California law governing exculpatory clauses and contractual limitations of liability

by Allen M Lee8. May 2013 09:16


In commercial contracts, California permits the use of exculpatory clauses and limitations of liability with some exceptions.  A limitation of liability clause permits contracting parties to reduce or eliminate the potential for direct, consequential, special, incidental and indirect damages for breaches of or claims under the contract. An exculpatory clause is a provision that relieves one party of liability altogether for the specified damages.  Below is a summary of the law in California with respect to some common subjects of exculpatory clauses and limitations of liability.

General.  In general, a contract may not exempt from liability for fraud, willful injury to the person or property of another, or violation of law, whether willful or negligent.  Cal. Civ. Code § 1668 (“All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law”); Health Net of California, Inc., 113 Cal.App.4th at 234 (“It is now settled—and in full accord with the language of the [Cal. Civ. Code § 1668] — that notwithstanding its different treatment of ordinary negligence, under section 1668, ‘a party [cannot] contract away liability for his fraudulent or intentional acts or for his negligent violations of statutory law,’ regardless of whether the public interest is affected”).  
Ordinary Negligence.  Contracts exempting from liability for ordinary negligence are valid where the public interest is not involved and no statute expressly prohibits it.  Health Net of California, Inc. v. Department of Health Services, 113 Cal.App.4th 224, 243 (2003) (“The present view is that a contract exempting from liability for ordinary negligence is valid where no public interest is involved ... and no statute expressly prohibits it”), citing 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 631, p. 569; see, e.g., Platzer v. Mammoth Mountain Ski Area, 104 Cal.App.4th 1253, 1258-1259 (2002) (stating that courts have consistently declined to invalidate exculpatory agreements in the recreational sports context).
Where the public interest is involved, exemptions from liability for ordinary negligence are not enforceable.  SeeTunkl v. Regents of University of California, 60 Cal.2d 92, 96 (1963) (finding that a contract between a hospital and an entering patient affects the public interest, the supreme court thereupon invalidated a clause in a hospital admission form that released the hospital from liability for any negligence of its employees) (“obviously no public policy opposes private, voluntary transactions in which one party, for a consideration, agrees to shoulder a risk which the law would otherwise have placed upon the other party”).The California Supreme Court has provided a rough outline of transactions which affect the public interest:
In placing particular contracts within or without the category of those affected with a public interest, the courts have revealed a rough outline of that type of transaction in which exculpatory provisions will be held invalid. Thus the attempted but invalid exemption involves a transaction which exhibits some or all of the following characteristics. It concerns a business of a type generally thought suitable for public regulation.  The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public.  The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards.  As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services.  In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence. Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents.  Tunkl, 60 Cal.2d at 98-101.  
Gross negligence.  California does not recognize any cause of action for “gross negligence” unless such an action is directly, or at least implicitly, authorized by one of the numerous statutes that employ gross negligence as the applicable standard.  City of Santa Barbara v. Superior Ct., 41 Cal.4th 747, 779 (2007); Continental Ins. Co. v. American Protection Industries, 197 Cal.App.3d 322, 328-30 (1987) (“we conclude that no defensible reason exists for categorizing wilful [sic] and wanton misconduct as a different kind of negligence not suitable for comparison with any other kind of negligence . . . any attempt to categorize gross negligence separately from ordinary negligence is unnecessary”). 
