Category Archives: Litigation

What the %@#&? Supreme Court Strikes Down Ban on Immoral or Scandalous Trademarks

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The Supreme Court struck down the Lanham Act’s prohibition on registering “immoral or scandalous” trademarks in its recent decision in Iancu v. Brunetti. Erik Brunetti is an artist who created a clothing line that uses the trademark FUCT. When he sought to register the mark, the U.S. Patent and Trademark Office (“USPTO”) denied his application, citing the Lanham Act’s prohibition on registering trademarks that contain immoral or scandalous matter. It is not hard to imagine that the mark would bring to mind perhaps the most famous four-letter curse word in American culture. Brunetti appealed and argued that the prohibition violates the First Amendment.

The Supreme Court agreed with Brunetti and held that the Lanham Act’s prohibition on registering immoral or scandalous trademarks is unconstitutional because it discriminates on the basis of viewpoint. By way of example, the Court pointed out how the USPTO registered the mark “D.A.R.E. TO RESIST DRUGS AND VIOLENCE” but refused to register “BONG HITS 4 JESUS” because it “suggests that people should engage in an illegal activity [in connection with worship]” and since “Christians would be morally outraged by a statement that connects Jesus Christ with illegal drug use.”

The Supreme Court’s rationale follows the same line of thinking from its decision in Matal v. Tam, two years ago, when the Court held that the ban on registering marks that “disparage” any person living or dead was unconstitutional. In that case, the Court also held that if a trademark registration bar is viewpoint-based, then it is unconstitutional under the First Amendment.

Does this mean that American consumers are likely to see an influx of brand names containing lewd, sexually explicit, and profane slogans? Not necessarily. While the Lanham Act’s prohibition had prevented the registration of immoral or scandalous marks, there is nothing that previously prevented individuals or businesses from using immoral or scandalous marks in commerce and enforcing the mark against potential infringers. Registration simply provides trademark owners with additional, valuable benefits such as the legal presumption of national ownership of a trademark. In other words, the landscape for offensive marks being used in the marketplace is unlikely to change too much, but owners will have an easier time protecting and enforcing these types of marks.

Questions? Let Eric know.

Eric ClendeningEric Clendening is a member of Flaster Greenberg’s Intellectual Property and Litigation Departments. He focuses his practice on intellectual property litigation and commercial litigation, including contract disputes, employment litigation, and other commercial disputes. He also advises clients on protecting and enforcing intellectual property rights online, including the resolution of domain name disputes and matters concerning e-commerce, online speech and conduct, and related intellectual property issues involving trademarks and copyrights.

Hiring A Competitor’s Employee? Proceed With Caution!

For the first time since its enactment over four years ago, a federal court has interpreted a provision of the New Jersey Trade Secrets Act (the “Act”).  The decision, unfortunately, leaves New Jersey employers who are considering hiring a competitor’s employee on uncertain ground.

In Baxter Healthcare Corp. v. HQ Specialty Pharma Corp., Baxter, a pharmaceutical company, sued its competitor HQ for patent infringement, tortious interference with the non-competition provision of its former employee’s employment contract, and breach of the Act for misappropriation of its trade secrets.   The court refused to dismiss the claim under the Act, despite finding Baxter could not prove HQ knew the employee was subject to a non-compete agreement or had knowledge of the former employer’s trade secrets.

George Owoo worked as a scientist for Baxter before leaving to work for its competitor, HQ.  He was a specialist in esmolol premixed injectable bag drug delivery systems.  At the time it hired him, HQ was not a participant in that market.  However, HQ soon filed several patent applications, listing Owoo as the inventor, for new esmolol products that would compete with Baxter’s similar products.

Before hiring Owoo, HQ had interviewed him extensively to inquire about his experience at Baxter.  He repeatedly denied he had an employment contract with Baxter or any knowledge of Baxter’s trade secrets, insisting that his knowledge in the esmolol premixed injectable bag market was in the public domain.  Based upon his representations, HQ hired Owoo and put him to work on developing esmolol products.

To prove its interference with contract claim, Baxter needed to show that HQ had acted with “malice”, i.e., an intention to interfere with its former employee’s contractual obligations to Baxter.  Because there was no evidence HQ had any knowledge of the employment contract, and, to the contrary, had been repeatedly assured by Owoo he had no contract, the court ruled Baxter could not show HQ acted maliciously and, therefore, could not prove tortious interference.

