Sunday, August 16, 2015

Are Courts Still Sprinkling Sugar on the Dawn Donut Rule in the Age of Internet Trademarks?


While federal trademarks afford businesses nationwide recognition, does a federally registered trademark always insure injunctive relief?  Not necessarily.  The problem stems from a 1959 trademark case in which Dawn Donut Co., a retailer of doughnuts and baked goods tried to stop another company, Hart’s Food Stores,[1] from using the word “Dawn” in the sale of doughnuts in the Rochester, New York area.  Dawn Donut Co., however, did not sell doughnuts in the Rochester market.  As colossal food fights go, this was a biggie.  The Dawn Donut rule concerns issues of priority of trademark rights. In trademark law, the general rule is that, where two parties seek to use the mark in the same geographic area, the earlier (i.e., “senior”) user has rights superior to rights of a subsequent (i.e., “junior”) user.[2]The trial court denied the injunction sought, and said Hart’s Food Stores could continue using the name.  The case was appealed, and the United States Federal Court for the Second Circuit agreed, and espoused one of the most popular rules in trademark law:  The Dawn Donut Rule.  The language of the Court is self-explanatory:

“Therefore, if the use of the marks by the registrant and the unauthorized user are confined to geographically separate markets, with no likelihood that the registrant will expand his use into the defendant’s market, so that no public confusion is possible, then the registrant is not entitled to enjoin the junior user’s use of the mark.”

Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358 (2nd Cir. 1959).  You might say this rule is irrelevant today with many businesses being online.  You might be wrong.  Fifty years after the rule came about, with the commercial world drifting into the web, Dawn Donut still has a cache.  The rule, however, is not uniformly interpreted in all federal circuits.  Texas is in the Fifth Circuit Court of Appeals, perhaps the most conservative circuit in the country.  The Fifth Circuit’s take on the rule is that injunctions in trademark infringement cases are limited “to those areas where the trademark has gone on the goods through sale or advertisement, together with such additional areas as are warranted under the evidence for expansion.[3]

The good faith basis for the Dawn Donut rule defense is being increasingly questioned in the Internet Age. After all, with registered trademark searches available online at no cost, it becomes difficult to argue the junior user didn’t, or couldn’t through the exercise of reasonable diligence, have known about the senior - use of the mark. If, under Dawn Donut, the use of a trademark by the registrant and an unauthorized junior user are confined to geographically separate markets, with no likelihood that the registrant will expand his use into the junior user’s market, so that no public confusion is possible, then the registrant is not entitled to enjoin the junior user’s use of the mark.[4]

The core of the rule is likelihood of confusion, and the way to overcome it is to show likelihood of confusion. Enter the Internet. Though the rule was a good one in 1959, it is not so in 2015. With increased travel, media, and the Internet, a business’s trademark may be known in several geographic markets, even though the business does not operate in all of those markets.

In Circuit City Stores, Inc., though the appellate court upheld an injunction against using CarMax’s federally registered mark, Circuit Judge Nathanial Jones, in a concurring opinion, offered the following observations regarding Dawn Donut:

Entering the new millennium, our society is far more mobile than it was four decades ago. For this reason and given that recent technological innovations such as the Internet are increasingly deconstructing geographical barriers for marketing purposes, it appears to me that a reexamination of precedents would be timely to determine whether the Dawn Donut Rule has outlived its usefulness.[5]

Ultimately, the Sixth Circuit concluded that geographic remoteness was but one factor to consider in deciding whether injunctive relief was warranted.[6] The Sixth Circuit already had an eight point test for infringement liability under the Lanham Act, of which entry into the market is but one factor to consider.[7]

In a more recent case, Boldface Licensing + Branding, a court declined to apply the Dawn Donut rule because the plaintiff, Tillett, sold products over the Internet and across the country, promoted its products in nationwide media, and had engaged in discussions with a U.K. distributor in the hope of using that deal to spur further sales in the U.S. Importantly, the court found that applying the Dawn Donut rule would have a significant adverse impact on Tillett’s rights arising from its federal registration.[8] Other courts have declined to apply the rule or have stated the rule is inappropriate where the trademark holder markets through the Internet.[9]

