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This Document Contains Chapters 39 to 40 Part Nine: Regulation of Business CONTENTS Chapter 39 Protection of Intellectual Property Chapter 40 Antitrust Chapter 41 Consumer Protection Chapter 42 Employment Law Chapter 43 Securities Regulation Chapter 44 Accountants' Legal Liability Chapter 45 Environmental Law Chapter 46 International Business Law ETHICS QUESTIONS RAISED IN THIS PART 1. In your opinion does government regulation work? Why or why not? If you are of the opinion that it does not work, who should police the conduct that you would characterize as unethical or wrongful? 2. Does a company have ethical responsibilities to its workers? If so, what are they? How can a company balance its ethical responsibilities to its workers and its legal responsibilities to its shareholders? 3. Who is harmed by insider trading? Do these people really need to be protected or are the securities laws unnecessary in today's business world? Why? 4. The trend in recent years has been towards deregulation of more and more industries. Is this a trend that is beneficial to society as a whole? Why? Cite examples to support your opinion. 5. Should the Internet be regulated in any way by the Federal government? Why or why not? 6. What is unethical about sexual harassment? In a world with two sexes who frequently work together, how do you distinguish between normal sexual behavior and conduct that you would characterize as sexual harassment? Do you think that the EEOC guidelines do a good job of defining sexual harassment? 7. If a company really must lay off employees, what ethical obligations does it have to them? Do the circumstances of the layoff make a difference? When should a company be able to fire an employee for misconduct? What are a company's obligations towards an employee suspected of misconduct? Should a nonunion employer be able to fire an employee who is organizing a union? Why? 8. Is it unethical to download copyrighted music from the Internet? What about downloading large portions of a paper written by someone else to use as-is in a class assignment? ACTIVITIES AND RESEARCH PROBLEMS 1. Have students select an industry that has recently been deregulated, such as the airline industry. Then have them research to determine whether the deregulation has benefited the consumer. 2. Have students conduct a survey of workers to see how many of them have experienced sexual harassment. Use the EEOC guidelines as a definition of conduct that would constitute sexual harassment. 3. Have students research news articles and recent court cases involving illegal trading on the New York Stock Exchange and the Chicago Board of Trade and the Chicago Mercantile Exchange. What sorts of violations occurred in these cases? Then have students discuss whether regulation is necessary to prevent fraud and insider trading. You might have a panel of students research such cases and then have an in-class discussion of the effect of these regulations on the market place. 4. There have been several recent judicial decisions on affirmative action and the use of quotas. Have one or more students read the cases, brief them and then present their briefs to the class for discussion. 5. Have antitrust laws been sufficiently upheld over the last fifteen years? Explain. Chapter 39 PROTECTION OF INTELLECTUAL PROPERTY Cases in This Chapter Chapter Outcomes After reading and studying this chapter, the student should be able to: • Explain what trade secrets protect and how they may be infringed. • Distinguish among the various types of trade symbols. • Explain the extent to which trade names are protected. • Explain what copyrights protect and the remedies for infringement. • Explain what patents protect and the remedies for infringement. TEACHING NOTES Intellectual property is an economically significant type of intangible personal property that includes trade secrets, trade symbols, trade names, copyrights, and patents. Protection of these property interests from infringement, or unauthorized use, is essential to the conduct of business. In this chapter, we will discuss the law protecting (1) trade secrets; (2) trade symbols, including trademarks, service marks, certification marks, and collective marks; (3) trade names; (4) copyrights; and (5) patents. *** Chapter Outcome *** Explain what trade secrets protect and how they may be infringed. 39-1 TRADE SECRETS A business may choose not to obtain a patent on a trade secret, because patent protection is available for only a limited time, whereas a trade secret may remain a secret as long as the company can protect it. 39-1a State Protection of Trade Secrets Definition -- A trade secret is commercially valuable, secret information that is guarded from disclosure and is not general knowledge. It may include a formula, pattern, compilation, program, device, method, technique or process. Misappropriation -- A trade secret may be disclosed in confidence to an employee with the understanding that the employee will not disclose the information. If a person wrongfully uses a trade secret, the owner may obtain damages and, where appropriate, injunctive relief. Trade secrets are misappropriated when (1) an employee wrongfully uses or discloses it; or (2) a competitor wrongfully obtains it. Remedies -- Includes damages and, where appropriate, injunctive relief. 39-1b Federal Protection of Trade Secrets Criminal Penalties -- As amended in 2012 and 2016, the Economic Espionage Act of 1996 prohibits the theft of trade secrets, as well as attempts and conspiracies to steal trade secrets, if the trade secret is related to a product or service used in or intended for use in interstate or foreign commerce. The Act imposes criminal penalties for violations and authorizes the U.S. Attorney General to bring a civil action to obtain appropriate injunctive relief against any violation of the Act. Penalties include both fines and imprisonment for those who knowingly violate the Act. The Act imposes more severe penalties on persons who knowingly violate the Act intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent. Such individuals may be fined up to $5 million, imprisoned for up to fifteen years, or both; such organizations are subject to fines of not more than the greater of $10 million or three times the value of the stolen trade secret to the organization violating the Act. Civil Remedies – In May 2016, the Defend Trade Secrets Act (DTSA) became effective, amending the Economic Espionage Act to allow the owner of a misappropriated trade secret to bring a civil action in Federal court if the secret is related to a product or service used in or intended for use in interstate or foreign commerce. CASE 39-1 ED NOWOGROSKI INSURANCE, INC. v. RUCKER Supreme Court of Washington, En Banc, 1999 137 Wash.2d 427, 971 P.2d 936 http://scholar.google.com/scholar_case?q=971+P.2d+936+&hl=en&as_sdt=2,34&case=15515769364715143148&scilh=0 Guy, C. J. Facts This case is a trade secrets misappropriation action brought under the Uniform Trade Secrets Act, [citation], by an employer against former employees. The employer, Ed Nowogroski Insurance, Inc. (Nowogroski Inc.), owned by the Rupp family, sued its former employees, Michael Rucker, Darwin Rieck and Jerry Kiser, for soliciting its clients using confidential information. The employees had worked for Nowogroski Inc. as insurance salesmen and servicers of insurance business. Nowogroski Inc. also sued Potter, Leonard and Cahan, Inc., a rival insurance agency, for which employees Rucker, Rieck and Kiser commenced work when they terminated their employment with Nowogroski Inc. Following * * * trial, the trial court found that the employees had misappropriated Nowogroski Inc.’s trade secrets by retaining and using confidential client lists and other information. However, it awarded no damages for one employee’s solicitation of clients through the use of memorized client information. None of the factual findings has been challenged in this Court. * * * Nowogroski Inc. appealed, arguing that the trial court erred in holding that prior Washington cases prohibiting an ex-employee from using memorized, confidential client information to solicit his former employer’s customers were abrogated by the Uniform Trade Secrets Act. Nowogroski Inc. argued that the form of information which constituted a trade secret is irrelevant. Nowogroski Inc. also argued that the employees should be liable for misappropriation of a trade secret whether the information that constituted the protected information was written or memorized. * * * The Court of Appeals held that there was no legal distinction between written and memorized information under the Washington Uniform Trade Secrets Act. * * * The Court of Appeals affirmed the trial court’s award of damages based on 0.5 percent of commission * * *. We granted the employees and their new employer’s petition for review. * * * The Petitioners challenge only the Court of Appeals’ conclusion that both memorized confidential information, as well as written information, may be protected under the Uniform Trade Secrets Act if it otherwise qualifies as a trade secret under the Act. * * * * * * Analysis As a general rule, an employee who has not signed an agreement not to compete is free, upon leaving employment, to engage in competitive employment. In so doing, the former employee may freely use general knowledge, skills, and experience acquired under his or her former employer. However, the former employee, even in the absence of an enforceable covenant not to compete, remains under a duty not to use or disclose, to the detriment of the former employer, trade secrets acquired in the course of previous employment. Where the former employee seeks to use the trade secrets of the former employer in order to obtain a competitive advantage, then competitive activity can be enjoined or result in an award of damages. [Citation.] Once a common law concept, trade secret protection is now governed by statutes in most states, including Washington. [Citation.] * * * The Act codifies the basic principles of common law trade secret protection. [Citation.] A purpose of trade secrets law is to maintain and promote standards of commercial ethics and fair dealing in protecting those secrets. [Citation.] The Uniform Trade Secrets Act defines trade secret as follows: “Trade secret” means information, including a * * * compilation * * * that: (a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. [Citation.] In determining whether information has “independent economic value” under the Uniform Trade Secrets Act, one of the key factors used by the courts is the effort and expense that was expended on developing the information. [Citation.] A plaintiff seeking damages for misappropriation of a trade secret under the Uniform Trade Secrets Act has the burden of proving that legally protectable secrets exist. [Citation.] In this case, the trial court found that the insurance information, including the customer lists: (1) derived independent economic value from not being known or readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use, and (2) that the plaintiff’s efforts to keep the customer files secret by educating its staff and by providing employment manuals and employment agreements had been reasonable. The portion of the Act’s definition of” misappropriation” which applies here proscribes the disclosure or use of a trade secret of another without express or implied consent by a person who, at the time of disclosure or use, knew or had reason to know his or her knowledge of the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use. [Citation.] The nature of the employment relationship imposes a duty on employees and former employees not to use or disclose the employer’s trade secrets. [Citation.] The Petitioners in the present case do not argue that the trial court erred in concluding that they “misappropriated” a trade secret; rather, they argue that information in the memory of the employee about a customer list is not a trade secret. A customer list is one of the types of information which can be a protected trade secret if it meets the criteria of the Trade Secrets Act. [Citations.] Trade secret protection will not generally attach to customer lists where the information is readily ascertainable. [Citations.] If information is readily ascertainable from public sources such as trade directories or phone books, then customer lists will not be considered a trade secret and a prior employee, not subject to a noncompetition agreement, would be free to solicit business after leaving employment. [Citation.] * * * Briefly expressed, whether a customer list is protected as a trade secret depends on three factual inquiries: (1) whether the list is a compilation of information; (2) whether it is valuable because unknown to others; and (3) whether the owner has made reasonable attempts to keep the information secret. There is no dispute in this case that the customer names, expiration dates, coverage information and related information is a compilation of information. The trial court found that the customer list and associated information derived independent economic value from not being known, or readily ascertainable by proper means, by other persons who can obtain economic value from its disclosure or use and that Nowogroski Inc. undertook reasonable steps to protect its secrecy. The question before us is whether the fact that the customer information was in one of the employee’s memory allows him to use with impunity the information which was otherwise a trade secret under our statute. * * * * * * The Uniform Trade Secrets Act does not distinguish between written and memorized information. The Act does not require a plaintiff to prove actual theft or conversion of physical documents embodying the trade secret information to prove misappropriation. [Citations.] The Washington Uniform Trade Secrets Act defines a “trade secret” to include compilations of information which have certain characteristics without regard to the form that such information might take. The definition of “misappropriation” includes unauthorized “disclosure or use.” [Citation.] As the Court of Appeals noted, two types of information mentioned in the Uniform Trade Secrets Act as examples of trade secrets include “method” and “technique;” these do not imply the requirement of written documents. [Citation.] * * * * * * If an employee was privy to a secret formula of a manufacturing company, which was valuable and kept secret, it should not cease to be a trade secret if an employee committed it to memory. [Citation.] While customer lists may or may not be trade secrets depending on the facts of the case, we conclude that trade secret protection does not depend on whether the list is taken in written form or memorized. Conclusion The form of information, whether written or memorized, is immaterial under the trade secrets statute; the Uniform Trade Secrets Act makes no distinction about the form of trade secrets. Whether the information is on a CD, a blueprint, a film, a recording, a hard paper copy or memorized by the employee, the inquiry is whether it meets the definition of a trade secret under the Act and whether it was misappropriated. Absent a contract to the contrary, an employee is free to compete against his or her former employer, and a former employee may use general knowledge, skills and experience acquired during the prior employment in competing with a former employer. However, an employee may not use or disclose trade secrets belonging to the former employer to actively solicit customers from a confidential customer list. In this case, the former employees actively solicited customers from the employer’s customer lists, which the trial court found to be of independent value because unknown and subject to reasonable efforts to keep secret. The weight of modern authority is that the manner of taking a trade secret is irrelevant. Hence, we conclude the Court of Appeals was correct in holding that there is no legal distinction between written and memorized information under the Uniform Trade Secrets Act and in remanding for a recalculation of damages. We affirm. *** Chapter Outcome *** Distinguish among the various types of trade symbols. 