Strict products liability.  Exemptions from strict products liability are not enforceable.  Westlye v. Look Sports, Inc., 17 Cal.App.4th 1715, 1741-47 (1993) (“We conclude that, as a matter of public policy, product suppliers cannot insulate themselves from strict liability in tort for injuries caused by defects in products they place on the market by obtaining a consumer's signature on an express assumption of risk”).  
Limitation of Liability.  Limitation of liability clauses, as opposed to a complete exemption from all liability, may be permissible.  See, e.g., Farnham v. Superior Ct. of Los Angeles County, 60 Cal. App. 4th 69, 77 (1997) (permitting a contractual limitation on the liability of directors for defamation arising out of their roles as directors where the injured party retains his right to seek redress from the corporation) (“Although exemptions from allliability for intentional wrongs, gross negligence and violations of the law have been consistently invalidated . . . we have not found any case addressing a limitation on liability for intentional wrongs, gross negligence or violations of the law”) (emphasis in original). 
Unconscionability.   A court may void a limitation of liability or exculpatory clause where such clause is unconscionable.  Cal. Civil Code § 1670.5(a) provides that “[i]f the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”  As one court has held, 
Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Phrased another way, unconscionability has both a ‘procedural’ and a ‘substantive’ element.  The procedural element focuses on two factors: "oppression" and "surprise." Oppression" arises from an inequality of bargaining power which results in no real negotiation and "an absence of meaningful choice." "Surprise" involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in a prolix printed form drafted by the party seeking to enforce the disputed terms. Characteristically, the form contract is drafted by the party with the superior bargaining position. Of course the mere fact that a contract term is not read or understood by the nondrafting party or that the drafting party occupies a superior bargaining position will not authorize a court to refuse to enforce the contract. Although an argument can be made that contract terms not actively negotiated between the parties fall outside the "circle of assent" which constitutes the actual agreement, commercial practicalities dictate that unbargained-for terms only be denied enforcement where they are also substantively unreasonable.  No precise definition of substantive unconscionability can be proffered. Cases have talked in terms of "overly harsh" or "one-sided" results.  One commentator has pointed out, however, that "... unconscionability turns not only on a 'one-sided' result, but also on an absence of 'justification' for it.", which is only to say that substantive unconscionability must be evaluated as of the time the contract was made.  The most detailed and specific commentaries observe that a contract is largely an allocation of risks between the parties, and therefore that a contractual term is substantively suspect if it reallocates the risks of the bargain in an objectively unreasonable or unexpected manner.  But not all unreasonable risk reallocations are unconscionable; rather, enforceability of the clause is tied to the procedural aspects of unconscionability such that the greater the unfair surprise or inequality of bargaining power, the less unreasonable the risk reallocation which will be tolerated.                 
A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473 (1982).   
California Uniform Commercial Code. The California Uniform Commercial Code (“UCC”), applicable to goods, provides additional limitations.  For purposes of the UCC, “ ‘Goods’ means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities . . .  and things in action.” Cal. Com. Code § 2105(1). 
  • “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this code.” Cal. Com. Code § 2719(2).
  • “Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.   Limitation of consequential damages for injury to the person in the case of consumer goods is invalid unless it is proved that the limitation is not unconscionable. Limitation of consequential damages where the loss is commercial is valid unless it is proved that the limitation is unconscionable.” Cal. Com. Code § 2719(3). 
Other references.  The following is an overview of the laws in the fifty states governing contractual Limitations of Liability, Warranties and Remedies (2006):http://www.pillsburylaw.com/siteFiles/Publications/0C62DFD605F0471619ADF0E2E5576E98.pdf.

