Chapter Seventeen | Employment Law, Regulation and Labor Law

History of Employment Law

For most of recorded history, employment law simply did not exist. There were no laws prohibiting discrimination or sexual harassment, no rules regulating the safety of the workplace, and no concept of unions. Traditionally, workers followed their parents into a profession or job, such as being merchants, tailors, bakers, farmers, and performed that job for their lifetime. Common law viewed the employment relationship as a private agreement between the employer and the employee. During the industrial revolution in the nineteenth and early twentieth centuries, workers left their agrarian lifestyle and migrated to cities to work in factories. Traditional bonds between landowner and worker broke down. Employees worked in grueling conditions in factory jobs for bosses who cared little for their workers well-being or safety. The muckraker Upton Sinclair portrayed these conditions vividly in “The Jungle.” Legislators, at the state and federal levels, responded to workplace abuses with a number of laws protecting workers rights. These acts are the foundation of current employment law, enacted to protect the physical, financial, and legal rights and expectations of workers in the United States.

The Employment Relationship

The employment relationship is a unique relationship that relies upon the skill, talents, and strengths of both the employer and the employee. The employment environment must be dynamic and responsive to changing social and legal developments. Employers and employees both need to be aware of social trends that affect the duties and obligations inherent to the employment relationship. Employees earn the necessities of life — food, clothing, and shelter — by working in productive employment and they rely upon their employers to supply a salary and contribute to work-related benefits, such as healthcare and retirement plans. Employers rely upon employees to achieve their business goals. An employee may believe that working long hours, performing well, behaving ethically, and remaining loyal to an employer will result in job security. In today’s employment environment, job security is often contingent on the type of employment. Employees are either hired by employers for a length of time as “contract employees” or are “at will” employees.

Contract Employment

Employment contracts set forth the start and end dates and the terms and conditions of employment. These agreements are typically drafted by the employer and are usually written in the employer’s favor. Contract employees do not automatically waive their statutory employment rights and protections. However, employees who enter into employment contracts should obtain review and advice before entering into any binding agreement, as many statutory rights can be waived in an agreement.

At Will Employment

The majority of employees in the United States are “at will” employees. The doctrine of employment at will provides that an employer can fire the employee at any time, for any or no reason, with no notice; at the same time, the employee can quit at any time, for any or no reason, with no notice. Workers can be terminated (or fired, discharged, laid off or let go) for economic reasons (including reductions in force), personality conflicts, lack of “fit” in the organization, lack of work, and unsatisfactory job performance. Workers may also be terminated for a myriad of additional reasons including those provided in an employee handbook, an employee code of conduct, and for violations of local, state and federal laws. An employee who has been terminated may seek contractual and statutory damages and equitable remedies if the termination is later found to be illegal. As the following case shows, a review of policies and procedures prior to taking actions affecting the employment relationship can greatly reduce an employer’s risk of liability.

 

Case Study

Metcalf v. Intermountain Gas Co.

778 P.2d 744 (Idaho)

Procedural Posture

Plaintiff, a former employee, filed an action against defendant corporation after the former employee’s hours were significantly reduced following her extensive use of accrued sick leave. The trial court granted summary judgment in favor of the corporation on the claims for breach of employment contract and breach of an implied covenant of good faith and fair dealing. The former employee appealed.

Overview

The former employee made extensive use of her accrued sick leave but never exhausted all of the time available to her. She was forced to quit to find better employment when her hours were reduced to two hours a day. The court found that summary judgment on the issue breach of employment contract was not appropriate because a material issue of fact existed regarding whether, by providing for accumulated sick leave benefits, the corporation impliedly agreed with the former employee that the employment relationship would not be terminated or the former employee penalized for using the sick leave benefits which had accrued. The court also found that summary judgment on the claim for breach an implied covenant of good faith and fair dealing was not appropriate. The court for the first time recognized an implied-in-law covenant of good faith and fair dealing in employment contracts. The covenant that the court adopted was grounded in contract, not tort, thus limiting recovery to contractual damages, and was violated by any action by either party that violated, nullified or significantly impaired any benefit of the employment contract.