By contrast, a claim under the Act requires neither an employment agreement nor knowledge of it by the new employer.  Baxter claimed HQ misappropriated Baxter’s trade secrets by using them without authorization to develop its own competing products.  The court stated HQ could be liable for breach of the Act if Baxter could show HQ had used Baxter’s trade secrets at a time when HQ either knew or should have known Owoo had acquired them through improper means.

The question before the court,therefore, was whether HQ knew or had reason to know that its new employee’s esmolol formulation for HQ was derived from his knowledge of Baxter’s trade secrets.  Significantly, the court found there was some evidence that suggested HQ knew of Owoo’s prior involvement in developing Baxter’s esmolol program.  Most troubling, the court found HQ’s interrogation about his work history at Baxter revealed a concern on HQ’s part that he might have been privy to Baxter’s trade secrets and might have been preparing to use them at HQ without Baxter’s authorization.  Thus, the very investigation by HQ that formed the basis for the court’s decision to dismiss the interference with contract claim became the key fact in the court’s conclusion not to dismiss Baxter’s Trade Secrets Act claim.

What can companies do in light of the Baxter decision to protect themselves from Act claims when they are considering hiring a competitor’s employee, who might have knowledge of its trade secrets?  The Baxter decision suggests that perhaps HQ was damned if it did and damned if it didn’t investigate.  Despite that HQ did investigate, and, in fact, at least in part, because it did investigate, the court refused to dismiss the Trade Secrets Act claim against it.  On the other hand, although not addressed by the court in Baxter, had HQ not investigated, the court almost certainly would have refused to dismiss the Trade Secrets Act claim, and perhaps the interference with contract claim, as well.  In other words, choosing not to investigate new employees’ backgrounds is not a wise strategy for avoiding future liability.

There are ways a new employer can enhance the benefit of its investigation in the hope of avoiding claims under the. Act.  First, HQ could have had its new employee sign a written statement following the investigation certifying that he (1) was not under any contractual obligations to Baxter, and (2) either had no knowledge of Baxter’s trade secrets, or, in any event, agrees not to use that knowledge in his new position.

Second, HQ accepted without attempting to verify Owoo’s claim that his information was in the public domain. Had it done so, it would have had a stronger argument to avoid liability under the Act.

Finally, employers can reduce exposure to liability by insulating their new employees from working in competition with their former employers.  That tactic might make the new employee less valuable to the new employer, so each employer will have to perform its own risk/reward analysis comparing the potential benefits of no restrictions on its new employee to the legal costs of an expensive lawsuit alleging violations of the Act.

There is no one-size-fits-all solution to the Hobson’s choice presented by the Baxter decision.  Companies considering hiring a competitor’s employee should proceed with caution, especially when the employee may know the competitor’s trade secrets.

Questions? Let Phil know.

 

Philip Kirchner is a shareholder in and former chair of Flaster/Greenberg P.C.’s Commercial Litigation Practice Group, a member of the Labor & Employment and Construction Litigation Practice Groups, and member of the Restaurant & Hospitality, Construction, Nonprofit & Charitable Organizations, Gaming and Alternative & Renewable Energy Industry Groups.

New Jersey Court Sets Limits For Enforcement Of Mandatory Arbitration Clause

 

Companies considering including a provision requiring arbitration of disputes in their contracts can learn valuable lessons from a recent New Jersey appellate court decision.  The court’s opinion highlights the pitfalls of relying upon an imprecisely drafted and/or one-sided arbitration clause, especially in a consumer contract.  Despite the continuing rise in popularity of arbitration clauses and the strong preference for arbitration under both federal and New Jersey law, the case reminds us that not every arbitration agreement will be enforced.

Background.

Analysis of early impact of the revised federal rules of discroty.

In Dvorak v. AW Development, LLC, (N.J. App. Div. January 13, 2016), homeowners contracted with AW Development to construct and install a two-bedroom prefab ranch home after their previous home had been destroyed by Superstorm Sandy.  Disputes arose about whether the house was timely delivered.  Despite a provision in the contract seemingly requiring non-binding arbitration, the homeowners filed a lawsuit in New Jersey state court alleging breach of contract and other causes of action.  The trial court granted AW’s motion to dismiss the complaint on the basis of the non-binding arbitration provision, and the homeowners appealed.

The Contract’s Arbitration Clause.