In the Third Circuit, the Holiday Inn chain sued a hotel in the U.S. Virgin Islands called Holiday Inn.[10] The chain did not have a hotel in the USVI at the time, but had two applications for franchises located there pending. [11] The Third Circuit stated that while the Holiday Inn chain had established a strong likelihood of confusion, it had failed to present sufficient evidence of debasement of its trademark, and therefore had not demonstrated a right to immediate relief, and that “the geographic location of the USVI militated against a finding that there was a use by the defendants of the type of competitive commerce envisioned by Congress.”[12] The Third Circuit also held that when Holiday Inn commenced operations in the USVI there would be a likelihood of public confusion, and the chain would be entitled to an injunction.[13]

In the Third Circuit (Western District of Pennsylvania), was infringing its registered trademarks, “Dogma” and “Dogma Grill A Frank Philosophy.”[14] Dogma Grill brought a complaint for trademark infringement, unfair competition, and cybersquatting under the Lanham Act. [15] Interestingly, in its complaint, Dogma Grill did not allege that it had marketed its products and services nationally, instead, Dogma Grill alleged that it was Hot Dogma that had marketed through the Internet and television, thus creating a likelihood of confusion. [16] However, the case settled before there was any substantial briefing.

Where does this leave most savvy online companies?  Essentially, the takeaway may be that companies must have some presence in markets in which it wants to stop a junior (unregistered) user of the mark.  Perhaps having a website with the ability to place orders; having some retailers or sales agents make sales calls; attending trade shows; looking for franchisees in an area, etc. may satisfy the Dawn Donut standard.  Not very definite, but that’s what keeps us trademark lawyers in business.

The better option is to visit with business lawyers and trademark attorneys and find out how you may show a business presence and market penetration in the market where injunction is sought.  If your company is not in that market, you just may be dunked by the Dawn Donut rule.

The business and intellectual law attorneys at the Vethan Law Firm, P.C. look forward to visiting with you and your management team.  Fixing your problems is our business.
 

[1] Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358 (2nd Cir. 1959).
[2] The "Dawn Donut Rule": Still Standing (Article III, That Is) Even with the Rise of the Internet, 90 Trademark Rep. 723, 723(2000).
[3] Am. Foods, Inc. v. Golden Flake, Inc., 312 F.2d 619, 625 (5th Cir. 1963).
[4] Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358 (2d Cir. 1959).
[5] Circuit City Stores, Inc. v. CarMax, Inc., 165 F.3d 1047, 1057 (6th Cir. 1999).
[6] Id. at 1056.
[7] Daddy's Junky Music Stores, Inc. v. Big Daddy's Family Music Ctr., 109 F.3d 275, 279, 287 (6th Cir. 1997).
[8] Boldface Licensing + Branding v. By Lee Tillett, Inc., 940 F.Supp.2d 1178 (C.D. Cal. 2013).
[9] Rebel Debutante LLC v. Forsythe Cosmetic Group, Ltd., 799 F.Supp.2d 558 n. 12 (M.D.N.C. 2011)(declining to apply rule where business marketed nationwide through Internet); see also A.Z. Johnson, Jr., Inc. v. Sosebee, 397 F. Supp. 2d 706, 710 n.1 (D.S.C. 2005)(application of rule inappropriate where the businesses transcend local boundaries such as through use of the Internet).
[10] Holiday Inns of America, Inc. v. B & B Corp., 409 F.2d 614, 618 (3rd Cir. 1969).
[11] Id.
[12] Id. at 618.
[13] Id. at 618-619.
[14] Dogma Grill, LLC v. Hot Dogma Enterprises, LLC, et al., Civil Action No. 2:06-cv-00495.
[15] Id.


Friday, August 14, 2015

Startups, Independent Contractors, and the Risk of Litigation

These days, many startups (Uber probably being the most famous example) make extensive use of independent contractors in order to provide services “on demand.” However, when these cutting edge businesses collide with established laws, the risks can be great.

Both parties can benefit from an independent contractor arrangement. Workers gain a degree of freedom and flexibility. Businesses can rapidly adjust the size of their workforces to meet changing demand, and often find that they save money.

However, misclassifying a worker as an independent contractor when they really should be considered a traditional employee can expose your company to litigation. Aside from the expense, litigation can cause harmful publicity, and make it more difficult to attract investors. Recently, several startups, including Uber and Lyft, using have been sued for allegedly misclassifying their workers as independent contractors. One such startup, Homejoy, which provided on-demand household cleaning services, announced that it is closing its doors after being sued for misclassification.

