terms of choice of arbitrator, the LCIA rules proved that it, alone, is empowered to appoint arbitrators; the ICC rules allow parties to nominate, by agreement, an arbitrator for the Court’s confirmation; and the AAA International Arbitration Rules only require that parties notify it of any designation of an arbitrator. o Where the forum of the arbitration has not been agreed to, the LCIA Rules provide the seat of the arbitration will be London, unless on the basis of the parties’ written comments, the LCIA Court deems another seat more appropriate in view of the circumstances. o Under the ICC Rules of Arbitration, the Terms of Reference must be drafted and submitted to the arbitrator and the opposing party, containing a summary of the parties’ claims, lists of issues to be determined, and applicable procedural rules, and arbitration awards must be submitted to the ICC Court for approval. • Ad Hoc Arbitration Rules: Rules such as those set out in the U.N. Commission on International Trade (UNCIT-RAL) Arbitration Rules serve to bridge the gap for parties who are unwilling to fork out additional expense to use the services of an arbitration body, but who do not wish to spend time agreeing to details of a procedure to govern their arbitration. F. Alternatives to the ICC: The World Intellectual Property Organization [P.718] Points to emphasize: • The World International Property Organization (WIPO) in Geneva, Switzerland, created an arbitration center for arbitration related to intellectual property. G. International Mediation [P.718] Points to emphasize: • Mediation and conciliation both involve a consensual (rather than adjudicative) process, often with the involvement of a neutral third party. • Mediation and conciliation are now widely used in many countries. H. International Commercial Law [P.718] Points to emphasize: • Commercial transactions and trade practices are also governed by various sources of international (and U.S.) law. • Foreign Corrupt Practices Act (FCPA): Was enacted in 1977 to prevent corporate bribery of foreign officials. o The FCPA was amended in 1988 to enact a knowing standard in order to find violations of the act. o The centerpiece of the FCPA is its broadly interpreted antibribery provision that prohibits a company, its officers, employees, and agents from giving, offering, or promising anything of value to any foreign (non-U.S.) official, with the intent to obtain or retain business or any other advantage. o A foreign official means any officer or employee of a foreign government, regardless of rank; employees of government-owned or government-controlled businesses; foreign political parties and party officials; candidates for political office; and employees of public international organizations. Self-Check: Foreign Corrupt Practices Act [P.719] • U.N. Convention on Contracts for the International Sale of Goods (UNICISG): The UNCISG, the international counterpart to the UCC, is a treaty that governs sales contracts between businesses located in its 63 signatory countries. o Coverage and Major Provisions of the UNCISG: Covers contracts for the sale of goods between merchants that maintain a place of business in one of the signatory countries. • No Writing Required: The UNCISG has no formal writing requirement and specifically provides that contracts are not subject to requirements as to format. • Offer and Acceptance: Offers can be withdrawn at any point prior to the offeror receiving the acceptance. • Remedies: The right to cure exists even after the performance period is over. • INCO: International Chamber of Commerce Terms: Standardized contractual terms and designations used in international sales contracts to avoid confusion due to language barriers and differing legal systems (e.g. FCA and FOB). Concept Summary: Contracts for International Sale of Goods [P.722] I. Enforcing Intellectual Property Rights Abroad [P.722] Points to emphasize: • While many countries have improved intellectual property rights protection significantly over the past several decades, these agreements are still voluntary, and even when the government of a country agrees to abide by them, they are sometimes difficult to enforce in certain parts of the world. • Comprehensive Agreements: The General Agreement on Tariffs and Trade (GATT) is a multinational agreement, administered by the WTO, whose purpose is to facilitate international trade. o The Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) is a multinational agreement covering minimum requirements and standards for all areas of intellectual property protections as well as providing an infrastructure for enforcement and dispute resolutions. • Agreement on Trademarks: International trademark policy is governed primarily by two agreements: the Paris Convention and the Madrid Protocol. • Agreement on Copyrights: Copyright protection in foreign countries is covered in the Berne