39-2 TRADE SYMBOLS “Palming off,” the fraudulent marketing of one person’s goods as those of another, was one of the earliest forms of unfair competition and is still common today. Section 43(a) of the Federal Trademark Act (known as the Lanham Act) prohibits the use of a false designation of nature, characteristics, qualities, or geographic origin in connection with any goods or services in interstate commerce. This section also prohibits false descriptions or representations of a person’s own goods and services. The Lanham Act also established federal registration of trade symbols and protection against misuse or infringement by injunctive relief and a right of action for damages against the infringer. International treaties protecting trademarks are the Paris Convention for the Protection of Industrial Property (at least 176 nations), the Arrangement of Nice Concerning the International Classification of Goods and Services (at least eighty-four nations), the Madrid Protocol of 1989 (at least ninety-seven nations), the 1973 Vienna Trademark Agreement (at least thirty-two nations), and the Trademark Law Treaty of 1994 (at least fifty-three nations). 39-2a Types of Trade Symbols The Lanham Act recognizes four types of trade symbols or marks. A trademark is a distinctive symbol, word, name, device, letter, number, design, picture, or combination in any arrangement that a person uses to identify the tangible products he manufactures or sells. Trademarks also include “trade dress,” which is the appearance of the goods or its packaging. Internet domain names that are used to identify and distinguish goods or services and to indicate the source of the goods and services may be registered as a trademark. A service mark, similar in function to the trademark, is used to identify and distinguish the services (such as TV show titles and characters or the name of a carpet cleaning process) of one person from those of another. May include trade dress such as a distinctive shape or decor of a building in which a service is provided. A certification mark is used with goods or services to certify the region of origin, composition, mode of manufacture, quality, accuracy, or other characteristics of goods or services. A collective mark is a distinctive mark or symbol used to indicate either that the producer or provider belongs to a trade union, trade association, fraternal society, or other organization or that the goods or services are produced by members of a collective group. CASE 39-2 WAL-MART STORES, INC. v. SAMARA BROTHERS, INC. Supreme Court of the United States, 2000 529 U.S. 205, 120 S.Ct. 1339, 146 L.Ed.2d 182 http://scholar.google.com/scholar_case?case=11551321958641509496&hl=en&as_sdt=2&as_vis=1&oi=scholarr Scalia, J. In this case, we decide under what circumstances a product’s design is distinctive, and therefore protectible, in an action for infringement of unregistered trade dress under §43(a) of the Trademark Act of 1946 (Lanham Act), [citation]. I Respondent Samara Brothers, Inc., designs and manufactures children’s clothing. Its primary product is a line of spring/summer one-piece seersucker outfits decorated with appliques of hearts, flowers, fruits, and the like. A number of chain stores, including JCPenney, sell this line of clothing under contract with Samara. Petitioner Wal-Mart Stores, Inc., is one of the nation’s best known retailers, selling among other things children’s clothing. In 1995, Wal-Mart contracted with one of its suppliers, Judy-Philippine, Inc., to manufacture a line of children’s outfits for sale in the 1996 spring/summer season. Wal-Mart sent Judy-Philippine photographs of a number of garments from Samara’s line, on which Judy-Philippine’s garments were to be based; Judy-Philippine duly copied, with only minor modifications, 16 of Samara’s garments, many of which contained copyrighted elements. In 1996, Wal-Mart briskly sold the so-called knockoffs, generating more than $1.15 million in gross profits. In June 1996, a buyer for JCPenney called a representative at Samara to complain that she had seen Samara garments on sale at Wal-Mart for a lower price than JCPenney was allowed to charge under its contract with Samara. The Samara representative told the buyer that Samara did not supply its clothing to Wal-Mart. Their suspicions aroused, however, Samara officials launched an investigation, which disclosed that Wal-Mart and several other major retailers—Kmart, Caldor, Hills, and Goody’s—were selling the knockoffs of Samara’s outfits produced by Judy-Philippine. After sending cease-and-desist letters, Samara brought this action in the United States District Court for the Southern District of New York against Wal-Mart, Judy-Philippine, Kmart, Caldor, Hills, and Goody’s for copyright infringement under federal law, consumer fraud and unfair competition under New York law, and—most relevant for our purposes—infringement of unregistered trade dress under §43(a) of the Lanham Act, [citation]. All of the defendants except Wal-Mart settled before trial. After a weeklong trial, the jury found in favor of Samara on all of its claims. Wal-Mart then renewed a motion for judgment as a matter of law, claiming * * * that there was insufficient evidence to support a conclusion that Samara’s clothing designs could be legally protected as distinctive trade dress for purposes of §43(a). The District Court denied the motion, [citation], and awarded Samara damages, interest, costs, and fees totaling almost $1.6 million, together with injunctive relief, [citation]. The Second Circuit affirmed the denial of the motion for judgment as a matter of law, [citation], and we granted certiorari, [citation]. II The Lanham Act provides for the registration of trademarks, which it defines in §45 to include “any word, name, symbol, or device, or any combination thereof [used or intended to be used] to identify and distinguish [a producer’s] goods * * * from those manufactured or sold by others and to indicate the source of the goods * *” [Citation.] Registration of a mark under the Act, [citation], enables the owner to sue an infringer under [citation]; it also entitles the owner to a presumption that its mark is valid, [citation], and ordinarily renders the registered mark incontestable after five years of continuous use, [citation]. In addition to protecting registered marks, the Lanham Act, in §43(a), gives a producer a cause of action for the use by any person of “any word, term, name, symbol, or device, or any combination thereof * * * which * * * is likely to cause confusion * * * as to the origin, sponsorship, or approval of his or her goods. * * *” [Citation.] It is the latter provision that is at issue in this case. The breadth of the definition of marks registrable under [the Act], and of the confusion-producing elements recited as actionable by §43(a), has been held to embrace not just word marks, such as “Nike,” and symbol marks, such as Nike’s “swoosh” symbol, but also “trade dress”—a category that originally included only the packaging, or “dressing,” of a product, but in recent years has been expanded by many courts of appeals to encompass the design of a product. [Citations.] These courts have assumed, often without discussion, that trade dress constitutes a “symbol” or “device” for purposes of the relevant sections, and we conclude likewise. * * * The text of §43(a) provides little guidance as to the circumstances under which unregistered trade dress may be protected. It does require that a producer show that the allegedly infringing feature is not “functional,” [citation], and is likely to cause confusion with the product for which protection is sought, [citation]. Nothing in §43(a) explicitly requires a producer to show that its trade dress is distinctive, but courts have universally imposed that requirement, since without distinctiveness the trade dress would not “cause confusion * * * as to the origin, sponsorship, or approval of [the] goods,” as the section requires. Distinctiveness is, moreover, an explicit prerequisite for registration of trade dress * * *.[Citation.] In evaluating the distinctiveness of a mark * * *, courts have held that a mark can be distinctive in one of two ways. First, a mark is inherently distinctive if “[its] intrinsic nature serves to identify a particular source.” [Citation.] In the context of word marks, courts have applied the now-classic test originally formulated by Judge Friendly, in which word marks that are “arbitrary” (“Camel” cigarettes), “fanciful” (“Kodak” film), or “suggestive” (“Tide” laundry detergent) are held to be inherently distinctive. [Citation.] Second, a mark has acquired distinctiveness, even if it is not inherently distinctive, if it has developed secondary meaning, which occurs when, “in the minds of the public, the primary significance of a [mark] is to identify the source of the product rather than the product itself.” [Citation.] The judicial differentiation between marks that are inherently distinctive and those that have developed secondary meaning has solid foundation in the statute itself. [The Act] requires that registration be granted to any trademark “by which the goods of the applicant may be distinguished from the goods of others”—subject to various limited exceptions. [Citation.] * * * Indeed, with respect to at least one category of mark—colors—we have held that no mark can ever be inherently distinctive. * * * We held that a color could be protected as a trademark, but only upon a showing of secondary meaning. * * * It seems to us that design, like color, is not inherently distinctive. The attribution of inherent distinctiveness to certain categories of word marks and product packaging derives from the fact that the very purpose of attaching a particular word to a product, or encasing it in a distinctive packaging, is most often to identify the source of the product. Although the words and packaging can serve subsidiary functions—a suggestive word mark (such as “Tide” for laundry detergent), for instance, may invoke positive connotations in the consumer’s mind, and a garish form of packaging (such as Tide’s squat, brightly decorated plastic bottles for its liquid laundry detergent) may attract an otherwise indifferent consumer’s attention on a crowded store shelf—their predominant function remains source identification. Consumers are therefore predisposed to regard those symbols as indication of the producer, which is why such symbols “almost automatically tell a customer that they refer to a brand,” [citation], and “immediately * * * signal a brand or a product ‘source,’” [citation]. And where it is not reasonable to assume consumer predisposition to take an affixed word or packaging as indication of source—where, for example, the affixed word is descriptive of the product (“Tasty” bread) or of a geographic origin (“Georgia” peaches)—inherent distinctiveness will not be found. That is why the statute generally excludes, from those word marks that can be registered as inherently distinctive, words that are “merely descriptive” of the goods, [citation], or “primarily geographically descriptive of them,” [citation]. In the case of product design, as in the case of color, we think consumer predisposition to equate the feature with the source does not exist. Consumers are aware of the reality that, almost invariably, even the most unusual of product designs—such as a cocktail shaker shaped like a penguin—is intended not to identify the source, but to render the product itself more useful or more appealing. * * * * * * To the extent there are close cases, we believe that courts should err on the side of caution and classify ambiguous trade dress as product design, thereby requiring secondary meaning. The very closeness will suggest the existence of relatively small utility in adopting an inherent-distinctiveness principle, and relatively great consumer benefit in requiring a demonstration of secondary meaning.* * * We hold that, in an action for infringement of unregistered trade dress under §43(a) of the Lanham Act, a product’s design is distinctive, and therefore protectible, only upon a showing of secondary meaning. The judgment of the Second Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion. 39-2b Registration To be protected by the Lanham Act, a mark must be distinctive. Marks may meet this requirement in one of two ways: (1) it may be inherently distinctive, such as marks that are fanciful or arbitrary, or (2) it may be distinctive through secondary meaning, by taking on an association with the product which is beyond its surface meaning. Descriptive or geographical marks may meet the distinctiveness requirement by the secondary meaning method, but not usually by the inherently distinctive method. The trademark office may accept as prima facie evidence of secondary meaning proof of substantially exclusive and continuous use of a mark for five years. Ironically, a mark can lose its protected status if its secondary meaning becomes understood by the public to mean the entire category of those goods (such as aspirin and thermos). Federal registration is not required to establish rights in a mark, nor is it required to begin using a mark. However, the mark must be registered with the Patent and Trademark Office to be federally protected, for a ten-year period with unlimited ten-year renewals. To retain trademark protection, an owner must use the mark at least every three years. A U.S. trade symbol registration provides protection only in the United States. However, in 2002 Congress enacted legislation implementing the Madrid Protocol, a procedural agreement allowing U.S. trademark owners to file for registration in at least ninety-seven member countries by filing a single application. Anyone who claims rights in a mark may use the TM (trademark) or SM (service mark) designation, even if the mark is not registered. Only owners of registered marks may use the symbol ®. 