The moral of the story? Simply calling your workers independent contractors does not make them so. A court will look beyond the title, and examine the nature of the work performed and the relationship between the worker and the employer. In particular, the degree of control exerted by the employer has been very persuasive.

The Department of Labor recently weighed in on this issue on a July 15 memo, emphasizing the need to look at the “big picture.” Critically, the memo expresses the view that most workers still fall under the traditional employee classification:

In sum, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee). The factors should be used as guides to answer that ultimate question of economic dependence. The correct classification of workers as employees or independent contractors has critical implications for the legal protections that workers receive, particularly when misclassification occurs in industries employing low wage workers.

There are still real advantages to using independent contractors, but make sure you seek qualified legal counsel.  If you have any questions, please contact the business law and employment attorneys at The Vethan Law Firm, P.C. Fixing your problem is our business.

Monday, August 3, 2015

Agreeing to Inevitable Disclosure?


As discussed in our June 7, 2015 blog post, the Texas Uniform Trade Secrets Act (“TUTSA”) became effective on September 1, 2013 authorized Courts to employ injunctive relief to stop “threatened misappropriation.”  Such “threatened misappropriation” has gone under many names, but is most commonly referred to as “inevitable disclosure.”  Which when combined with the Texas Supreme Court’s trend toward favoring enforcement of non-competes, has tilted the balance to pro-business in the never-ending tug-of-war between employer proprietary concerns and employee mobility interests.  This is a new weapon in the race to protect the businesses’ proprietary information and we are already seeing cutting edge businesses adapt.  As legal frameworks shift, businesses should reevaluate their employment contracts to ensure the highest levels of protection for their critical information

One such consideration is whether to include “threatened misappropriation” directly into an employee’s contract.  While it is common place to find contractual clauses protecting various forms of “Confidential Information” as defined in the relevant agreement, or post-employment restrictions on competition, solicitation of clients, and poaching of fellow employees, most employment contracts do not include any use of the “threatened misappropriation.”  That is beginning to change.  The Vethan Law Firm, P.C. has begun to see, and in appropriate cases begun to use clauses such as the one below.


Employee agrees that Employee’s work for Employer’s competitor during the Non-Competition Period would inevitably lead to Employee’s unauthorized use of Employer’s Confidential Information, even if such use were unintentional.  Because it would be impossible, as a practical matter, to monitor, restrain, or police Employee’s use of such Confidential Information other than by Employee’s not working for a competitor, Employee agrees that restricting such employment as set forth in this Agreement is the narrowest way to protect Employer’s interest, and the narrowest way of enforcing Employee’s promise not to use or disclose the Confidential Information and/or Specialized Training.


While this clause and clauses like it have, as of the writing of this blog, yet to be tested in Texas courts, with appropriate drafting and in the right context, using the “inevitable disclosure” doctrine gives businesses one more weapon in the arsenal of post-employment protections.

Thursday, July 30, 2015



Congratulations to Texas Board of Legal Specialization (TBLS) on celebrating their 40th Anniversary

 
On June 19th TBLS celebrated its 40th anniversary at the Henry B. Gonzalez convention center in downtown San Antonio.  At the celebration 35 Texas Board Certified Criminal Law attorneys were recognized for 40 years of Board Certification.  Thirteen attorneys were present to accept a plaque in recognition from TBLS for their special 40 year Board Certification achievement. 
TBLS Executive Director Gary McNeil recognized the 40-year Board Certified Criminal Law attorneys and lauded them as trailblazers who have paved the way for thousands of attorneys who have since become board certified. 
Congratulations again to the attorneys and TBLS on 40 years!

Sunday, June 7, 2015

Exploring the Contours of “Threatened Disclosure” Under Texas’ Uniform Trade Secrets Act



In a commercial market increasingly connected through the Internet, the importance of trade secret protection for businesses is growing exponentially. A single key employee can wreak havoc if he misappropriates trade secrets and then uses that information or discloses it to compete against his former employer. Traditionally, employers have been able to secure injunctions in Texas courts against former employees’ actual use or disclosure of trade secret information based on evidence of those employees’ intentions. And while a few Texas courts have gone so far as to issue injunctions where it was merely probable a defendant would use or disclosure trade secrets, none have expressly or formally adopted the doctrine is known as ‘inevitable’ disclosure. The Texas Uniform Trade Secrets Act (TUTSA) may have changed that effective September 1, 2013, wherein the state legislature added a new tool to employers’ arsenal by expressly authorizing injunctive relief for “threatened misappropriation.” When combined with the Texas Supreme Court’s trend toward favoring enforcement of non-competes, Texas has, at least temporarily, tilted pro-business in the never-ending tug-of-war between employer proprietary concerns and employee mobility interests. What is less clear is how this augurs for the future.