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General | Web 2.0

US Supreme Court holds that first sale doctrine applies to copies of a copyrighted work lawfully made abroad.

by Allen M Lee22. March 2013 10:01

In Kirtsaeng v. John Wiley & Sons, Inc., the U.S. Supreme Court has held that the “first sale” doctrine, which allows the owner of a copy of a copyrighted work to sell or otherwise dispose of that copy as he or she wishes, applies to copies of a copyrighted work lawfully made abroad.

Section 106 of the Copyright Act grants “the owner of copyright” certain exclusive rights, including the right “to distribute copies . . . of the copyrighted work to the public by sale or other transfer of ownership.” 17 U. S. C. §  106(3).  This right is qualified by, among other things, the first sale doctrine, which provides that “the owner of a particular copy . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.”  17 U.S.C. §109(a). 

However, prior to Kirtsaeng, courts were divided as to whether the first sale doctrine applied to works that were made by the copyright owner outside of the United States.  Under 17 U.S.C. § 602, importation into the United States of so called “gray-market goods” constituted an infringement of the copyright owner’s exclusive right to distribute copies of his or her work.  See 17 U.S.C. § 602(a)(1) (“Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501”).

In Kirtsaeng, the Court held that that the first sale doctrine applies to copies of a copyrighted work lawfully made abroad.  Accordingly, a buyer of a copy of a copyrighted work lawfully manufactured abroad is free to import that copy into the United States and sell it or give it away without obtaining permission to do so from the copyright owner.

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General | Web 2.0

U.S. Supreme Court holds that a buyer of a copy of a copyrighted work lawfully manufactured abroad is free to import that copy into the United States and sell it or give it away without obtaining permission to do so from the copyright owner.

by Allen M Lee22. March 2013 10:01

In Kirtsaeng v. John Wiley & Sons, Inc., the U.S. Supreme Court has held that the “first sale” doctrine, which allows the owner of a copy of a copyrighted work to sell or otherwise dispose of that copy as he or she wishes, applies to copies of a copyrighted work lawfully made abroad.

Section 106 of the Copyright Act grants “the owner of copyright” certain exclusive rights, including the right “to distribute copies . . . of the copyrighted work to the public by sale or other transfer of ownership.” 17 U. S. C. § 106(3).  This right is qualified by, among other things, the first sale doctrine, which provides that a purchaser of a work protected by copyright is permitted to freely sell or otherwise dispose of that copy without the permission of the copyright owner.  17 U.S.C. § 109(a) (“the owner of a particular copy . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy”). 

However, prior to Kirtsaeng, courts were divided as to whether the first sale doctrine applied to works that were made by the copyright owner outside of the United States.  Under 17 U.S.C. § 602, importation into the United States of so called “gray-market goods” constituted an infringement of the copyright owner’s exclusive right to distribute copies of his or her work.  See 17 U.S.C. § 602(a)(1) (“Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501”).

In Kirtsaeng, the Court held that that the first sale doctrine applies to copies of a copyrighted work lawfully made abroad.  Accordingly, a buyer of a copy of a copyrighted work lawfully manufactured abroad is free to import that copy into the United States and sell it or give it away without obtaining permission to do so from the copyright owner.

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U.S. Supreme Court holds that a buyer of a copy of a copyrighted work lawfully manufactured abroad is free to import that copy into the United States and sell it or give it away without obtaining permission to do so from the copyright owner.

by Allen M Lee22. March 2013 09:18

In Kirtsaeng v. John Wiley & Sons, Inc., the U.S. Supreme Court has held that the “first sale” doctrine, which allows the owner of a copy of a copyrighted work to sell or otherwise dispose of that copy as he or she wishes, applies to copies of a copyrighted work lawfully made abroad.

Section 106 of the Copyright Act grants “the owner of copyright” certain exclusive rights, including the right “to distribute copies . . . of the copyrighted work to the public by sale or other transfer of ownership.” 17 U. S. C. § 106(3).  This right is qualified by, among other things, the first sale doctrine, which provides that a purchaser of a work protected by copyright is permitted to freely sell or otherwise dispose of that copy without the permission of the copyright owner.  17 U.S.C. § 109(a) (“the owner of a particular copy . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy”). 

However, prior to Kirtsaeng, courts were divided as to whether the first sale doctrine applied to works that were made by the copyright owner outside of the United States.  Under 17 U.S.C. § 602, importation into the United States of so called “gray-market goods” constituted an infringement of the copyright owner’s exclusive right to distribute copies of his or her work.  See 17 U.S.C. § 602(a)(1) (“Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501”).

In Kirtsaeng, the Court held that that the first sale doctrine applies to copies of a copyrighted work lawfully made abroad.  Accordingly, a buyer of a copy of a copyrighted work lawfully manufactured abroad is free to import that copy into the United States and sell it or give it away without obtaining permission to do so from the copyright owner.