Outcome

The court reversed the trial court’s grant of summary judgment in favor of the corporation on the former employee’s claims for breach of employment contract and breach of an implied covenant of good faith and fair dealing and remanded to the trial court for further proceedings.

Exceptions to Discharge At Will

Employees who are not subject to at will termination include the following:

  • Contract employees (as per the employment contract);
  • Implied contract employees (usually a long-term, high level employee, wherein promises were made to the employee, or are found in an employment manual or handbook that prohibit termination without cause);
  • Union employees (the terms of the collective bargaining agreement between the employer and the union will govern discharge); Public employees working for local, state and federal agencies and governments. Typically, public employees must be discharged for cause, which is defined in civil service rules and regulations.

Public policy exceptions to at will termination protect employees when society deems the action so unfair or unreasonable that statutory law or common law specifically prohibits them. Situations where employees are not subject to at will termination due to public policy considerations include:

  • An employer may not terminate an employee for refusing to participate in an illegal activity, e.g., illegal dumping of hazardous material or committing perjury.
  • An employer may not discharge an employee for performing an important public obligation, such as jury duty.
  • An employer may not fire an employee for exercising a legal right (ex: voting) or interest (ex: legally filing a worker’s compensation claim).
  • An employer may not terminate an employee if prohibited by state or federal statute from doing so (ex: discrimination) or for exposing legal wrongdoing in the employee’s company (ex: whistleblowing).
  • Pursuant to an implied covenant of good faith and fair dealing, an employer may not dismiss an employee for performing an act that public policy would encourage or refusing to perform something that public policy would condemn, when the discharge is linked with a showing of bad faith, malice or retaliation.

Employers can avoid potential employee litigation and liability for wrongful termination by being aware of what has been promised to an employee during the hiring process and what may be contained in an employee handbook, or in any oral statements or promises made by an employer; educating supervisors; reviewing performance evaluations of employees; reviewing hiring and firing policies and procedures including those that relate to warnings and suspensions; and having an attorney review any terminations prior to taking effect.

 

Case Study

Cocchiara v. Lithia Motors, Inc.

297 P.3d 1277 (Or. 2013)

Procedural Posture

Petitioner, an employee, challenged a decision from the Court of Appeals (Oregon), which affirmed the trial court’s summary judgment in favor of respondent, the employer, based on the employee’s promissory estoppel and fraudulent misrepresentation claims.


Overview

The employee, who worked as a salesperson for the employer, told his manager that he was leaving to work for another company. He alleged in his complaint that his manager told him a new position was available and, after calling the employer’s corporate offices, the manager told the employee that he definitely had been given the position. In reliance on that information, the employee turned down the job with the other company. The employer did not hire him for the new position. The court held that the at-will nature of the new position did not preclude the employee from pursuing his claims of promissory estoppel and fraudulent misrepresentation. The parties’ lengthy employment relationship might have made it reasonable for the employee to rely on the promise of employment, even though the new position was terminable at will. Moreover, the at-will nature of the new position did not create a conclusive presumption that the employee could not prove damages consisting of future lost wages. He could attempt to show the likely duration of employment. Pleading only damages associated with the loss of the new position, and not damages associated with turning down the other job, did not defeat the fraud claim.
In Oregon, the general rule is that an employer may discharge an employee at any time and for any reason, absent a contractual, statutory, or constitutional requirement to the contrary. The focus of the at-will employment doctrine is on termination: Both the employer and the employee have a right to terminate the employment relationship for any reason or for no reason without liability. As a result, when employment is at will, typically, neither party can expect the employment to continue for any specified period of time. Perhaps because the at-will employment doctrine focuses on termination, courts have disagreed regarding the significance of the at-will nature of employment before employment begins. In particular, courts have disagreed whether it is reasonable to rely on an offer of at-will employment, which in turn affects whether an employer’s termination of an at-will employment agreement before the employee begins working is actionable under a theory of promissory estoppel or fraudulent misrepresentation. **** A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. The requirement that enforcement be necessary to avoid injustice may depend on the reasonableness of the promisee’s reliance, and on its definite and substantial character in relation to the remedy sought, among other things.