Although the concept of threatened misappropriation has been a part of the Uniform Trade Secrets Act since its inception in 1979, the flavor known as “inevitable disclosure” did not gain widespread currency until PepsiCo Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). Traditional threatened misappropriation cases issued injunctive relief based on evidence of probability under the circumstances that the former employee would use the trade secret information in his new job. The inevitable disclosure doctrine dispenses with an analysis of the circumstantial evidence surrounding the particular former employee’s subjective likely future intent, and instead entertains the objective question of whether someone in the former employee’s situation would inevitably use the former employer’s proprietary information.  Some state courts have adopted “inevitable disclosure” as the standard for measuring “threatened disclosure” under the Uniform Trade Secrets Act. Others have rejected it, opting for an approach that balances the competing interests of employee mobility against the need to protect trade secrets.

The inevitable disclosure doctrine has a checkered past in Texas jurisprudence. Although no Texas court has formally recognized the doctrine under a common law theory, several have fashioned analogous remedies using similar analysis. But with TUTSA, the days of non-recognition have changed. What is unknown is what form “threatened disclosure” may take in Texas jurisprudence. Will it be of the “inevitable disclosure” variety espoused by Redmond, or a more conservative flavor adopted by other jurisdictions? Prior Texas cases provide few clues.

Three common threads run through the Texas cases that approximated the inevitable disclosure doctrine even before TUTSA: (1) possession of trade secret information, (2) the employee is in a position to use the trade secret information, and (3) that the trade secrets “probably would” be disclosed in the absence of injunctive relief. For example, in Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548 (Tex.App.-Dallas 1993, no writ), the court of appeals upheld a temporary injunction prohibiting the defendant from calling on, soliciting, or transacting business with customers and consultants of her former employer, and also from using confidential information and trade secrets she acquired while employed by her former employer. Id. at 550. Despite evidence in the record that the defendant had not actually used or disclosed the trade secrets, the court nonetheless affirmed the injunction, stating, “Rugen is in possession of IBS's confidential information and is in a position to use it. Under these circumstances, it is probable that Rugen will use the information for her benefit and to the detriment of IBS.” Id. at 552. Thus, each of the above threads, (1) possession of the information, (2) position to use the information, and (3) probability of disclosure, are present in the Rugen holding.

Other decisions tend to support the Rugen court’s reasoning. In Williams v. Compressor Eng'g Corp., 704 S.W.2d 469 (Tex. App–Houston [14th Dist.] 1986, writ ref'd n.r.e.), the court of appeals affirmed an injunction based on a jury finding that trade secrets “probably would” be disclosed. Id. at 470-472. That court went on to note that proof that trade secrets “will be used” by a former employee to compete supports injunctive relief. Id. The court of appeals in Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 902 (Tex.Civ.App.—Houston[1st Dist.] 1978, ref’d n.r.e.), upheld an injunction prohibiting a former employee from working for a competitor. The Weed Eater court noted that injunctive relief was the only viable remedy where even in the best of good faith, the former employee could hardly prevent his knowledge of his former employer’s confidential methods from showing up in his work. And finally, in Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 860 (Tex.App.--Fort Worth 2003, no pet.), the court of appeals held that a plaintiff was not required to prove that a defendant is actually using the information, but only needed to prove that the defendant was in possession of the information and was in a position to use it.

It is unclear, however, whether the three factors enumerated above are more or less restrictive than the inevitable disclosure doctrine enunciated in Redmond. In its purest formulation in Redmond, “inevitable disclosure” means that a plaintiff may prove a claim of trade secret misappropriation by demonstrating that the defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets. Behind the Seventh Circuit’s holding stands a well-reasoned opinion: Teradyne Inc. v. Clear Communication Corp., 707 F. Supp. 353 (N.D. Ill. 1989). As in Redmond, the court in Teradyne analyzed inevitable disclosure in light of the Illinois Uniform Trade Secret Act, holding that “threatened misappropriation can be enjoined under Illinois law” where there is a “high degree of probability of inevitable and immediate ... use of ... trade secrets.” Id. None of the Texas cases cited above, however, discuss the degree of probability that information will be disclosed necessary to support injunctive relief for threatened misappropriation. This appears to be an unanswered question in Texas.