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U.S. Supreme Court holds that a buyer of a copy of a copyrighted work lawfully manufactured abroad is free to import that copy into the United States and sell it or give it away without obtaining permission to do so from the copyright owner.

by Allen M Lee22. March 2013 09:18

In Kirtsaeng v. John Wiley & Sons, Inc., the U.S. Supreme Court has held that the “first sale” doctrine, which allows the owner of a copy of a copyrighted work to sell or otherwise dispose of that copy as he or she wishes, applies to copies of a copyrighted work lawfully made abroad.

Section 106 of the Copyright Act grants “the owner of copyright” certain exclusive rights, including the right “to distribute copies . . . of the copyrighted work to the public by sale or other transfer of ownership.” 17 U. S. C. § 106(3).  This right is qualified by, among other things, the first sale doctrine, which provides that a purchaser of a work protected by copyright is permitted to freely sell or otherwise dispose of that copy without the permission of the copyright owner.  17 U.S.C. § 109(a) (“the owner of a particular copy . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy”). 

However, prior to Kirtsaeng, courts were divided as to whether the first sale doctrine applied to works that were made by the copyright owner outside of the United States.  Under 17 U.S.C. § 602, importation into the United States of so called “gray-market goods” constituted an infringement of the copyright owner’s exclusive right to distribute copies of his or her work.  See 17 U.S.C. § 602(a)(1) (“Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501”).

In Kirtsaeng, the Court held that that the first sale doctrine applies to copies of a copyrighted work lawfully made abroad.  Accordingly, a buyer of a copy of a copyrighted work lawfully manufactured abroad is free to import that copy into the United States and sell it or give it away without obtaining permission to do so from the copyright owner.

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Ninth Circuit clarifies certain aspects of the DMCA safe harbor provisions in favor of online service providers (UMG Recordings, Inc. v. Veoh Networks, Inc.)

by Allen M Lee16. March 2012 11:29

The Digital Millennium Copyright Act (“DMCA”), 17 U.S.C. § 512, among other things, limits the liability of online service providers (OSPs) for copyright infringement under certain conditions.  OSPs are defined as any entity “offering the transmission, routing, or providing of connections for digital online communications, between or among points specified by a user, of material of the user’s choosing, without modification to the content of the material as sent or received.”   17 U.S.C. §512(k)(1)(A).  OSPs include sites such as YouTube and Flickr, which make user uploaded content accessible to other people. In enacting the DMCA and limiting OSPs’ liability, Congress’ intent was to ensure that “the efficiency of the Internet will continue to improve and that the variety and quality of services on the Internet will continue to expand.”  UMG Recordings, Inc. v. Veoh Networks, Inc., 667 F.3d 1022, 2011 U.S. App. Lexis 25168, at *14 (9th Cir. 2011) (citing S. Rep. No. 105-190, at 8 (1998).

To qualify for the safe harbor provisions of the DMCA, OSPs must take certain steps and meet a number of conditions.    A threshold condition is that the OSP must merely store the content at the direction of the user:

 

            (c) Information residing on systems or networks at direction of users. --

(1) In general. -- A service provider shall not be liable for monetary relief,  or, except as provided in subsection (j), for injunctive or other equitable relief, for infringement of copyright by reason of the storage at the direction of a user of material that resides on a system or net-work controlled or operated by or for the service provider . . .