Convention agreement, which requires that foreigners from signatory countries must be granted protection via reciprocity under the copyright laws of any other member country. • Agreement on Patents: The Paris Convention agreement requires the approximately 160 member countries that signed the agreement to protect the same inventor rights under any member country’s patent laws as enjoyed by those citizens of that member country. END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P. 725] 1. Because it focuses on regulation of private individuals and business entities, private international would apply to the transaction (e.g., agreements governed by UNCISG) and certain public laws that apply to all transactions (e.g., FCPA). The relationship and transactions between CCC and Telefonica is also subject to treaties, customs, and judicial decisions. [Ties to Sources of International Law and UNCISG]. 2. The ICC arbitration clause would likely be valid. Unless Telefonica can prove that clause gives CCC some undue power or that CCC used deception in negotiations, the clause will typically be enforceable. Here the parties negotiated an agreement in good faith and selected ICC rules. While it is true that travel to Europe is burdensome to a certain extent, it is not so outlandish as to give CCC an unfair advantage. [Ties to International Dispute Resolution]. 3. Under the CISG, FOB means that the seller’s expense and risk of loss end when the seller delivers the goods “over the ship’s rail.” The buyer is responsible for the freighter delivery charges and any losses occurring en route to delivery. Because Telefonica is the buyer, they assume the risk of loss once the goods are on the ship in Miami. However, if the goods were destroyed before they were loaded on the ship, CCC would bear the risk of loss. If the goods were already loaded, the risk of loss shifts to Telefonica. [Ties to UNCISG]. 4. CCC paying the bill would violate the Foreign Corrupt Practices Act (FCPA). No matter what the custom is in any foreign country, any CCC employee or agent that gives, offers, or promises anything of value to a foreign official, with intent to obtain or retain business or any other advantage, violates the statute. The FCPA is interpreted broadly and payment of the golf expenses, etc., even after the fact, would fall into FCPA coverage. Competitive advantage is not a factor under the FCPA. [Ties to Foreign Corrupt Practices Act]. 5. CCC does not have recourse against the Argentinean government. The Foreign Sovereign Immunities Act is a federal statute that explicitly prohibits U.S. courts from rendering judicial actions against foreign nations or their governments (exceptions: 1) waiver, 2) commercial enterprise, 3) U.S. interests). [Ties to Sovereign Immunity]. Manager’s Challenge [P.725] Sample answers to all Manager’s Challenge exercises are provided in the student and instructor’s versions of this textbook’s Web site. Case Summary 26.1: Arbitration Enforcement: TermoRio v. Electricrificadora del Atlantico S.A. [P.726] 1. Under the Convention on the Recognition and Enforcement of Arbitral Awards, would the U.S. courts have authority to decide this case? Answer: The U.S. courts do not have subject matter jurisdiction under the Convention of the Recognition and Enforcement of Arbitral Awards. This matter is subject to the jurisdiction of the courts of Columbia, and if they refuse to enforce the award, that is the decision that U.S. courts will recognize and they will not intervene in the matter. 2. What do the ICC rules provide? Answer: The ICC rules provide that arbitration awards must be submitted to the ICC Court for approval. Case Summary 26.2: Sovereign Immunity: Plaintiffs A, B, C v. Zemin [P.726] 1. May the federal court issue a default judgment against the defendants? Answer: The federal court cannot issues a default judgment against the defendant because the former president of China is protected under the doctrine of sovereign immunity. Additionally, the federal court lacks personal jurisdiction over the agency because the service of process in this case was insufficient to confer personal jurisdiction. 2. What role does the doctrine of sovereign immunity play in this case? Answer: The doctrine of sovereign immunity protects the defendants in this case because as a former head of state, the Chinese president is exempt from jurisdiction in the U.S. courts unless his actions qualify for one of the three exceptions. Case Summary 26.3: Contracts for the International Sale of Goods: Chateau des Charmes Wines Ltd. v. Sabate [P.726] 1. Is Chateau’s silence upon receiving the invoices binding on them under the Convention on Contracts for the International Sale of Goods (CISG)? Answer: Chateau’s silence upon receiving the invoices is not binding on them under the CISG. Under the CISG, the forum selection clauses were not part of any agreement between the two parties because the oral agreements between the parties as to the kind of cork, the quantity, and the price were sufficient to create complete and binding contracts, and the terms of those agreements did not include any forum selection clause. 