39-2c Infringement Infringement occurs when a person without authorization uses an identical or substantially indistinguishable mark that is likely to cause confusion, or mistake, or that is likely to deceive. Intention and actual confusion need not be proved. The Federal Trademark Dilution Act of 1995 amended the Lanham Act to protect famous marks from dilution of their distinctive quality. The Trademark Cyberpiracy Prevention Act of 1999 amended the Lanham Act to protect the owner of a trademark or service mark from any person who, with a bad faith intent to profit from the mark, registers, traffics in, or uses a domain name which, at the time of its registration, (1) is identical or confusingly similar to a distinctive mark; or (2) is dilutive of a famous mark; or (3) is a protected trademark, word, or name.. 39-2d Remedies The Lanham Act provides several remedies for infringement: 1) injunctive relief, 2) an accounting for profits, 3) damages, 4) destruction of infringing articles, 5) attorneys’ fees in some cases, and 6) costs. In assessing damages for trademark counterfeiting, the court shall, unless it finds extenuating circumstances, enter judgment for three times the defendant’s profits or the plaintiff’s damages, whichever is greater, plus reasonable attorneys’ fees. Instead of actual damages and profits, the plaintiff may elect to receive an award of statutory damages, in an amount the court considers just, between $1,000 and $200,000 per counterfeit mark or, if the use of the counterfeit mark was willful, not more than $2 million per counterfeit mark. Criminal sanctions include a fine of up to $2 million, imprisonment of up to ten years, or both. Under the Federal Trademark Dilution Act of 1995, the owner of a famous mark can obtain only injunctive relief unless the infringer willfully intended to trade on the owner’s reputation or to cause dilution of the famous mark. When a person intentionally traffics in goods or services known to bear a counterfeit mark, both civil and criminal remedies are available. In addition, goods bearing the counterfeit mark may be destroyed. *** Chapter Outcome *** Explain the extent to which trade names are protected. 39-3 TRADE NAMES A trade name is any name used to identify a business, vocation, or occupation. Although descriptive and generic words, and personal and generic names are not proper trademarks, they may become protected as trade names upon acquiring a special significance in the trade which is referred to as “secondary meaning.” Trade names may not be federally registered under the Lanham Act, but they are protected. Remedies include injunction and damages. *** Chapter Outcome *** Explain what copyrights protect and the remedies for infringement. 39-4 COPYRIGHTS Copyright is a form of protection provided by the Federal Copyright Act to authors of original works, which include literary works, musical works, dramatic works, pantomimes, choreographic works, pictorial, graphic and sculptural works, motion pictures, architectural works, and sound recordings. The act extends the protection to “original works of authorship in any tangible medium of expression, now known or later developed.” Since 1980 protection has extended to computer programs. On March 1, 1989, the United States joined the Berne Convention, an international treaty protecting copyrighted works adopted by at least 171 nations. Other treaties covering copyrights are the 1952 Universal Copyright Convention (at least 100 nations) and the World Intellectual Property Organization (WIPO) Copyright Treaty of 1996 (at least ninety-four nations). In 1998 Congress enacted the Digital Millennium Copyright Act (DMCA), which amended the Copyright Act to implement the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty of 1996 by extending U.S. copyright protection to works required to be protected under these two treaties. The WIPO treaty called for adequate legal protection and effective legal remedies against the circumvention of effective technological measures that are used by copyright owners to prevent unauthorized exercise of their copyrights. The DMCA contains three principal anticircumvention provisions, which are discussed in Chapter 48. 39-4a Registration Although registration is not required (protection begins automatically as soon as the work is fixed in a tangible medium), it is advisable since it a condition for some remedies. Applications are filed with the Register of Copyrights, Washington, D.C. 39-4b Rights In most instances, copyright protection lasts for the period of an author’s life plus fifty years. The owner of the copyright has the exclusive right to the copyright. However, this ownership is subject to the limitations of “compulsory licenses,” “fair use” and. the “first sale doctrine.” In a work made for hire the copyright lasts for a term of 95 years from the year of its first publication, or a term of 120 years from its creation, whichever expires first. Compulsory licenses permit certain limited uses of copyrighted material upon the payment of specified royalties and compliance with statutory conditions. Fair use of a copyrighted work for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research is not an infringement of copyright. The first sale doctrine limits the copyright owner’s exclusive right of distribution by allowing the owner of a particular lawfully made copy of a work to sell or otherwise dispose of possession of that copy without authority of the copyright owner. 39-4c Ownership The author of a creative work owns the entire copyright; this is usually the actual creator of the work, except in two situations under the doctrine of works for hire (1) when an employee prepares a work within the scope of employment, her employer is considered author of the work, (2) if a work is specially ordered or commissioned for certain purposes and the parties expressly agree in writing that the work shall be considered a work for hire, the person commissioning the work is deemed the author. The ownership of a copyright may be transferred in whole or in part by conveyance, will, or intestate succession. There must be a written note or memorandum of the transfer signed by the transferor or the transfer is invalid. Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from the ownership of any material object that embodies the work (such as a book). Under the first sale doctrine, the purchaser may of a material object that embodies the work may rent, lend, or resell that object. Section 109 CASE 39-3 SUPAP KIRTSAENG v. JOHN WILEY & SONS, INC. Supreme Court of the United States, 2013 568 U.S. ____, 133 S.Ct. 1351, 185 L.Ed.2d 392 http://scholar.google.com/scholar_case?case=15712401143530412161&q=133+S.Ct.+1351&hl=en&as_sdt=2,34 Breyer, J. [The business of respondent, John Wiley & Sons, Inc., includes publishing academic textbooks. Wiley often assigns to its wholly owned foreign subsidiary, Wiley Asia, rights to publish, print, and sell a foreign edition of Wiley’s English language textbooks abroad. Each copy of a Wiley Asia foreign edition will likely contain language making clear that the copy is to be sold only in a particular country or geographical region outside the United States. Thus there are two essentially equivalent versions of a Wiley textbook, each version manufactured and sold with Wiley’s permission: (1) a U.S. version printed and sold in the United States, and (2) a foreign version manufactured and sold abroad. Wiley makes certain that copies of the foreign version state that they are not to be taken without permission into the United States. Petitioner, Supap Kirtsaeng, a citizen of Thailand, moved to the United States in 1997 to study mathematics at Cornell University. He paid for his education with the help of a Thai Government scholarship which required him to teach in Thailand for ten years on his return. Kirtsaeng successfully completed his undergraduate courses at Cornell, successfully completed a Ph. D. program in mathematics at the University of Southern California, and then, as promised, returned to Thailand to teach. While he was studying in the United States, Kirtsaeng asked his friends and family in Thailand to buy copies of foreign edition English language textbooks at Thai bookstores, where they sold at low prices, and mail them to him in the United States. Kirtsaeng would then sell them, reimburse his family and friends, and keep the profit. In 2008, Wiley brought this Federal lawsuit against Kirtsaeng for copyright infringement. Wiley claimed that Kirtsaeng’s unauthorized importation of its English language books and his later resale of those books amounted to an infringement of Wiley’s exclusive right to distribute under the Copyright Act’s as well as the Act’s related import prohibition. Kirtsaeng replied that the books he had acquired were “lawfully made” and that he had acquired them legitimately. Thus, in his view, the Copyright Act’s “first sale” doctrine permitted him to resell or otherwise dispose of the books without the copyright owner’s further permission. The District Court held that Kirtsaeng could not assert the “first sale” defense because, that doctrine does not apply to “foreign-manufactured goods,” even if made abroad with the copyright owner’s permission. The jury then found that Kirtsaeng had willfully infringed Wiley’s American copyrights by selling and importing without authorization copies of eight of Wiley’s copyrighted titles and assessed statutory damages of $600,000 ($75,000 per work). On appeal, the Second Circuit affirmed, concluding that the “first sale” doctrine does not apply to copies of American copyrighted works manufactured abroad.] Section 106 of the Copyright Act grants “the owner of copyright under this title” certain “exclusive rights,” including the right “to distribute copies … of the copyrighted work to the public by sale or other transfer of ownership.” [Citation.] These rights are qualified, however, by the application of various limitations set forth in the next several sections of the Act, §§107 through 122. Those sections, typically entitled “Limitations on exclusive rights,” include, for example, the principle of “fair use” (§107), permission for limited library archival reproduction, (§108), and the doctrine at issue here, the “first sale” doctrine (§109). Section 109(a) sets forth the “first sale” doctrine as follows: “Notwithstanding the provisions of section 106(3) [the section that grants the owner exclusive distribution rights], the owner of a particular copy or phonorecord lawfully made under this title … is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” (Emphasis added.) Thus, even though §106(3) forbids distribution of a copy of, say, the copyrighted novel Herzog without the copyright owner’s permission, §109(a) adds that, once a copy of Herzog has been lawfully sold (or its ownership otherwise lawfully transferred), the buyer of that copy and subsequent owners are free to dispose of it as they wish. In copyright jargon, the “first sale” has “exhausted” the copyright owner’s §106(3) exclusive distribution right. What, however, if the copy of Herzog was printed abroad and then initially sold with the copyright owner’s permission? Does the “first sale” doctrine still apply? Is the buyer, like the buyer of a domestically manufactured copy, free to bring the copy into the United States and dispose of it as he or she wishes? To put the matter technically, an “importation” provision, §602(a)(1), says that “[i]mportation into the United States, without the authority of the owner of copyright under this title, of copies … of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies … under section 106 … .” [Citation] (emphasis added [by Court]). Thus §602(a)(1) makes clear that importing a copy without permission violates the owner’s exclusive distribution right. But in doing so, §602(a)(1) refers explicitly to the §106(3) exclusive distribution right. As we have just said, §106 is by its terms “[s]ubject to” the various doctrines and principles contained in §§107 through 122, including §109(a)’s “first sale” limitation. Do those same modifications apply—in particular, does the “first sale” modification apply—when considering whether §602(a)(1) prohibits importing a copy? In Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., [citation], we held that §602(a)(1)’s reference to §106(3)’s exclusive distribution right incorporates the later subsections’ limitations, including, in particular, the “first sale” doctrine of §109. Thus, it might seem that, §602(a)(1) notwithstanding, one who buys a copy abroad can freely import that copy into the United States and dispose of it, just as he could had he bought the copy in the United States. But Quality King considered an instance in which the copy, though purchased abroad, was initially manufactured in the United States (and then sent abroad and sold). This case is like Quality King but for one important fact. The copies at issue here were manufactured abroad. That fact is important because §109(a) says that the “first sale” doctrine applies to “a particular copy or phonorecord lawfully made under this title.” And we must decide here whether the five words, “lawfully made under this title,” make a critical legal difference. Putting section numbers to the side, we ask whether the “first sale” doctrine applies to protect a buyer or other lawful owner of a copy (of a copyrighted work) lawfully manufactured abroad. Can that buyer bring that copy into the United States (and sell it or give it away) without obtaining permission to do so from the copyright owner? Can, for example, someone who purchases, say at a used bookstore, a book printed abroad subsequently resell it without the copyright owner’s permission? In our view, the answers to these questions are, yes. We hold that the “first sale” doctrine applies to copies of a copyrighted work lawfully made abroad. * * * We must decide whether the words “lawfully made under this title” restrict the scope of §109(a)’s “first sale” doctrine geographically. * * * Under any of [the] geographical interpretations, §109(a)’s “first sale” doctrine would not apply to the Wiley Asia books at issue here. And, despite an American copyright owner’s permission to make copies abroad, one who buys a copy of any such book or other copyrighted work—whether at a retail store, over the Internet, or at a library sale—could not resell (or otherwise dispose of) that particular copy without further permission. * * * In our view, §109(a)’s language, its context, and the common-law history of the “first sale” doctrine, taken together, favor a non-geographical interpretation. * * * We consequently conclude that Kirtsaeng’s nongeographical reading is the better reading of the Act. The language of §109(a) read literally favors Kirtsaeng’s nongeographical interpretation, namely, that “lawfully made under this title” means made “in accordance with” or “in compliance with” the Copyright Act. The language of §109(a) says nothing about geography. * * * * * * Other provisions of the present statute also support a nongeographical interpretation. * * * * * * The “first sale” doctrine is a common-law doctrine with an impeccable historic pedigree. * * * * * * The common-law doctrine makes no geographical distinctions * * * * * * Associations of libraries, used-book dealers, technology companies, consumer-goods retailers, and museums point to various ways in which a geographical interpretation would fail to further basic constitutional copyright objectives, in particular “promot[ing] the Progress of Science and useful Arts.” U. S. Const., Art. I, §8, cl. 8. The American Library Association tells us that library collections contain at least 200 million books published abroad (presumably, many were first published in one of the nearly 180 copyright-treaty nations and enjoy American copyright protection under [citation]); that many others were first published in the United States but printed abroad because of lower costs; and that a geographical interpretation will likely require the libraries to obtain permission (or at least create significant uncertainty) before circulating or otherwise distributing these books. [Citations.] * * * Technology companies tell us that “automobiles, microwaves, calculators, mobile phones, tablets, and personal computers” contain copyrightable software programs or packaging. [Citations.] Many of these items are made abroad with the American copyright holder’s permission and then sold and imported (with that permission) to the United States. [Citation.] A geographical interpretation would prevent the resale of, say, a car, without the permission of the holder of each copyright on each piece of copyrighted automobile software. * * * Without that permission a foreign car owner could not sell his or her used car. Retailers tell us that over $2.3 trillion worth of foreign goods were imported in 2011. [Citation.] American retailers buy many of these goods after a first sale abroad. [Citation.] And, many of these items bear, carry, or contain copyrighted “packaging, logos, labels, and product inserts and instructions for [the use of] everyday packaged goods from floor cleaners and health and beauty products to breakfast cereals.” [Citation.] The retailers add that American sales of more traditional copyrighted works, “such as books, recorded music, motion pictures, and magazines” likely amount to over $220 billion. [Citations.] A geographical interpretation would subject many, if not all, of them to the disruptive impact of the threat of infringement suits. [Citation.] * * * Thus, we believe that the practical problems that petitioner and his amici [parties filing “friends of the court” briefs] have described are too serious, too extensive, and too likely to come about for us to dismiss them as insignificant—particularly in light of the evergrowing importance of foreign trade to America. [Citation.] See The World Bank, Imports of goods and services (% of GDP) (imports in 2011 18% of U. S. gross domestic product compared to 11% in 1980), [citation]. The upshot is that copyright-related consequences along with language, context, and interpretive canons argue strongly against a geographical interpretation of §109(a). * * * For these reasons we conclude that the considerations supporting Kirtsaeng’s nongeographical interpretation of the words “lawfully made under this title” are the more persuasive. The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion. It is so ordered. 39-4d Infringement and Remedies To sue for infringement the copyright must be registered with the Copyright Office unless the work is a Berne Convention work whose country of origin is not the United States. Infringement occurs when somebody exercises the rights exclusively reserved for the copyright owner without authorization. Intent is not necessary for infringement. Remedies after registration include: (1) injunction; (2) impoundment and destruction of the infringing articles; (3) actual damages plus profits made by the infringer, or statutory damages; (4) costs; and (5) criminal penalties. In 1997 Congress enacted the No Electronic Theft Act (NET Act) to close a loophole in the Copyright Act, which permitted infringers to pirate copyrighted works willfully and knowingly, so long as they did not do so for profit. The NET Act amended Federal copyright law to define “financial gain” to include the receipt of anything of value, including the receipt of other copyrighted works. *** Chapter Outcome *** Explain what patents protect and the remedies for infringement. 39-5 PATENTS The U.S. Constitution grants Congress the power “to promote the Progress of Science and useful Arts, by securing for limited Times to . . . Inventors the exclusive Right to their . . . Discoveries.” A patent is the exclusive right to make, use, or sell an invention to the absolute exclusion of others. The patent owner may also profit by selling the patent or by licensing others to use the patent on a royalty basis. The patent may not be renewed, however: upon expiration, the invention enters the “public domain,” and anyone may use it. On September 16, 2011, President Obama signed into law the Leahy-Smith America Invents Act, which represents the most significant reform of the Patent Act since 1952. Subject to some exceptions, the America Invents Act provides that the United States will no longer award a patent to the first person to create an invention but instead will award the patent to the first inventor to file an application for the invention. 39-5a Patentability Any new and useful process, machine, manufacture, or composition of matter or any new and useful improvement thereof may be patented as a utility patent. Naturally occurring substances and fundamental truths or ideas are not patentable. To be patentable as a utility patent, the process, machine, manufacture, or composition must be (1) novel; (2) useful; and (3) nonobvious. There are also plant patents (the exclusive right to reproduce a new and distinctive variety of asexually reproducing plant) and design patents (for new, original, ornamental design for an article of manufacture). Utility and plant patents have a term which begin on the date of the patent’s grant and ends twenty years from the date of application. Design patents have a term of fourteen years form the date of the grant. CASE 39-4 ASSOCIATION FOR MOLECULAR PATHOLOGY v. MYRIAD GENETICS, INC. Supreme Court of the United States, 2013 569 U. S. ____, 133 S.Ct. 2107 http://scholar.google.com/scholar_case?q=Association+for+MMolecular+Pathology+v.+Myriad+Genetics,+Inc.&hl=en&as_sdt=4,60&case=16946808550965094679&scilh=0 Thomas, J. Respondent Myriad Genetics, Inc. (Myriad), discovered the precise location and sequence of two human genes, mutations of which can substantially increase the risks of breast and ovarian cancer. Myriad obtained a number of patents based upon its discovery. This case involves claims from three of them and requires us to resolve whether a naturally occurring segment of deoxyribonucleic acid (DNA) is patent eligible under [Section 101 of the Patent Act] by virtue of its isolation from the rest of the human genome. We also address the patent eligibility of synthetically created DNA known as complementary DNA (cDNA), which contains the same protein-coding information found in a segment of natural DNA but omits portions within the DNA segment that do not code for proteins. For the reasons that follow, we hold that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated, but that cDNA is patent eligible because it is not naturally occurring. We, therefore, affirm in part and reverse in part the decision of the United States Court of Appeals for the Federal Circuit. I A * * * DNA’s informational sequences and the processes * * * occur naturally within cells. Scientists can, however, extract DNA from cells using well known laboratory methods. These methods allow scientists to isolate specific segments of DNA—for instance, a particular gene or part of a gene—which can then be further studied, manipulated, or used. It is also possible to create DNA synthetically through processes similarly well known in the field of genetics. * * * This synthetic DNA created in the laboratory * * * is known as complementary DNA (cDNA). Changes in the genetic sequence are called mutations. Mutations can be as small as the alteration of a single nucleotide [a molecule that forms the building block for DNA]—a change affecting only one letter in the genetic code. Such small-scale changes can produce an entirely different amino acid or can end protein production altogether. Large changes, involving the deletion, rearrangement, or duplication of hundreds or even millions of nucleotides, can result in the elimination, misplacement, or duplication of entire genes. Some mutations are harmless, but others can cause disease or increase the risk of disease. As a result, the study of genetics can lead to valuable medical breakthroughs. B This case involves patents filed by Myriad after it made one such medical breakthrough. Myriad discovered the precise location and sequence of what are now known as the BRCA1 and BRCA2 genes. Mutations in these genes can dramatically increase an individual’s risk of developing breast and ovarian cancer. The average American woman has a 12– to 13–percent risk of developing breast cancer, but for women with certain genetic mutations, the risk can range between 50 and 80 percent for breast cancer and between 20 and 50 percent for ovarian cancer. Before Myriad’s discovery of the BRCA1 and BRCA2 genes, scientists knew that heredity played a role in establishing a woman’s risk of developing breast and ovarian cancer, but they did not know which genes were associated with those cancers. Myriad identified the exact location of the BRCA1 and BRCA2 genes on chromosomes 17 and 13. * * * Knowledge of the location of the BRCA1 and BRCA2 genes allowed Myriad to determine their typical nucleotide sequence. That information, in turn, enabled Myriad to develop medical tests that are useful for detecting mutations in a patient’s BRCA1 and BRCA2 genes and thereby assessing whether the patient has an increased risk of cancer. Once it found the location and sequence of the BRCA1 and BRCA2 genes, Myriad sought and obtained a number of patents. * * * * * * C Myriad’s patents would, if valid, give it the exclusive right to isolate an individual’s BRCA1 and BRCA2 genes * * * The patents would also give Myriad the exclusive right to synthetically create BRCA cDNA. In Myriad’s view, manipulating BRCA DNA in either of these fashions triggers its “right to exclude others from making” its patented composition of matter under the Patent Act. [Citation.] Some years later, [petitioners including medical patients, advocacy groups, and doctors] filed this lawsuit seeking a declaration that Myriad’s patents are invalid * * * The District Court then granted summary judgment to petitioners on the composition claims at issue in this case based on its conclusion that Myriad’s claims, including claims related to cDNA, were invalid because they covered products of nature. [Citation.] [The Federal Circuit initially reversed, but on remand the Federal Circuit found both isolated DNA and cDNA patent eligible.] II A Section 101 of the Patent Act provides: “Whoever invents or discovers any new and useful ... composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” [Citation.] We have “long held that this provision contains an important implicit exception[:] Laws of nature, natural phenomena, and abstract ideas are not patentable.” [Citation.] Rather, “‘they are the basic tools of scientific and technological work’” that lie beyond the domain of patent protection. [Citation.] As the Court has explained, without this exception, there would be considerable danger that the grant of patents would “tie up” the use of such tools and thereby “inhibit future innovation premised upon them.” [Citation.] This would be at odds with the very point of patents, which exist to promote creation. [Citation.] The rule against patents on naturally occurring things is not without limits, however, for “all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas,” and “too broad an interpretation of this exclusionary principle could eviscerate patent law.” [Citation.] As we have recognized before, patent protection strikes a delicate balance between creating “incentives that lead to creation, invention, and discovery” and “imped[ing] the flow of information that might permit, indeed spur, invention.” [Citation.] We must apply this well-established standard to determine whether Myriad’s patents claim any “new and useful ... composition of matter,” § 101, or instead claim naturally occurring phenomena. B It is undisputed that Myriad did not create or alter any of the genetic information encoded in the BRCA1 and BRCA2 genes. The location and order of the nucleotides existed in nature before Myriad found them. Nor did Myriad create or alter the genetic structure of DNA. Instead, Myriad’s principal contribution was uncovering the precise location and genetic sequence of the BRCA1 and BRCA2 genes within chromosomes 17 and 13. The question is whether this renders the genes patentable. Myriad recognizes that our decision in [Diamond v. Chakrabarty] is central to this inquiry. * * * The Chakrabarty bacterium was new “with markedly different characteristics from any found in nature,” [citation], due to the additional plasmids and resultant “capacity for degrading oil.” [Citation.] In this case, by contrast, Myriad did not create anything. To be sure, it found an important and useful gene, but separating that gene from its surrounding genetic material is not an act of