17 U.S.C. § 512(c)(1).

In Veoh, plaintiff Universal Music Group (“UMG”), one of the world’s largest music publishing companies, sued video-hosting service Veoh for copyright infringement arising from unauthorized copyrighted content that was uploaded to Veoh’s website by its users.    Veoh argued that it had complied with the safe harbor provisions of the DMCA, including 17 U.S.C. § 512(c)(1).  UMG disagreed, arguing that the DMCA safe harbor provision did not apply to Veoh because Veoh did more than just store the user uploaded videos, but it also performed some automated processes to facilitate public access to the content, such as breaking the video files into smaller 256-kilobyte chunks and converting the video files into other formats such as Flash 7, Flash 8, and MPEG-4 formats.  In essence, UMG’s contention was that the DMCA safe harbor provisions do not apply to where the OSP does anything to the content to make it accessible other than simply storing it.  The district court rejected this argument, and on appeal, the Ninth Circuit affirmed, holding that “the language and structure of the statute, as well as the legislative intent that motivated its enactment, clarify that § 512(c) encompasses the access-facilitating processes that automatically occur when a user uploads a video to Veoh.”  Accordingly, the DMCA safe harbor provisions continue to apply where an OSP undertakes any automatic processes to facilitate public access to user uploaded content.

Veoh’s victory was bitter-sweet however.  On February 12, 2010, Veoh filed for bankruptcy under Chapter 7 on March 19, 2010, with some claiming this was due in part to its legal defense costs.

 

 

Allen M. Lee  Mr. Lee’s practice focuses on trademark, copyright, intellectual property and corporate law.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

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IRS Audit Red Flags: The Dirty Dozen

by Allen M Lee31. January 2012 19:26

Great article to read as you start on your tax returns.

IRS Audit Red Flags: The Dirty Dozen Here are 12 hot spots on your return that can raise the chances of scrutiny by the IRS.

http://finance.yahoo.com/news/irs-audit-red-flags--the-dirty-dozen.html

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U.S. Supreme Court affirms Ninth Circuit holding limiting the First Sale doctrine to works that are legally made and sold in the United States

by Allen M Lee5. July 2011 12:03

Under the First Sale doctrine, codified in 17 U.S.C. § 109(a), once a copyright owner consents to the sale of a copy of his work, he may not thereafter exercise the distribution rights with respect to those copies.  Section § 109(a) provides in pertinent part:

 

Notwithstanding  the provisions of section 106(3), the owner of a particular  copy . . . lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy . . . .

At issue in Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. Cal. 2008), was whether the First Sale doctrine applies where the works are made outside the United States and sold here. The Ninth Circuit held that the First Sale doctrine does not apply.  On appeal, the U.S. Supreme Court issued a decision without analysis affirming the judgment in a 4-4 Split Decision.   Costco Wholesale Corp. v. Omega, S.A., 2010 U.S. LEXIS 9597 (U.S. Dec. 13, 2010) (affirmed by an equally divided Court).

In Omega S.A., defendant Costco Wholesale Corporation (“Costco”) purchased watches bearing Omega, S.A.’s (“Omega”) copyrighted designs on the “gray market” in the following manner:  Omega manufactured the watches in Switzerland and sold them to authorized distributors overseas.  Other third parties then purchased these watches and sold them to a New York distributor, which then sold the watches to Costco, who then sold the watches in the U.S.  Omega filed a lawsuit alleging that Costco’s sales of its watches constituted copyright infringement because it violated Omega’s exclusive right to distribute copies under 17 U.S.C. § 602(a) and 106(3).  These sections provide in pertinent part:

 

17 U.S.C. § 602(a):

Importation 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, actionable under section 501.

 

17 U.S.C. § 106(3):

Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights . . . to distribute copies . . . of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.

In reaching its decision, the Ninth Circuit applied its prior precedent, including the presumption against extraterritoriality, which states that a U.S. statute "applies only to conduct occurring within, or having effect  within, the territory of the United States, unless the contrary is clearly indicated by the statute."  Omega S.A. at 987-88 (“the [Copyright] Act presumptively does not apply to conduct that occurs abroad even when that conduct produces harmful effects within the United States”).  Therefore, Section 109(a) applied only to copies lawfully made and sold in the U.S., and not to copies made overseas.  Since the Omega watches sold by Costco were not made in the U.S., Section 109(a) was not available as a defense to copyright infringement. 