The at-will nature of an underlying promise of employment does not bar a claim based on promissory estoppel, even if it might limit the nature of the damages available in some cases. An employer’s legal right to fire an employee at any time and for any reason absent contrary contractual, statutory, or constitutional requirements does not carry with it a conclusive presumption that the employer will exercise that right. Absent that presumption, it may be reasonable for an employee to rely on a promise of employment, because the employee may have reason to believe that the employer’s right to terminate at will not be exercised before the employee begins work. Particularly where the employee has had a lengthy employment relationship with his employer, and the employer asserts the employee’s value to the company, it may be reasonable for the employee to rely on the promise of employment, even though the job is terminable at will. However, reasonableness is an issue for the jury, considering all the relevant circumstances.

Outcome

The court reversed the lower courts’ decisions and remanded to the circuit court for further proceedings.

Employment Regulations and Protections

In addition to common law protections of their rights, employees enjoy certain statutory protections at the federal, state, and local levels regarding what have been termed “financial expectations” and “physical well-being expectations.”

Financial Protections

Social Security Act (SSA) of 1935

The Social Security Act established retirement, disability, and survivor benefits for workers, their spouses, and their dependent children. Employers and independent contractors who do not comply with the requirements of this act face financial penalties in the form of fines and interest on unpaid taxes. The Social Security Administration administers this act.

Federal Unemployment Tax Act (FUTA) of 1935

Unemployment compensation, or unemployment insurance, is a benefit paid to private sector workers terminated without cause or through no fault of their own. Unemployment compensation is state-specific and funded by federal and state employment taxes on employers. During times of economic upheaval, the federal government has authorized extended periods of benefits. Federal, state, and railroad employees are subject to similar statues.

Fair Labor Standards Act (FLSA) of 1938

The FLSA specifies the minimum wages to be paid covered workers, when overtime payments are due, and places restrictions on child labor. Employers engaged in interstate commerce must comply with this act or face fines and penalties. The Wage and Hour division of the Department of Labor administers this act.

Equal Pay Act of 1963

The Equal Pay Act requires that men and women receive equal pay for jobs requiring equal skill, effort, responsibility, and working conditions. Under this act, an employee may not be paid a lesser rate than employees of the opposite sex for the same work. The Equal Employment Opportunity Commission (EEOC) administers the law. Unless the pay difference can be justified by such factors as merit, seniority, productivity, or some other “non-gender” factor, the employer will be held responsible if unequal pay exists between genders under an analysis called the “Kress Test.” Under the act, wages can include more than hourly or annual pay, and may involve payments for insurance, employee benefits, and other perquisites. A violation of the Equal Pay Act may also be a violation of Title VII of the Civil Rights Act of 1964.

Today, women are still not paid equal wages with men for equal work, and many maintain that the Equal Pay Act has not done enough to guard against pay inequities. Some argue that the doctrine of comparable worth should apply – equal pay for work of comparable value. However, this concept can create problems as to what to reference in order to define “worth.” Society? The employer? Some other point of reference? What happens when jobs are not equal, but have “equal” or “comparable worth” to society? Which job adds more value to society? Moreover, if the two jobs add “comparable value” to society, shouldn’t the two occupations be similarly compensated?

In Corning Glass Works v. Brennan, the U.S. Supreme Court addressed the Equal Pay Act in light of pay differentials for men and women on different work shifts.

 

Case Study

Corning Glass Works v. Brennan

417 U.S. 188 (1974)

Procedural Posture

The Secretary of Labor instituted two actions, one in New York and one in Pennsylvania, to enjoin the employer from violating the [Equal Pay] Act by the practices stated above and to collect back wages allegedly due female employees because of past violations. The District Court rendered judgment for the Secretary and the United States Court of Appeals for the Second Circuit, modifying some provisions of the injunction not relevant in the instant review proceedings, affirmed the District Court’s judgment as modified, the District Court rendered judgment for the employer and the Court of Appeals for the Third Circuit affirmed (480 F2d 1254).