The arbitration clause in the contract said, in relevant part:

Any claim arising out of or related to this Agreement shall be subject to non-binding arbitration . . . in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect. . . .  [T]his paragraph does not preclude [AW Development] from seeking prejudgment remedies and/or emergency relief from a court of equity or other court of competent jurisdiction.  Buyer may not seek such prejudgment/emergent relief under any circumstances.  EACH PARTY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR OTHERWISE RELATING TO THE RELATIONSHIP OF THE PARTIES, WHETHER IN CONTRACT, TORT OR OTHERWISE.  (emphasis in original)

The Court’s Decision.  

  1. Imprecise Contract Language.

An arbitration clause will be enforced only when it is the product of mutual assent and clearly explains to the parties that they are waiving their right to go to court.  If arbitration is intended to be a mandatory condition that must be satisfied before a lawsuit can be filed, the contract must clearly say so.  Because this contract did not clearly state that arbitration was a condition precedent to filing a lawsuit, the court ruled that it was not.  In the court’s opinion, the statement in the contract that claims “shall be subject to non-binding arbitration,” does not expressly or impliedly prohibit a party from filing suit or empower another party to force the dispute into arbitration after a lawsuit has been filed; it merely says the parties agree to non-binding arbitration if one of them demands it.

Next, the court took issue with the fact that the jury waiver provision had a broader reach than the arbitration clause.  The latter applied only to “claims arising out of or related to this Agreement,” whereas the jury waiver provision applied additionally to claims “relating to the relationship of the parties, whether in contract, tort or otherwise.”  Certain claims, therefore, could be subject to the jury waiver but not the non-binding arbitration clause.  That inconsistency also led the court to conclude that the arbitration provision was unenforceable.

Finally, with regard to the precision of the non-binding arbitration clause, the court found fault with its reference to “the Construction Industry Arbitration Rules of the [AAA],” because those rules do not include a provision for non-binding arbitration.  For all these reasons involving imprecise drafting, the court found that the arbitration clause did not clearly and unambiguously require the parties to arbitrate their claims before filing a lawsuit.

  1. Unconscionable Contract.

Even if this arbitration clause had been precisely drafted to bar a lawsuit, it would have been unenforceable, nonetheless, because it is an unconscionable contract of adhesion.  A contract of adhesion is one drafted solely by a party with superior bargaining power and imposed on the other party as a “take it or leave it” proposition.  Although calling a contract one of adhesion sounds pejorative, such contracts are, in fact, enforceable unless they are unconscionable in content.  Here, the court found the contract was so unfairly one-sided that it was unenforceable.  Among other reasons, the contract was objectionable because it allowed AW, but not the homeowners, to cure defects, and because it allowed AW, but not the homeowners, to seek recovery of consequential damages.  Such provisions, the court held, reflect the unequal bargaining power of the parties.  The most egregious discrepancy was in the arbitration provision itself.  That clause gave AW, but not the homeowners, the right to seek injunctive and emergent relief from a court without regard to the arbitration requirement.  As the court put it, “[t]his grossly imbalanced approach to the availability of interlocutory or emergent relief constitutes harsh and unfair one-sided terms that do not deserve judicial enforcement.”

WHAT SHOULD CONTRACTING PARTIES DO TO ASSURE THAT THEIR ARBITRATION AGREEMENTS ARE ENFORCED?

  • First, define all contract terms and reference arbitration rules and procedures that actually exist. If your contract calls, for example, for arbitration under the rules of the American Arbitration Association, make sure that the AAA rules and procedures provide for the type of arbitration your contract mandates.
  • Second, your contract must state that the parties are waiving their legal right to go to court and have a jury trial and are agreeing instead to refer their disputes to arbitration. If the intent is to make arbitration non-binding, but a prerequisite to filing suit, the agreement must expressly state those terms.
  • Third, be fair in allocating rights and privileges under the contract and resist the temptation to give the company, but not the other party, a procedural or substantive advantage unless there is an objective rationale for doing so. Courts do not look kindly on contracts that provide for disparate treatment of the parties without justification, and any attempt to use superior bargaining power to gain an unfair advantage over an adversary might backfire.
  • The same dynamics at play in this case involving a consumer contract are frequently found in employment agreements, which are also prone to contracts of adhesion. An employer that chooses to implement mandatory arbitration agreements with its employees should ensure that the contracts are even-handed and comply with other legal requirements the courts have imposed on employment arbitration agreements.

Philip Kirchner is a member of Flaster/Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

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