2. Would your answer be the same under the UCC? Answer: Chateau’s silence upon receiving the invoices would be binding under the UCC 2-201, which provides that contracts between merchants are enforceable if the party receiving the invoice fails to object within 10 days after it is received. Case Summary 26.4: Foreign Sovereign Immunities Act Scope: Altmann v. Republic of Austria [P.727] 1. Do sovereigns have immunity protection for actions prior to the FSIA’s enactment? Answer: The FSIA applies to conduct occurring before the enactment of the FSIA, and even before the U.S. adopted its restrictive theory of limited sovereign immunity. The presumption against the retroactive application of statutes does not apply in this context because sovereign immunity involved political realities and relationships rather than reliance on existing immunity rules. 2. Is it fair to allow Austria protection under these circumstances? Why or why not? Answer: It is not fair to allow Austria protection under these circumstances because Austria wrongfully expropriated property. Allowing foreign sovereignties to wrongfully expropriate property and escape jurisdiction based on the FSIA would be unjust. Case Summary 26.5: Dispute Resolution: DiMercurio v. Sphere Drake Insurance PLC [P.727] 1. Recall that in the Brower v. Gateway case in Chapter 4 “Resolving Disputes: Litigation and Alternative Dispute Resolution Options” the court held that Gateway’s inclusion of an arbitration clause in a terms and conditions agreement was invalid because of the choice of ICC as the arbitration forum. Why is this case distinguishable? Answer: This case is distinguishable from Brower v Gateway because in that case, the ICC rules unreasonably favored Gateway and posed a substantial burden on the consumer because the nonrefundable deposit was more than the cost of the product. Therefore, the arbitration clause was invalid because it essentially undermined any recourse for the consumer against Gateway. Here, the arbitration clause does not unreasonably favor DiMercurio or Sphere Drake in particular. The amount in controversy is significantly more, the written agreement to arbitrate is more than a shrink-wrap agreement, and Sphere Drake is not an American-based insurance company. 2. Given the court’s language in this case, give an example of what types of agreements would be too one-sided to be valid. Answer: Given the court’s language in this case, agreements that were the result of undue power or deception on the part of the insurer in the negotiation of the policy would be too one-sided to be valid. For example, if the broker who initially selected the agreement was unfamiliar with the Sphere Drake policy forms because they were ambiguous or deceptive, the agreement may be determined to be too one-sided to be valid. Additionally, overly restrictive agreements like one that requires confined proceedings (e.g. to recover premiums or like fees) to be held in a foreign arbitration forum may render the contract impermissibly unbalanced. Quick Assessment Questions (QAQs) 1. Which category of legal systems have drawn their body of law largely from the Roman law heritage that uses written law as the highest source, and have opted for a systematic codification of their general law. a. Civil law systems b. Common law systems c. Religious-based legal systems d. Mixed legal systems e. None of the above Answer: a 2. Which international legal doctrine stands for the proposition that, with some exceptions, foreign nations are exempt from jurisdiction from U.S. courts? a. Comity b. Foreign exemption c. International immunity d. Sovereign immunity e. None of the above Answer: d 3. Which of the following multinational agreements requires that foreigners from signatory countries be granted protection via reciprocity under the copyright laws of any other member country? a. Madrid Protocol b. Berne Convention c. Paris Convention d. General Agreement on Tariffs and Trade e. All of the above Answer: b 4. Treaties, customs, and judicial decisions are primary sources of international law. Answer: True 5. The U.N. Convention on Contracts for the International Sale of Goods (UNCISG) covers contracts for the sale of goods only between nonmerchants. Answer: False 6. With the advent of multinational agreements, enforcing intellectual property rights abroad is relatively unproblematic, especially when the government of a country agrees to abide by them. Answer: False Solution Manual for The Legal Environment of Business: A Managerial Approach: Theory to Practice Sean P. Melvin, Michael A. Katz 9780078023804
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