Overview

Corning Glass Works, which operates plants both in New York and in Pennsylvania, paid its night inspectors, who were all male, significantly higher wages than its day inspectors, who were all female and performed the same tasks. The employer continued this practice after the effective date (June 11, 1964) of the Equal Pay Act of 1963 (29 USCS 206(d)(1)), which prohibits sex discrimination by an employer in the payment of wages for equal work. Beginning in June 1966, the employer started to open up jobs on the night shift to women. Previously separate male and female seniority lists were consolidated and women became eligible to exercise their seniority, on the same basis as men, to bid for the higher paid night inspection jobs as vacancies occurred.

On January 20, 1969, a new collective bargaining agreement went into effect, establishing a new “job evaluation” system for setting wage rates; the agreement abolished for the future the separate base wages for day and night shift inspectors and imposed a uniform base wage for inspectors exceeding the wage rate for the night shift previously in effect. All inspectors hired after January 20, 1969 were to receive the same base wage, whatever their sex or shift. The collective bargaining agreement further provided for a higher “red circle” rate for employees hired prior to the date of the agreement, when working as inspectors on the night shift; this “red circle” rate served essentially to perpetuate the differential in base wages between day and night inspectors.

The Supreme Court held the Equal Pay Act of 1963, 29 U.S.C.S. § 206 et seq. is “…violated by an employer’s paying a lower base wage to female day inspectors than to night shift inspectors, where the female inspectors performed the same tasks as their male counterparts and the higher wage was paid in addition to a separate night shift differential paid to all employees for night work.” The Court noted, “the purpose of the Equal Pay Act of 1963 (29 USCS 206(d)(1)), requiring that equal work be rewarded by equal wages irrespective of sex, is to remedy what was perceived to be a serious and endemic problem of employment discrimination in private industry, that is, the fact that the wage structure of many segments of American industry was based on an ancient but outmoded belief that a man, because of his role in society, should be paid more than a woman, even though his duties are the same.”

The [Equal Pay] Act establishes four exceptions — three specific and one a general catchall provision — where different payment to employees of opposite sexes is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex. Under the Equal Pay Act, once the Secretary of Labor has carried his burden of showing that the employer pays workers of one sex more than workers of the opposite sex for equal work, the burden shifts to the employer to show that the differential is justified under one of the Equal Pay Act’s four exceptions.

On writs of certiorari, the United States Supreme Court affirmed the judgment of the Second Circuit Court of Appeals and reversed the judgment of the Third Circuit Court of Appeals, remanding the case to that court.

The Court held that (1) the employer violated the Act by paying a lower base wage to female day shift inspectors than to male night shift inspectors; and (2) the employer did not cure its violations of the Act by permitting, in 1966, women to work as night shift inspectors nor by equalizing, in 1969, day and night inspector wage rates but establishing higher “red circle” rates for existing employees working on the night shift.

Outcome

The Court affirmed the Second Circuit ruling and reversed the Third Circuit ruling.

Civil Rights Act of 1964

Civil Rights Acts enacted in 1866 and 1870 prohibited intentional discrimination based upon race, color, national origin, or ethnicity. However, it was not until the enactment of the Civil Rights Act of 1964 that workers received legal protection from workplace discrimination based upon race, sex, color, religion, and national origin. The Civil Rights Act of 1964 represents one of the most important developments in the twentieth century in employment law and is discussed more in-depth in the chapter on employment discrimination. It should be noted that not all forms of employment discrimination, for example, that based on an employee’s sexual orientation is address by the act, and are not illegal unless there is a special state law providing protection for a worker.

Employee Retirement Income Security Act (ERISA) of 1974

ERISA applies to private sector employers who establish a pension benefit or other employee benefit plans (health, disability, death, legal services, etc.) for their employees. The act specifies how persons become vested in pension plans, how employers fund such plans, how pension funds are to be invested, and how employees may file an appeal in a case where retirement benefits are improperly denied them.