Not all courts have lauded the inevitable disclosure doctrine. The California appellate court for the Fourth Appellate District rejected the doctrine in Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277 (Cal. App. 2002). Although the court acknowledged that the majority of jurisdictions which had considered the inevitable disclosure doctrine had accepted it in some form, the California court joined a small but growing number of jurisdictions rejecting the doctrine. In doing so, the court explained, “Decisions rejecting the inevitable disclosure doctrine correctly balance competing public policies of employee mobility and protection of trade secrets.” The California court observed that the inevitable disclosure doctrine created a de facto covenant not to compete that ran counter to California’s established public policy favoring employee mobility. The court also criticized the doctrine because it rewrote employment agreements after-the-fact, without the employee’s consent, based on inferences drawn from circumstantial evidence.

As previously stated, Texas courts have been reluctant to adopt a common-law variant of the inevitable disclosure doctrine. Two factors now militate against that trend, however. First, of course, is TUTSA. Texas’ Uniform Trade Secrets Act closely resembles Illinois Act. For example, both states that include a “list of actual or potential customers or suppliers” in the definition of a trade secret; that particular addition is absent from the Uniform Act and most other states’ adoption of the Uniform Act. The Redmond case has its origins in the Illinois Act. The second factor is the Texas Supreme Court’s recently announced public policy shift in Exxon Corp. v. Drennen, --- S.W.3d ---, 57 Tex. Sup. J. 1346 (Tex. Aug. 29, 2014), a non-compete case. There the Texas Supreme Court noted that with Texas hosting many of the world’s largest corporations, “public policy has shifted from a patriarchal one in which we valued uniform treatment of Texas employees from one employer to the next above all else, to one in which we also value the ability of a company to maintain uniformity in its employment contracts across all employees, whether the individual employees reside in Texas or New York.” Thus, the Texas Supreme Court effectively jettisoned its role as the protector of employee mobility in favor of a policy that avoids “’disruptions of orderly employer-employee relations’ within large multistate companies and avoids disruption to ‘competition in the marketplace.’” This public policy shift is quietly abetted by TUTSA, which provides that the Act overrides conflicting law, which could include the Texas Covenant Not to Compete Act’s stringent requirements to establish an enforceable non-compete agreement. Under TUTSA’s provisions, Texas courts may find the justification needed to impose de facto non-competes in the form of injunctive relief for threatened misappropriation. Thus, while Texas courts have previously shied away from adopting the inevitable disclosure doctrine, those days are likely numbered in the pro-business environment prevalent at Texas’ highest legislative and jurisprudential levels.

How Texas courts interpret “threatened disclosure” under TUTSA remains to be seen. Texas courts will have to balance the public policy behind the Uniform Trade Secrets Act against that behind the Covenants Not to Compete Act. One way of doing so would be to require a high degree of probability of inevitable disclosure to trigger relief for threatened disclosure. That is the standard for “inevitable disclosure,” however, and courts rejecting the doctrine argue it runs the risk of creating de facto non-competes in employment relationships. Furthermore, Texas courts are reluctant to depart from existing precedent. Existing precedent suggests that proof of a probability of disclosure is all that is necessary to support injunctive relief. Doesn’t that create an even greater risk of turning TUTSA into a tool for forging de facto non-competes in the employment relationship? None of this bodes well for a balanced approach that weighs employee mobility against the protection of trade secrets. Thus, Texas courts may well trend away from such a balanced approach when interpreting TUTSA’s threatened disclosure provision. How far away they will trend, and whether the Covenant Not to Compete Act’s public policy goals militate against that trend, remain to be seen. Until a Texas court delivers a definitive decision, Texas lawyers will be navigating uncertain waters, and employer attempts to enjoin former employees from unfairly competing may be very difficult to predict.

To learn more about how the Vethan Law Firm P.C. (VLF) may help you, visit our website at vethanlaw.com or call our main office at (713) 526-2222