invention. Groundbreaking, innovative, or even brilliant discovery does not by itself satisfy the § 101 inquiry. * * * Myriad found the location of the BRCA1 and BRCA2 genes, but that discovery, by itself, does not render the BRCA genes “new ... composition[s] of matter,” § 101, that are patent eligible. Nor are Myriad’s claims saved by the fact that isolating DNA from the human genome severs chemical bonds and thereby creates a nonnaturally occurring molecule. * * * * * * C cDNA does not present the same obstacles to patentability as naturally occurring, isolated DNA segments. As already explained, creation of a cDNA sequence * * * results in a * * * molecule that is not naturally occurring. Petitioners concede that cDNA differs from natural DNA in that “the non-coding regions have been removed.” [Citation.] They nevertheless argue that cDNA is not patent eligible because “[t]he nucleotide sequence of cDNA is dictated by nature, not by the lab technician.” [Citation.] That may be so, but the lab technician unquestionably creates something new when cDNA is made. cDNA retains the naturally occurring exons of DNA, but it is distinct from the DNA from which it was derived. As a result, cDNA is not a “product of nature” and is patent eligible under § 101, except insofar as very short series of DNA may * * * be indistinguishable from natural DNA. III It is important to note what is not implicated by this decision. First, there are no method claims before this Court. Had Myriad created an innovative method of manipulating genes while searching for the BRCA1 and BRCA2 genes, it could possibly have sought a method patent. But the processes used by Myriad to isolate DNA were well understood by geneticists at the time of Myriad’s patents “were well understood, widely used, and fairly uniform insofar as any scientist engaged in the search for a gene would likely have utilized a similar approach,” [citation], and are not at issue in this case. Similarly, this case does not involve patents on new applications of knowledge about the BRCA1 and BRCA2 genes. * * * Nor do we consider the patentability of DNA in which the order of the naturally occurring nucleotides has been altered. Scientific alteration of the genetic code presents a different inquiry, and we express no opinion about the application of § 101 to such endeavors. We merely hold that genes and the information they encode are not patent eligible under § 101 simply because they have been isolated from the surrounding genetic material. For the foregoing reasons, the judgment of the Federal Circuit is affirmed in part and reversed in part. It is so ordered. 39-5b Issuance of Patents The United States Patent and Trademark Office (USPTO) issues patents upon the basis of an application containing a specification and claims. Prior to the 2011 America Invents Act, the applicant must have been the inventor. Under the America Invents Act, a person to whom the inventor has assigned, or is under an obligation to assign, the invention may file a patent application. The USPTO determines whether the application meets the required criteria. Applications are confidential, but the confidentiality ends upon the granting of the patent. A rejected applicant may apply for reexamination and if rejected again may appeal to the Board of Appeals and to the federal courts. The rights granted by a U.S. patent extend only to the United States. The Patent Cooperation Treaty, adhered to by the United States and more than 120 other countries, facilitates the filing of applications for patents on the same invention in member countries by providing for centralized filing procedures and a standardized application format. 39-5c Infringement A direct infringer makes, uses, offers to sell, or sells a patented invention without permission. An indirect infringer actively encourages another to make, use, offers to sell, or sell a patented invention without permission. A contributory infringer knowingly sells or supplies a part or component of a patented invention. Good faith and ignorance are defenses to contributory infringement. . To recover damages a patent owner must give (1) actual notice to an infringer or (2) constructive notice by marking a patented article with the word “Patent” and the number of the patent. The America Invents Act permits patent holders to “virtually mark” a product by providing the address of a publicly available website that associates the patented article with the number of the patent. 39-5d Remedies Remedies include: 1) injunctive relief; 2) damages of not less than a reasonable royalty for use; 3) treble damages; 4) attorney’s fees in some cases; and 5) costs. NOTE: See Figure 39-1: Intellectual Property. Chapter 40 ANTITRUST Sherman Antitrust Act [40-1] Restraint of Trade [40-1a] Standards Horizontal and Vertical Restraints Concerted Action Price Fixing Market Allocations Boycotts Tying Arrangements Monopolies [40-1b] Monopolization Attempts to Monopolize Conspiracies to Monopolize Clayton Act [40-2] Tying Contracts and Exclusive Dealing [40-2a] Mergers [40-2b] Robinson-Patman Act [40-3] Primary-line Injury [40-3a] Secondary- and Tertiary-line Injury [40-3b] Cost Justification [40-3c] Meeting Competition [40-3d] Federal Trade Commission Act [40-4] Cases in This Chapter American Needle, Inc. v. National Football League Leegin Creative Leather Products, Inc. v. PSKS, Inc. Eastman Kodak Co. v. Image Technical Services, Inc. Hospital Corporation of America v. FTC Chapter Outcomes After reading and studying this chapter, the student should be able to: • Describe and explain horizontal restraints of trade. • Describe and explain vertical restraints of trade. • Explain monopolization, attempts to monopolize, and conspiracies to monopolies and why they are illegal. • Explain the Clayton Act and its rules governing (1) tying contracts, (2) exclusive dealing, (3) horizontal mergers, (4) vertical mergers, and (5) conglomerate mergers. • Describe (1) the Robinson-Patman Act and the various defenses to it and (2) the Federal Trade Commission Act. TEACHING NOTES Although the public’s interest is best served by free competition in trade and industry, most businesses would prefer to eliminate competition and enjoy control over the price of their goods and the quantity they produce. The common law, strengthened by several antitrust statutes enacted during the 1800s, favors competition and has held that restraints of trade and certain monopolies are illegal. The law of antitrust attempts to assure free and fair competition in the marketplace by prohibiting those illegitimate activities such as fixing prices and allocating exclusive territories to competitors. 40-1 SHERMAN ACT The Sherman Act gives the federal district courts power to issue injunctions restraining violations; and anyone injured by a violation is entitled to recover treble damages in a civil action. Section 1 prohibits contracts, combinations, and conspiracies that restrain trade, and Section 2 precludes monopolies or attempts to monopolize. The Supreme Court previously stated the purpose of the Sherman Act as follows: The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions. Northern Pacific Railway Co. v. United States, 356 U.S. 1 (1958). As amended by the Antitrust Criminal Penalty Enhancement and Reform Act of 2004, the Sherman Act subjects individual offenders to imprisonment of up to ten years and fines up to $1 million, while corporate offenders are subject to fines of up to $100 million per violation. Moreover, under the Federal Alternative Fines Act, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million. 40-1a Restraint of Trade Section 1 of the Sherman Act provides that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations is hereby declared to be illegal.” Because the language of the section is so broad, judicial interpretation has played a significant role in establishing the elements that constitute a violation. Standards — Includes unreasonable restraints of trade. The Rule of Reason test is a flexible standard to determine if practice unreasonably restricts competition; the test considers the makeup of the industry, the defendants’ positions within the industry, ability of the defendants’ competitors to respond to the challenged practice, and the defendants’ purpose in adopting the restraint. Certain categories of restraints are unreasonable by their very nature, that is, illegal per se. Over the last decade a third, intermediate test has been frequently used when the per se approach is not appropriate for the situation but the challenged conduct has obvious anticompetitive effects. Under this “quick look” rule of reason analysis, the courts will apply an abbreviated rule of reason standard rather than using the extensive analysis required by a full-blown rule of reason test. However, the extensiveness of the legal analysis required under the quick look test will vary based upon the circumstances, details, and logic of the restraint being reviewed. CASE 40-1 AMERICAN NEEDLE, INC. v. NATIONAL FOOTBALL LEAGUE Supreme Court of the United States, 2010 560 U.S. 183, 130 S.CT. 2201, 176 L.ED. 2D 947 http://scholar.google.com/scholar_case?case=7494086478657562944&q=American+Needle,+Inc.+v.+National+Football+League&hl=en&as_sdt=2,34&as_vis=1 Stevens, J. [Originally organized in 1920, the National Football League (NFL) is an unincorporated association that encompasses 32 separately owned professional football teams. Each team has its own name, colors, and logo, and owns related intellectual property. Prior to 1963, the teams made their own arrangements for licensing their intellectual property and marketing trademarked items such as caps and jerseys. In 1963, the teams formed National Football League Properties (NFLP) to develop, license, and market their intellectual property. Most, but not all, of the substantial revenues generated by NFLP have either been given to charity or shared equally among the teams. However, the teams are able to and have at times sought to withdraw from this arrangement. Between 1963 and 2000, NFLP granted nonexclusive licenses to a number of vendors, permitting them to manufacture and sell apparel bearing team insignias. American Needle, Inc., was one of those licensees. In December 2000, the teams voted to authorize NFLP to grant exclusive licenses, and NFLP granted Reebok International Ltd. an exclusive ten-year license to manufacture and sell trademarked headwear for all thirty-two teams. It thereafter declined to renew American Needle’s nonexclusive license. American Needle filed this action in the Northern District of Illinois, alleging that the agreements between the NFL, its teams, NFLP, and Reebok violated Sections 1 and 2 of the Sherman Act. In their answer to the complaint, the defendants asserted that the teams, NFL, and NFLP were incapable of conspiring within the meaning of Section 1 “because they are a single economic enterprise, at least with respect to the conduct challenged.” The District Court granted summary judgment for the NFL on this question. The Court of Appeals for the Seventh Circuit affirmed.] As the case comes to us, we have only a narrow issue to decide: whether the NFL respondents are capable of engaging in a “contract, combination …, or conspiracy” as defined by §1 of the Sherman Act, [citation], or, as we have sometimes phrased it, whether the alleged activity by the NFL respondents “must be viewed as that of a single enterprise for purposes of §1.” [Citation.] * * * We have long held that concerted action under §1 does not turn simply on whether the parties involved are legally distinct entities. Instead, we have eschewed such formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate. * * * Conversely, there is not necessarily concerted action simply because more than one legally distinct entity is involved. * * * * * * * * * The key is whether the alleged “contract, combination …, or conspiracy” is concerted action—that is, whether it joins together separate decisionmakers. The relevant inquiry, therefore, is whether there is a “contract, combination … or conspiracy” amongst “separate economic actors pursuing separate economic interests,” [citation], such that the agreement “deprives the marketplace of independent centers of decisionmaking,” [citation], and therefore of “diversity of entrepreneurial interests,” [citations]. * * * The NFL teams do not possess either the unitary decisionmaking quality or the single aggregation of economic power characteristic of independent action. Each of the teams is a substantial, independently owned, and independently managed business. “[T]heir general corporate actions are guided or determined” by “separate corporate consciousnesses,” and “[t]heir objectives are” not “common.” [Citations.] The teams compete with one another, not only on the playing field, but to attract fans, for gate receipts and for contracts with managerial and playing personnel. [Citations.] Directly relevant to this case, the teams compete in the market for intellectual property. To a firm making hats, the Saints and the Colts are two potentially competing suppliers of valuable trademarks. When each NFL team licenses its intellectual property, it is not pursuing the “common interests of the whole” league but is instead pursuing interests of each “corporation itself,” [citation]; teams are acting as “separate economic actors pursuing separate economic interests,” and each team therefore is a potential “independent cente[r] of decisionmaking,” [citation]. Decisions by NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that “depriv[e] the marketplace of independent centers of decisionmaking,” [citation], and therefore of actual or potential competition. [Citation.] * * * Although NFL teams have common interests such as promoting the NFL brand, they are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned. [Citations.] * * * The question whether NFLP decisions can constitute concerted activity covered by §1 is closer than whether decisions made directly by the 32 teams are covered by §1. This is so both because NFLP is a separate corporation with its own management and because the record indicates that most of the revenues generated by NFLP are shared by the teams on an equal basis. Nevertheless we think it clear that for the same reasons the 32 teams’ conduct is covered by §1, NFLP’s actions also are subject to §1, at least with regards to its marketing of property owned by the separate teams. NFLP’s licensing decisions are made by the 32 potential competitors, and each of them actually owns its share of the jointly managed assets. [Citation.] Apart from their agreement to cooperate in exploiting those assets, including their decisions as the NFLP, there would be