The Department of Labor, Employee Benefits Security Administration (EBSA) (formerly the Pension and Welfare Benefits Administration – PWBA) and the Internal Revenue Service administer the act. The Pension Benefit Guaranty Corporation (PBGC), created by ERISA, also serves to protect the retirement income of American workers when companies cease to exist, and is funded by employer insurance payments. The passage of ERISA was greatly influenced by the collapse of the Studebaker Corporation in the 1960s which resulted in the loss of pension and health benefits for its employees.

Worker Adjustment and Retraining Notification (WARN) Act of 1988

The Worker Adjustment and Retraining Notification (WARN) Act requires employers of more than 100 workers to give advance notice – up to 60 calendar days – of plant closings or mass layoffs.

Physical Protections

Occupational Safety and Health Administration Act (OSHA) of 1970

OSHA creates a general duty for employers to provide work environments that do not harm their employees. Employers must comply with minimum safety and health standards in the workplace. Employees, labor representatives, or the government itself has the authority to inspect work sites if there is a reason to believe a violation of OSHA has occurred. OSHA violations leave employers vulnerable to fines, penalties, corrective action, administrative oversight, and potential criminal sanctions. The Occupational Safety and Health Administration agency administers this federal act.

Many states have enacted their own equivalent of OSHA, so employers need to be aware of both federal and state requirements. Some states have also enacted their own “Right- to–Know” laws that guarantee individual workers and local communities the right to know what, if any, hazardous chemicals are present in the workplace. This information is also required under the federal statute.

Workers Compensation Statutes and Disability Statutes

Workers compensation statutes provide for wage replacement, medical treatment, vocational training, compensation for permanent disability from workplace injury or illness, and other benefits for employees who suffer injury or illness either at the workplace, or on a job site. The Department of Labor, Office of Workers Compensation Programs administers benefits to injured federal employees. States have created their own administrative agencies to run state programs and require employers to fund state programs by paying for workers compensation insurance. Laws vary from state to state.

An employee who is injured or suffers illness on the job or at a workplace, is not required to apply for workers compensation; but if he or she does, then the employee must comply with the state workers compensation insurance requirements for treatment. If the employee believes that he or she is receiving unfair treatment, or the employer believes there might be some type of fraud, a claim may be filed with the workers compensation court or board. An administrative law judge oversees these types of cases until the case has been closed. All expenses, including medical expenses, are a lien against any potential judgment an employee may win in a civil suit brought against the employer and/or responsible third parties.

Employee disability that occurs outside the workplace is governed by several federal and state laws, including the Social Security Act, the Americans With Disabilities Act, and state short-term or long-term disability statutes. Both employers and employees pay taxes to fund state disability programs. Statutes govern the definition and determination of various types of disabilities. Employers must be aware of the impact of these laws on employee accommodations and the workplace environment.

Consolidated Omnibus Budget Reconciliation Act (COBRA) 1985

The Consolidated Omnibus Budget Reconciliation Act (COBRA) 1985, amended ERISA to allow qualified employees to maintain group health, dental, and vision benefits upon termination. This act applies to employers with twenty or more employees that offers a group health plan. The terminated employee has sixty (60) days to elect this continuing coverage and must pay the entire premium, plus an administrative fee.

Health Insurance Portability and Accountability Act (HIPPA) of 1996

The Health Insurance Portability and Accountability Act (HIPPA) of 1996 amended ERISA to provide for improved portability and continuity of health insurance coverage for employees belonging to a group health plan at their work place. HIPPA also gives employees additional protections relating to coverage exclusions or denial of coverage due to preexisting conditions, and enrollment rights, and also prohibits discrimination based on a variety of health and non-health status-related factors. HIPPA’s extensive privacy rules protect individual employee’s expectations of privacy regarding their medical records and other information. The U.S. Department of Health and Human Services Office for Civil Rights enforces HIPPA’s privacy rule.

Amendments to ERISA that protect employee health include the Newborns’ and Mothers’ Health Protection Act of 1996, which requires employer group plans that offer maternity coverage to pay for at least a 48 hour hospital stay following childbirth (96 hours if a cesarean section), and by the Women’s Health and Cancer Rights Act of 1998, which extends protection to employee-patients who elect breast reconstruction in connection with a mastectomy. Additional protections for employee medical records is provided in the Americans With Disabilities Act and in various state statutes.