As a result of Omega S.A., retailers in the Ninth Circuit that resell goods manufactured from abroad, and purchased and imported into the U.S. by third parties, must obtain consent from the copyright owners prior to reselling the goods.  Similarly, importers of such goods must obtain consent from the relevant copyright owners prior to resale.

 

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

 

 

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Ninth Circuit clarifies test for trademark infringement involving the purchase of keywords in search engine advertising

by Allen M Lee6. June 2011 09:22

(This is a follow-up article to “What is the state of the law concerning keyword advertising?” accessible at http://www.allenmlee.com/blogengine.net/post/2010/01/22/What-is-the-state-of-the-law-concerning-keyword-advertising.aspx).

In Network Automation, Inc. v. Advanced Systems Concepts, Inc., 638 F.3d 1137, 2011 U.S. App. LEXIS 4488 (2011), the Ninth Circuit issued a significant decision that clarifies the test for trademark infringement in Ninth Circuit cases involving the purchase of keywords in search engine advertising. 

At issue in this case was Network Automation’s purchase of the keyword ACTIVEBATCH in various search engines like Google and Microsoft Bing.  ACTIVEBATCH is the registered trademark of Advanced Systems Concepts, a direct competitor. When search engine users keyed in ACTIVEBACTCH, a results page showing www.NetworkAutomation.com was displayed as a sponsored link. 

The district court granted an injunction after applying the eight-factorSleekcraft test, AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979), for likelihood of confusion, emphasizing the three factors outlined in Brookfield Commc'ns, Inc. v. West Coast Entm't Corp., 174 F.3d 1036, 1054 (9th Cir. 1999) – now often referred to as the “Internet trinity” or “Internet troika” – as being determinative.  On appeal, the Court of Appeals reversed and remanded.

First, the Court held that the use of a trademark as a search engine keyword that triggers the display of a competitor’s advertisement does indeed constitute “use in commerce” under the Lanham Act.  Network Automation, Inc. at *10.  This is important because “use in commerce” is a required element for bringing a trademark action.

The Court then rejected a rigid application of the “Internet troika” analysis to internet cases, stating that "[w]e must be acutely aware of excessive rigidity when applying the law in the Internet context; emerging technologies require a flexible approach."  Id. at *1.  The Court identified the key issue as follows:  “The potential infringement in this context arises from the risk that while using [Advanced Systems Concepts, Inc.] mark to search for information about its product, a consumer might be confused by a results page that shows a competitor's advertisement on the same screen, when that advertisement does not clearly identify the source or its product.” 

Accordingly, in order to determine whether this infringement was actionable, “[t]he sine qua non of trademark infringement is consumer confusion,” Id. at *2-3, and  “the eight factors established more than three decades ago in Sleekcraft are the nonexhaustive list of factors relevant to determining the likelihood of consumer confusion.”  Id. at 3.

Of interest, in applying the Sleekcraftfactors to keyword advertising, the Court found the following:

  1. Proximity of the Goods.  As a general rule, the more related the goods, the greater the likelihood of confusion. The District Court had found that this factor favored Advanced Systems Concepts, Inc. since the parties were direct competitors.  On appeal, the Court of Appeals found this was reversible error since the lower court weighed this factor in isolation by failing to consider whether the parties’ status as direct competitors would actually lead to a likelihood of confusion. Instead, this factor must be considered in conjunction with the labeling and appearance of the advertisements and the degree of care exercised by the consumers of Network Automation’s software. Id. at *27.  [Win for advertisers]
  2. Similarity of the Marks.  The Court determined that a proper analysis of this factor was not possible in this case since consumers do not actually confront two distinct marks. Rather, upon entering one company’s mark as a search term, a competitor’s sponsored link is displayed which shows neither company’s trademarks.  Thus, the lower court erred in treating the search term ACTIVEBATCH as conceptually separate from the mark ACTIVEBATCH and then comparing the same.  Id. at *28-29.  [Win for advertisers]
  3. Marketing Channels.  The Court determined that this factor merited little weight.  As a general rule, convergent marketing channels increase the likelihood of confusion.  However, the Court found that it is rare for a retailer today not to advertise online, and thus the use of a ubiquitous marketing channel like the internet sheds little light on the issue of likelihood of confusion.  Id. at *32.  [Win for advertisers]
  4. Type of Goods and Consumer Care.  The District Court found that Internet users on the whole exercise a low degree of care based on the Court’s decision in Brookfield and other early internet cases.  The Court determined that this was reversible error since this was no longer a reasonable assumption.  The factors that must be analyzed include the nature and cost of the goods, the whether the products are being marketed primarily to expert buyers.  Id. at *32.  [Win for advertisers]
  5. Defendant’s Intent.  Normally, when an alleged infringer knowingly adopts a mark similar to another’s, courts may presume that the public will be deceived.  However, in the context of search engine advertising, this factor must be determined in the context of whether a party intended to compare its products to that of the trademark proprietor as opposed to deceiving consumers.  [Win for advertisers]
  6. Other relevant factors.  In the keyword advertising context the "likelihood of confusion will ultimately turn on what the consumer saw on the screen and reasonably believed, given the context.” Id. at *36 (citingHearts on Fire Co. v. Blue Nile, Inc., 603 F. Supp. 2d 274, 289 (D. Mass. 2009). The Court found that the labeling and appearance of the advertisements and their surrounding context were important factors to consider.  Of note, while the advertisement at issue did not clearly identify their source, the sponsored links are clearly labeled as such and segregated from the objective search results.  [Win for advertisers] 

In summary, the Network Automation, Inc. decision provides additional guidelines for advertisers to follow in minimizing their liability when structuring their keyword campaigns. 

 

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

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General | Web 2.0

Status of Noncompetition Agreements in California

by Allen M Lee4. February 2011 08:27

In many states, and still so today, contractual restraints on the practice of a profession, business or trade were generally considered valid so long as they were reasonably imposed. This was true in California until 1872, when the California legislature rejected the so-called rule of reasonableness by enacting legislation that made covenants not to compete void, subject to some exceptions.  Today, this statute is codified in Cal. Bus. & Prof. Code § 16600-16602.5, which states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  Excluded from the scope of this prohibition are noncompetition agreements in the sale or dissolution of corporations (Cal. Civ. Code § 16601), partnerships (Id.; § 16602), and limited liability corporations (Id.,§ 16602.5). 

In the years since its enactment, California courts have generally condemned noncompetition agreements.  See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 123, fn. 12 (Cal. 2000) (stating that such restraints on trade are “largely illegal”). In this regard, California courts have consistently affirmed that Section 16600 evinces a settled legislative policy in favor of open competition and employee mobility.  Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 946 (Cal. 2008).  This law protects Californians and ensures “that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.” Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 859 (Cal. Ct. App. 1994).  It protects “the important legal right of persons to engage in businesses and occupations of their choosing.”  Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1520 (Cal. Ct. App. 1997). 

More recently, in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, the California Supreme Court again reaffirmed that noncompete agreements are automatically void as a matter of law under Section 16600.  At issue in Edwards were two non-compete clauses.  The first prohibited the plaintiff accountant employee from performing professional services of the type he had provided while at his former firm for any client he had worked on in the 18 months prior to his separation from the firm.  The second clause prohibited the accountant, for a year after termination, from ‘soliciting,’ defined under the noncompete agreement as providing professional services to any client of the former employer’s Los Angeles office.  The Court held these provisions to be invalid because it restrained the employee’s ability to practice his profession.

Notably, in Edwards the Supreme Court rejected the limited or “narrow-restraint” exception to section 16600 followed by some federal courts, which excepted application of Section 16600 “where one is barred from pursuing only a small or limited part of the business, trade or profession.”  Under some interpretations of the narrow-restraint exception, only noncompetition agreements that completely restrained the employee from practicing his profession, trade, or business were void.

 

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

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General | Web 2.0

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