nothing to prevent each of the teams from making its own market decisions relating to purchases of apparel and headwear, to the sale of such items, and to the granting of licenses to use its trademarks. * * * Thirty-two teams operating independently through the vehicle of the NFLP are not like the components of a single firm that act to maximize the firm’s profits. The teams remain separately controlled, potential competitors with economic interests that are distinct from NFLP’s financial well-being. [Citation.] Unlike typical decisions by corporate shareholders, NFLP licensing decisions effectively require the assent of more than a mere majority of shareholders. And each team’s decision reflects not only an interest in NFLP’s profits but also an interest in the team’s individual profits. [Citation.] The 32 teams capture individual economic benefits separate and apart from NFLP profits as a result of the decisions they make for the NFLP. NFLP’s decisions thus affect each team’s profits from licensing its own intellectual property. “Although the business interests of” the teams “will often coincide with those of the” NFLP “as an entity in itself, that commonality of interest exists in every cartel.” [Citation.] In making the relevant licensing decisions, NFLP is therefore “an instrumentality” of the teams. [Citation.] If the fact that potential competitors shared in profits or losses from a venture meant that the venture was immune from §1, then any cartel “could evade the antitrust law simply by creating a ‘joint venture’ to serve as the exclusive seller of their competing products.” [Citations.] However, competitors “cannot simply get around” antitrust liability by acting “through a third-party intermediary or ‘joint venture.’” [Citation.] * * * The fact that NFL teams share an interest in making the entire league successful and profitable, and that they must cooperate in the production and scheduling of games, provides a perfectly sensible justification for making a host of collective decisions. But the conduct at issue in this case is still concerted activity under the Sherman Act that is subject to §1 analysis. When “restraints on competition are essential if the product is to be available at all,” per se rules of illegality are inapplicable, and instead the restraint must be judged according to the flexible Rule of Reason. [Citations.] And depending upon the concerted activity in question, the Rule of Reason may not require a detailed analysis; it “can sometimes be applied in the twinkling of an eye.” [Citation.] Other features of the NFL may also save agreements amongst the teams. We have recognized, for example, “that the interest in maintaining a competitive balance” among “athletic teams is legitimate and important.” [Citation.] While that same interest applies to the teams in the NFL, it does not justify treating them as a single entity for §1 purposes when it comes to the marketing of the teams’ individually owned intellectual property. It is, however, unquestionably an interest that may well justify a variety of collective decisions made by the teams. What role it properly plays in applying the Rule of Reason to the allegations in this case is a matter to be considered on remand. Accordingly, the judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion. *** Chapter Outcomes *** Describe and explain horizontal and vertical restraints of trade. Horizontal and Vertical Restraints — Trade restraints are horizontal if they involve competitors at the same level, while vertical agreements include those between parties who are not in direct competition and are at different levels of the chain of distribution. Concerted Action — Section 1 does not prohibit unilateral (solitary) conduct; rather, it forbids concerted action. Thus, one person or business by itself cannot violate the section. Proof of concerted action must sometimes be inferred from circumstantial evidence. Price-Fixing — An effort to establish minimum or maximum prices, raise or stabilize prices, or depress prices. A per se violation if horizontal. Although many States harmonize their antitrust laws with Federal antitrust law, some States specifically prohibit vertical price fixing and at least one State’s supreme court has held that minimum, vertical price fixing is illegal per se under that State’s antitrust laws. CASE 40-2 LEEGIN CREATIVE LEATHER PRODUCTS, INC. v. PSKS, INC. Supreme Court of the United States, 2007 551 U.S. 877, 127 S.Ct. 2705, 168 L.Ed.2d 623 http://scholar.google.com/scholar_case?case=15925807009998997000&q=127+S.Ct.+2705&hl=en&as_sdt=2,34 Kennedy, J. Petitioner, Leegin Creative Leather Products, Inc. (Lee-gin), designs, manufactures, and distributes leather goods and accessories. In 1991, Leegin began to sell belts under the brand name “Brighton.” The Brighton brand has now expanded into a variety of women’s fashion accessories. It is sold across the United States in over 5,000 retail establishments, for the most part independent, small boutiques and specialty stores. Leegin’s president, Jerry Kohl, also has an interest in about 70 stores that sell Brighton products. Leegin asserts that, at least for its products, small retailers treat customers better, provide customers more services, and make their shopping experience more satisfactory than do larger, often impersonal retailers. Kohl explained: “[W]e want the consumers to get a different experience than they get in Sam’s Club or in Wal-Mart. And you can’t get that kind of experience or support or customer service from a store like Wal-Mart.” Respondent, PSKS, Inc. (PSKS), operates Kay’s Kloset, a women’s apparel store in Lewisville, Texas. Kay’s Kloset buys from about 75 different manufacturers and at one time sold the Brighton brand. It first started purchasing Brighton goods from Leegin in 1995. Once it began selling the brand, the store promoted Brighton. For example, it ran Brighton advertisements and had Brighton days in the store. Kay’s Kloset became the destination retailer in the area to buy Brighton products. Brighton was the store’s most important brand and once accounted for 40 to 50 percent of its profits. In 1997, Leegin instituted the “Brighton Retail Pricing and Promotion Policy.” Following the policy, Leegin refused to sell to retailers that discounted Brighton goods below suggested prices. The policy contained an exception for products not selling well that the retailer did not plan on reordering. In the letter to retailers establishing the policy, Leegin stated: * * * We, at Leegin, choose to break away from the pack by selling [at] specialty stores; specialty stores that can offer the customer great quality merchandise, superb service, and support the Brighton product 365 days a year on a consistent basis. * * * Leegin adopted the policy to give its retailers sufficient margins to provide customers the service central to its distribution strategy. It also expressed concern that discounting harmed Brighton’s brand image and reputation. A year after instituting the pricing policy Leegin introduced a marketing strategy known as the “Heart Store Program.” It offered retailers incentives to become Heart Stores, and, in exchange, retailers pledged, among other things, to sell at Leegin’s suggested prices. Kay’s Kloset became a Heart Store soon after Leegin created the program. After a Leegin employee visited the store and found it unattractive, the parties appear to have agreed that Kay’s Kloset would not be a Heart Store beyond 1998. Despite losing this status, Kay’s Kloset continued to increase its Brighton sales. In December 2002, Leegin discovered Kay’s Kloset had been marking down Brighton’s entire line by 20 percent. Kay’s Kloset contended it placed Brighton products on sale to compete with nearby retailers who also were undercutting Leegin’s suggested prices. Leegin, nonetheless, requested that Kay’s Kloset cease discounting. Its request refused, Leegin stopped selling to the store. The loss of the Brighton brand had a considerable negative impact on the store’s revenue from sales. PSKS sued Leegin in the United States District Court for the Eastern District of Texas. It alleged, among other claims, that Leegin had violated the antitrust laws by “enter-[ing] into agreements with retailers to charge only those prices fixed by Leegin.” Leegin planned to introduce expert testimony describing the procompetitive effects of its pricing policy. The District Court excluded the testimony, relying on the per se rule established by Dr. Miles. [In Dr. Miles Medical Co. v. John D. Park & Sons Co. (1911), the U.S. Supreme Court established the rule that it is per se illegal under the Sherman Act for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer’s goods.] * * * The jury agreed with PSKS and awarded it $1.2 million. Pursuant to [statute], the District Court trebled the damages and reimbursed PSKS for its attorney’s fees and costs. It entered judgment against Leegin in the amount of $3,975,000.80. The Court of Appeals for the Fifth Circuit affirmed. * * * We granted certiorari to determine whether vertical minimum resale price maintenance agreements should continue to be treated as per se unlawful. * * * The rule of reason is the accepted standard for testing whether a practice restrains trade in violation of §1. [Citation.] “Under this rule, the fact finder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.” [Citation.] Appropriate factors to take into account include “specific information about the relevant business” and “the restraint’s history, nature, and effect.” [Citation.] Whether the businesses involved have market power is a further, significant consideration. [Citations.] In its design and function the rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest. The rule of reason does not govern all restraints. Some types “are deemed unlawful per se.” [Citation.] The per se rule, treating categories of restraints as necessarily illegal, eliminates the need to study the reasonableness of an individual restraint in light of the real market forces at work, [citation]; and, it must be acknowledged, the per se rule can give clear guidance for certain conduct. Restraints that are per se unlawful include horizontal agreements among competitors to fix prices, [citation], or to divide markets [citation]. Resort to per se rules is confined to restraints, like those mentioned, “that would always or almost always tend to restrict competition and decrease output.” [Citation.] To justify a per se prohibition a restraint must have “manifestly anticompetitive” effects, [citation], and “lack … any redeeming virtue,” [citation]. As a consequence, the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue, [citation], and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason, [citation]. It should come as no surprise, then, that “we have expressed reluctance to adopt per se rules with regard to restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious.” [Citations.] And, as we have stated, a “departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than … upon formalistic line drawing.” [Citation.] The Court has interpreted Dr. Miles Medical Co. v. John D. Park & Sons Co., [citation], as establishing a per se rule against a vertical agreement between a manufacturer and its distributor to set minimum resale prices. * * * * * * The reasons upon which Dr. Miles relied do not justify a per se rule. As a consequence, it is necessary to examine, in the first instance, the economic effects of vertical agreements to fix minimum resale prices, and to determine whether the per se rule is nonetheless appropriate. [Citation.] * * * The justifications for vertical price restraints are similar to those for other vertical restraints. [Citation.] Minimum resale price maintenance can stimulate interbrand competition—the competition among manufacturers selling different brands of the same type of product—by reducing intrabrand competition—the competition among retailers selling the same brand. The promotion of inter-brand competition is important because “the primary purpose of the antitrust laws is to protect [this type of] competition.” [Citation.] A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between. Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate. [Citation.] Consumers might learn, for example, about the benefits of a manufacturer’s product from a retailer that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees. [Citation.] Or consumers might decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. [Citation.] If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider. With price competition decreased, the manufacturer’s retailers compete among themselves over services. Resale price maintenance, in addition, can increase interbrand competition by facilitating market entry for new firms and brands. “[N]ew manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer.” [Citations.] New products and new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price maintenance there is a procompetitive effect. Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding. It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services. [Citations.] While vertical agreements setting minimum resale prices can have procompetitive justifications, they may have anticompetitive effects in other cases; and unlawful price fixing, designed solely to obtain monopoly profits, is an ever present temptation. Resale price maintenance may, for example, facilitate a manufacturer cartel. [Citation.] * * * Vertical price restraints also “might be used to organize cartels at the retailer level.” [Citation.] A group of retailers might collude to fix prices to consumers and then compel a manufacturer to aid the unlawful arrangement with resale price maintenance. In that instance the manufacturer does not establish the practice to stimulate services or to promote its brand but to give inefficient retailers higher profits. Retailers with better distribution systems and lower cost structures would be prevented from charging lower prices by the agreement. [Citations.] A horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful. * * * Resale price maintenance, furthermore, can be abused by a powerful manufacturer or retailer. A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs. A manufacturer might consider it has little choice but to accommodate the retailer’s demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s distribution network. * * * Notwithstanding the risks of unlawful conduct, it cannot be stated with any degree of confidence that resale price maintenance “always or almost always tend[s] to restrict competition and decrease output.” [Citation.] Vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed. And although the empirical evidence on the topic is limited, it does not suggest efficient uses of the agreements are infrequent or hypothetical. [Citations.] As the rule would proscribe a significant amount of pro-competitive conduct, these agreements appear ill suited for per se condemnation. * * * Resale price maintenance, it is true, does have economic dangers. If the rule of reason were to apply to vertical price restraints, courts would have to be diligent in eliminating their anticompetitive uses from the market. * * * * * * The rule of reason is designed and used to eliminate anticompetitive transactions from the market. This standard principle applies to vertical price restraints. * * * For all of the foregoing reasons, we think that were the Court considering the issue as an original matter, the rule of reason, not a per se rule of unlawfulness, would be the appropriate standard to judge vertical price restraints. * * * The judgment of the Court of Appeals is reversed, and the case is remanded for proceedings consistent with this opinion. It is so ordered. Market Allocations — Horizontal market divisions are illegal per se, while vertical restrictions are evaluated in accordance with the rule of reason. Boycotts — Although sellers can refuse to sell to a particular buyer, an agreement between buyers would be viewed as a concerted refusal to deal. Such an agreement would violate the Sherman Act, Section 1. Group boycotts designed to eliminate a competitor or to force a competitor to meet a standard are illegal per se if the boycotting group has market power. Cooperative arrangements “designed to increase economic efficiency and render markets more, rather than less, competitive” are subject to the rule of reason. Tying Arrangements — exist when a seller exploits its economic power in one market to expand its empire into another market by requiring the buyer of one product to also purchase a second product, service, or intangible (the “tied” product) from the seller. CASE 40-3 EASTMAN KODAK CO. v. IMAGE TECHNICAL SERVICES, INC. Supreme Court of the United States, 1992 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 http://scholar.google.com/scholar_case?case=6652719385155799724&q=504+U.S.+451&hl=en&as_sdt=2,22 Blackmun, J. * * * Kodak manufactures and sells complex business machines—as relevant here, high-volume photocopier and micrographics equipment. Kodak equipment is unique; micrographic software programs that operate on Kodak machines, for example, are not compatible with competitors’ machines. Kodak parts are not compatible with other manufacturers’ equipment, and vice versa. Kodak equipment, although expensive when new, has little resale value. Kodak provides service and parts for its machines to its customers. It provides some of the parts itself; the rest are made to order for Kodak by independent original-equipment manufacturers (OEMs). Kodak does not sell a complete system of original equipment, lifetime service, and lifetime parts for a single price. Instead, Kodak provides service after the initial warranty period either through annual service contracts, which include all necessary parts, or on a per-call basis. It charges, through negotiations and bidding, different prices for equipment, service, and parts for different customers. Kodak provides 80% to 95% of the service for Kodak machines. Beginning in the early 1980s, ISOs [independent service organizations] began repairing and servicing Kodak equipment. They also sold parts and reconditioned and sold used Kodak equipment. Their customers were federal, state, and local government agencies, banks, insurance companies, industrial enterprises, and providers of specialized copy and microfilming services. ISOs provide service at a price substantially lower than Kodak does. Some customers found that the ISO service was of higher quality. Some of the ISOs’ customers purchase their own parts and hire ISOs only for service. Others choose ISOs to supply both service and parts. ISOs keep an inventory of parts, purchased from Kodak or other sources, primarily the OEMs. In 1985 and 1986, Kodak implemented a policy of selling replacement parts for micrographic and copying machines only to buyers of Kodak equipment who use Kodak service or repair their own machines. As part of the same policy, Kodak sought to limit ISO access to other sources of Kodak parts. Kodak and the OEMs agreed that the OEMs would not sell parts that fit Kodak equipment to anyone other than Kodak. Kodak also pressured Kodak equipment owners and independent parts distributors not to sell Kodak parts to ISOs. In addition, Kodak took steps to restrict the availability of used machines. Kodak intended, through these policies, to make it more difficult for ISOs to sell service for Kodak machines. It succeeded. ISOs were unable to obtain parts from reliable sources, and many were forced out of business, while others lost substantial revenue. Customers were forced to switch to Kodak service even though they preferred ISO service. In 1987, the [18] ISOs filed the present action in the District Court, alleging, inter alia, that Kodak had unlawfully tied the sale of service for Kodak machines to the sale of parts, in violation of §1 of the Sherman Act, and had unlawfully monopolized and attempted to monopolize the sale of service for Kodak machines, in violation of §2 of that Act. * * * A tying arrangement is “an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.” [Citation.] Such an arrangement violates §1 of the Sherman Act if the seller has “appreciable economic power” in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market. [Citation.] Kodak did not dispute that its arrangement affects a substantial volume of interstate commerce. It, however, did challenge whether its activities constituted a “tying arrangement” and whether Kodak exercised “appreciable economic power” in the tying market. We consider these issues in turn. For the respondents to defeat a motion for summary judgment on their claim of a tying arrangement, a reasonable trier of fact must be able to find, first, that service and parts are two distinct products, and, second, that Kodak has tied the sale of the two products. For service and parts to be considered two distinct products, there must be sufficient consumer demand so that it is efficient for a firm to provide service separately from parts. [Citation.] Evidence in the record indicates that service and parts have been sold separately in the past and still are sold separately to self-service equipment owners. Indeed, the development of the entire high-technology service industry is evidence of the efficiency of a separate market for service. Kodak insists that because there is no demand for parts separate from service, there cannot be separate markets for service and parts. By that logic, we would be forced to conclude that there can never be separate markets, for example, for cameras and film, computers and software, or automobiles and tires. That is an assumption we are unwilling to make. * * * Having found sufficient evidence of a tying arrangement, we consider the other necessary feature of an illegal tying arrangement: appreciable economic power in the tying market. Market power is the power “to force a purchaser to do something that he would not do in a competitive market.” [Citation.] It has been defined as “the ability of a single seller to raise price and restrict output.” [Citations.] The existence of such power ordinarily is inferred from the seller’s possession of a predominant share of the market. [Citations.] * * * The extent to which one market prevents exploitation of another market depends on the extent to which consumers will change their consumption of one product in response to a price change in another, i.e., the “cross-elasticity of demand.” See Du Pont, [citations]. Kodak’s proposed rule rests on a factual assumption about the cross-elasticity of demand in the equipment and after-markets: “If Kodak raised its parts or service prices above competitive levels, potential customers would simply stop buying Kodak equipment. Perhaps Kodak would be able to increase short term profits through such a strategy, but at a devastating cost to its long term interests.” Kodak argues that the Court should accept, as a matter of law, this “basic economic realit[y],” that competition in the equipment market necessarily prevents market power in the aftermarkets. * * * We conclude * * * that Kodak has failed to demonstrate that respondents’ inference of market power in the service and parts markets is unreasonable, and that, consequently, Kodak is entitled to summary judgment. It is clearly reasonable to infer that Kodak has market power to raise prices and drive out competition in the aftermar-kets, since respondents offer direct evidence that Kodak did so. It is also plausible, as discussed above, to infer that Kodak chose to gain immediate profits by exerting that market power where locked-in customers, high information costs, and discriminatory pricing limited and perhaps eliminated any long-term loss. Viewing the evidence in the light most favorable to respondents, their allegations of market power “mak[e] * * * economic sense.” [Citation.] * * * We need not decide whether Kodak’s behavior has any procompetitive effects and, if so, whether they outweigh the anticompetitive effects. We note only that Kodak’s service and parts policy is simply not one that appears always or almost always to enhance competition, and therefore to warrant a legal presumption without any evidence of its actual economic impact. In this case, when we weigh the risk of deterring procompetitive behavior by proceeding to trial against the risk that illegal behavior go unpunished, the balance tips against summary judgment. [Citations.] * * * We therefore affirm the denial of summary judgment on respondents’ §1 claim. * * * Respondents also claim that they have presented genuine issues for trial as to whether Kodak has monopolized or attempted to monopolize the service and parts markets in violation of §2 of the Sherman Act. “The offense of monopoly under §2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” [Citation.] The existence of the first element, possession of monopoly power, is easily resolved. As has been noted, respondents have presented a triable claim that service and parts are separate markets, and that Kodak has the “power to control prices or exclude competition” in service and parts. Du Pont, [citation]. Monopoly power under §2 requires, of course, something greater than market power under §1. [Citation.] Respondents’ evidence that Kodak controls nearly 100% of the parts market and 80% to 95% of the service market, with no readily available substitutes, is, however, sufficient to survive summary judgment under the more stringent monopoly standard of §2. [Citations.] Kodak also contends that, as a matter of law, a single brand of a product or service can never be a relevant market under the Sherman Act. We disagree. The relevant market for antitrust purposes is determined by the choices available to Kodak equipment owners. [Citation.] Because service and parts for Kodak equipment are not interchangeable with other manufacturers’ service and parts, the relevant market from the Kodak equipment owner’s perspective is composed of only those companies that service Kodak machines. See Du Pont, [citation] (the “market is composed of products that have reasonable interchangeability”). This Court’s prior cases support the proposition that in some instances one brand of a product can constitute a separate market. [Citations.] The second element of a §2 claim is the use of monopoly power “to foreclose competition, to gain a competitive advantage, or to destroy a competitor.” [Citation.] If Kodak adopted its parts and service policies as part of a scheme of willful acquisition or maintenance of monopoly power, it will have violated §2. [Citations.] As recounted at length above, respondents have presented evidence that Kodak took exclusionary action to maintain its parts monopoly and used its control over parts to strengthen its monopoly share of the Kodak service market. Liability turns, then, on whether “valid business reasons” can explain Kodak’s actions. [Citations.] * * * * * * In the end, of course, Kodak’s arguments may prove to be correct. It may be that its parts, service, and equipment are components of one unified market, or that the equipment market does discipline the aftermarkets so that all three are priced competitively overall, or that any anti-competitive effects of Kodak’s behavior are outweighed by its competitive effects. But we cannot reach these conclusions as a matter of law on a record this sparse. Accordingly, the judgment of the Court of Appeals denying summary judgment is affirmed. It is so ordered. NOTE: See Figure 40:1: Restraints of Trade under Sherman Act. *** Question to Discuss*** Explain monopolization, attempts and conspiracies to monopolize and why they are illegal. 40-1a Monopolies Monopoly power is the ability to effectively prevent others from competing in the same market. A company’s market share is determined by evaluating the relevant product and geographic markets. A relevant product market refers to products that are similar with respect to price, quality, and adaptability. The relevant geographic market concerns the area where the company sells its products. To address the problem of monopolization, Section 2 of the Sherman Act prohibits monopolies and all attempts or conspiracies to monopolize. Thus, Section 2 prohibits both agreements among businesses and, unlike Section 1, unilateral conduct by one firm. Monopolization — Following the establishment of monopoly power it must also be shown that the company either attained the monopoly power unfairly or abused that power, once attained. Monopoly power is the ability to control prices or to exclude competitors from the marketplace. In grappling with this question of power, the courts have developed a number of criteria, but the prevalent test is market share. If sufficient monopoly power has been proved, the law then must show that the firm has engaged in unfair conduct. The courts, however, have yet to agree upon what constitutes such conduct. To prove that an attempt to monopolize existed, it must be demonstrated that there was a specific intent and a very high probability of success. The U.S. Supreme Court decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), held that “[i]f a firm has been attempting to exclude rivals on some basis other than efficiency, it is fair to characterize its behavior as predatory.” Attempts to Monopolize — Section 2 also prohibits attempts to monopolize, but the courts have had difficulty defining what distinguishes undesirable conduct likely to lead to a monopoly from healthy, competitive conduct. The standard test applied by the courts requires proof of a specific intent to monopolize plus a dangerous probability of success, but does not define “intent” or “success.” Conspiracies to Monopolize — Section 2 also condemns conspiracies to monopolize. Few cases involve this offense alone, as any conspiracy to monopolize would also constitute a combination in restraint of trade in violation of Section 1. *** Chapter Outcome*** Explain the Clayton Act and its rules governing (1) tying contracts, (2) exclusive dealing, (3) horizontal mergers, (4) vertical mergers, and (5) conglomerate mergers. 40-2 CLAYTON ACT Enacted in 1914, the Clayton Act provides only for civil actions, not for criminal penalties. Private parties may bring civil actions in federal court for treble damages and attorneys’ fees. In addition, the Justice Department and the FTC may bring civil actions, including proceedings in equity, to prevent and restrict violations of the act. The Clayton Act’s major provisions deal with price discrimination, tying contracts, exclusive dealing, and mergers, and exempts labor, agricultural, and horticultural organizations from all antitrust laws. 40-2a Tying Contracts and Exclusive Dealing Section 3 of the Clayton Act is intended to attack fledgling anticompetitive practices before they grow into violations of Section 1 or 2 of the Sherman Act. Unlike the Sherman Act, however, Section 3 applies only to practices involving commodities (goods), not to those that involve services, intangibles, or land. Exclusive dealing contracts prohibit a purchaser from dealing with a seller’s competitors. Section 3 makes exclusive dealing and tying arrangements illegal if they substantially lessen competition or tend to create a monopoly. 40-2b Mergers A horizontal merger occurs where one company acquires a competing company. Because of the much greater likelihood of impeding competition and increasing monopoly power, the Justice Department looks very closely at horizontal mergers. A vertical merger is where a company acquires one of its customers or suppliers. The term conglomerate is used to describe all mergers that are not horizontal or vertical. In reviewing horizontal mergers courts consider the following: • the market share of each of the merging firms, • the degree of industry concentration, • the number of firms in the industry, • entry barriers, • market trends, • the vigor and strength of other competitors in the industry, • the character and history of the merging firms, • market demand, and • the extent of industry price competition. In general, most courts condemn vertical mergers where the effect is clearly anti-competitive. Conglomerate mergers are generally questioned only (1) where one of the merging firms is likely to enter the other firm’s market or (2) where the merged company would be disproportionately large, when compared to competitors. In 1992 the Justice Department and the FTC jointly issued new guidelines for evaluating the effect of a horizontal merger. These guidelines, revised in 1997 and 2010 are an analytical framework to judge the impact of potential mergers. The 2010 guidelines are intended to identify harmful mergers while avoiding unnecessary interference with potentially beneficial mergers. NOTE: See textbook for details of these guidelines. CASE 40-4 HOSPITAL CORPORATION OF AMERICA v. FTC United States Court of Appeals, Seventh Circuit, 1986 807 F.2d 1381 http://scholar.google.com/scholar_case?case=2172341578258873948&q=807+F.2d þ 1381&hl=en&as_sdt=2,34 Posner, J. Hospital Corporation of America, the largest proprietary hospital chain in the United States, asks us to set aside the decision by the Federal Trade Commission that it violated section 7 of the Clayton Act, [citation], by the acquisition in 1981 and 1982 of two corporations, Hospital Affiliates International, Inc. and Health Care Corporation. Before these acquisitions (which cost Hospital Corporation almost $700 million), Hospital Corporation had owned one hospital in Chattanooga, Tennessee. The acquisitions gave it ownership of two more. In addition, pursuant to the terms of the acquisitions it assumed contracts, both with four-year terms, that Hospital Affiliates International had made to manage two other Chattanooga-area hospitals. So after the acquisitions Hospital Corporation owned or managed 5 of the 11 hospitals in the area. Later one of the management contracts was cancelled; and one of the lesser issues raised by Hospital Corporation, which we might as well dispose of right now, is whether the Commission should have disregarded the assumption of that contract. We agree with the Commission that it was not required to take account of a post-acquisition transaction that may have been made to improve Hospital Corporation’s litigating position. The contract was cancelled after the Commission began investigating Hospital Corporation’s acquisition of Hospital Affiliates, and while the initiative in cancelling was taken by the managed hospital, Hospital Corporation reacted with unaccustomed mildness by allowing the hospital to withdraw from the contract. For it had sued three other hospitals that tried to get out of their management contracts—only none of these hospitals was in a market where Hospital Corporation’s acquisition of Hospital Affiliates was likely to be challenged. Post-acquisition evidence that is subject to manipulation by the party seeking to use it is entitled to little or no weight. [Citation.] * * * If all the hospitals brought under common ownership or control by the two challenged acquisitions are treated as a single entity, the acquisitions raised Hospital Corporation’s market share in the Chattanooga area from 14 percent to 26 percent. This made it the second largest provider of hospital services in a highly concentrated market where the four largest firms together had a 91 percent market share compared to 79 percent before the acquisitions. These are the FTC’s figures, and Hospital Corporation thinks they are slightly too high * * * but the discrepancy is too slight to make a legal difference. Nor would expressing the market shares in terms of the Herfindahl index alter the impression of a highly concentrated market. * * * The Commission may have made its task harder (and opinion longer) than strictly necessary, however, by studiously avoiding reliance on any of the [U.S.] Supreme Court’s section 7 decisions from the 1960s except [citation], which took an explicitly economic approach to the interpretation of the statute. The other decisions in that decade * * * seemed, taken as a group, to establish the illegality of any nontrivial acquisition of a competitor, whether or not the acquisition was likely either to bring about or shore up collusive or oligopoly pricing. The elimination of a significant rival was thought by itself to infringe the complex of social and economic values conceived by a majority of the Court to inform the statutory words “may * * * substantially * * * lessen competition.” None of these decisions has been overruled. * * * The most important developments that cast doubt on the continued vitality of such [1960s] cases as [citations] are found in other cases, where the Supreme Court, echoed by the lower courts, has said repeatedly that the economic concept of competition, rather than any desire to preserve rivals as such, is the lodestar that shall guide the contemporary application of the antitrust laws, not excluding the Clayton Act * * *. Applied to cases brought under section 7, this principle requires the district court (in this case, the Commission) to make a judgment whether the challenged acquisition is likely to hurt consumers, as by making it easier for the firms in the market to collude, expressly or tacitly, and thereby force price above or farther above the competitive level. So it was prudent for the Commission, rather than resting on the very strict merger decisions of the 1960s, to inquire into the probability of harm to consumers. * * * When an economic approach is taken in a section 7 case, the ultimate issue is whether the challenged acquisition is likely to facilitate collusion. In this perspective the acquisition of a competitor has no economic significance in itself; the worry is that it may enable the acquiring firm to cooperate (or cooperate better) with other leading competitors on reducing or limiting output, thereby pushing up the market price * * *. There is plenty of evidence to support the Commission’s prediction of adverse competitive effect in this case. * * * The acquisitions reduced the number of competing hospitals in the Chattanooga market from 11 to 7. * * * The reduction in the number of competitors is significant in assessing the competitive vitality of the Chattanooga hospital market. The fewer competitors there are in a market, the easier it is for them to coordinate their pricing without committing detectable violations of section 1 of the Sherman Act, which forbids price fixing. This would not be very important if the four competitors eliminated by the acquisitions in this case had been insignificant, but they were not; they accounted in the aggregate for 12 percent of the sales of the market. As a result of the acquisitions the four largest firms came to control virtually the whole market, and the problem of coordination was therefore reduced to one of coordination among these four. Moreover, both the ability of the remaining firms to expand their output should the big four reduce their own output in order to raise the market price (and, by expanding, to offset the leading firms’ restriction of their own output), and the ability of outsiders to come in and build completely new hospitals, are reduced by Tennessee’s certificate-of-need law. Any addition to hospital capacity must be approved by a state agency. * * * In showing that the challenged acquisitions gave four firms control over an entire market so that they would have little reason to fear a competitive reaction if they raised prices above the competitive level, the Commission went far to justify its prediction of probable anticompetitive effects. Maybe it need have gone no further. [Citations.] But it did. First it pointed out that the demand for hospital services by patients and their doctors is highly inelastic under competitive conditions. This is not only because people place a high value on their safety and comfort and because many of their treatment decisions are made for them by their doctor, who doesn’t pay their hospital bills; it is also because most hospital bills are paid largely by insurance companies or the federal government rather than by the patient. The less elastic the demand for a good or service is, the greater are the profits that providers can make by raising price through collusion. * * * Second, there is a tradition, well documented in the Commission’s opinion, of cooperation between competing hospitals in Chattanooga * * *. But a market in which competitors are unusually disposed to cooperate is a market prone to collusion. * * * Third, hospitals are under great pressure from the federal government and the insurance companies to cut costs. One way of resisting this pressure is by presenting a united front in negotiations with the third-party payors * * *. The fewer the independent competitors in a hospital market, the easier they will find it, by presenting an unbroken phalanx of representations and requests, to frustrate efforts to control hospital costs. This too is a form of collusion that the antitrust laws seek to discourage * * *. All these considerations, taken together, supported * * * the Commission’s conclusion that the challenged acquisitions are likely to foster collusive practices, harmful to consumers, in the Chattanooga hospital market. Section 7 does not require proof that a merger or other acquisition has caused higher prices in the affected market. All that is necessary is that the merger create an appreciable danger of such consequences in the future. A predictive judgment, necessarily probabilistic and judgmental rather than demonstrable [citation]. * * * The Commission’s order is affirmed and enforced. *** Chapter Outcome*** Describe (1) the Robinson-Patman Act and the various defenses to it and (2) the Federal Trade Commission Act. 40-3 ROBINSON-PATMAN ACT The Robinson-Patman Act amended the Clayton Act to prohibit buyers from inducing and sellers from granting price discrimination in interstate commerce of commodities of similar grade and quality. To violate the act, the price discrimination must substantially lessen competition or tend to create a monopoly. Violation of Robinson-Patman, with few exceptions, is civil, not criminal. 40-3a Primary-line Injury Injuries to a seller’s competitors are called “primary-line” injuries. The plaintiff must either show that the defendant engaged in predatory pricing or present a detailed market analysis that demonstrates how the defendant’s price discrimination actually harmed competition. 40-3b Secondary- and Tertiary-line Injury Injuries to some buyers because of the lower prices granted to other buyers are called “secondary-line” injuries. A plaintiff in a secondary-line injury case must either show substantial and sustained intra-market price differentials or offer a detailed market analysis that demonstrates actual harm to competition. Tertiary-line injury occurs when the recipient of a lowered price passes the discounted price on to the next level of distribution. 40-3c Cost Justification If a seller can show that it costs less to sell a product to a particular buyer, the seller may lawfully pass along the cost savings. It is usually extremely difficult, however, to calculate and prove such savings. 40-3d Meeting Competition A seller may lower its price in a good faith attempt to meet competition, and may beat its competitor’s price if it does not know the competitor’s price, cannot reasonably determine the competitor’s price, and acts reasonably in setting its own price. NOTE: See Figure 40-2: Meeting Competition Defense. 40-4 FEDERAL TRADE COMMISSION ACT Enacted in 1914 this act prohibited unfair methods of competition and unfair or deceptive acts or practices in commerce. To this end, the five-member commission is empowered to conduct appropriate investigations and hearings. Although the cease and desist order is the primary means used by the FTC to combat this activity, the Commission has ordered other relief in appropriate cases including affirmative disclosure and corrective advertising. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637

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