The Family Medical Leave Act (FMLA) of 1993

The Family Medical Leave Act (FMLA) was enacted in response to growing concerns about balancing work and home life in the event of family medical emergencies and conditions. This federal act applies to employers who have 50 or more full-time employees within a 75 mile range and allows eligible employees to take up to 12 work weeks unpaid, job protected leave. Eligible employees must have worked for a covered employer for at least 12 months (can be nonconsecutive months) and have at least 1,250 hours of service for the employer during the 12 month period immediately preceding the leave.

Leave may be taken for the birth, adoption, or foster care of a child; to care for a spouse, child, or parent who has a serious health condition; for an employee’s own serious health condition that makes the employee unable to perform the essential functions of his or her job; or for any qualifying exigency arising out of the fact that a spouse, child, or parent is a military member on covered active duty or called to covered active duty status. Leave may be taken for the full 12 workweeks, or any amount of that time, continuously or on an intermittent basis (up to 26 weeks when caring for a service member that is a parent, spouse, son or daughter, or the employee is the next of kin of the service member). Employers may require the employee to use paid leave time prior to or concurrent with FMLA time. Employers may request proof of the medical reason for the leave request. Employees must comply with the employer’s leave request policies whenever possible.

Protections afforded to employees under the act include restoring an employee to his or her original job, or to an equivalent job with equivalent pay, benefits, and other terms and conditions of employment; FMLA leave cannot be counted against the employee under a “no-fault” attendance policy; and continuation of group health insurance coverage for an employee on FMLA leave under the same terms and conditions as if the employee had not taken leave. Restoration of benefits other than health insurance, are determined based on the employer’s policies. Employees who may be denied restoration are those deemed to be a “key” employee – among the highest-paid 10 percent of all of the employer’s employees within 75 miles – if the employer proves substantial and grievous economic harm, gives notice to the employee, and gives the employee the opportunity to return to work. The Department of Labor, Wage and Hour Division administers this act.

Patient Protection and Affordable Care Act (PPACA) of 2010

The 2010 enactment of the Patient Protection and Affordable Care Act (PPACA), affects employers and employees across the country. Also known as the “Affordable Care Act” (ACA) or “Obamacare,” this act, together with the Health Care and Education Reconciliation Act of 2010, creates a mandate that employers with 50 or more employees who do not offer health insurance to their full-time employees must pay a tax penalty. These acts also extends coverage and privacy protections for patients. The employer mandate went into effect in 2015. The tax penalty may also apply to an individual who does not possess health insurance. This controversial law remains in the forefront of political discourse and debate.

Whistleblowing Protections

Federal and state protections are available to employees, called “whistleblowers,” who report illegal, prohibited, or unethical actions of their employers. Often these employees are subject to retaliation from their employers, including termination, demotions, and withheld bonuses and benefits. Whistleblowing statutes are grounded in public policy initiatives that seek to protect those workers who report actions that might harm society. Deadlines for an employee to file a claim vary from thirty days to one hundred eighty days at the federal level and in some states may be filed up to one year after the retaliatory action. Employees may seek monetary damages and equitable remedies which include reinstatement, back pay, and bonuses, other fringe benefits, seniority status, and costs and attorney fees. An employee may also seek an injunction to prevent future retaliatory actions by the employer.

At the federal level, employee protections from retaliation as a result of reporting illegal or harmful employer actions may be found in several statutes. The False Claims Act (31 U.S.C. §§3729-3733, imposes liability on persons and companies contracted with the federal government who defraud governmental programs. Those who report the illegal action are entitled to a percentage of the fines and penalties. Federal employee whistleblowers are protected by the Civil Service Reform Act and the Whistleblower Protection Act of 1989 (WPA). The Whistleblower Protection Enhancement Act of 2012 protects federal employees who disclose evidence of waste, fraud, or abuse.

OSHA provides whistleblowing protections for private sector employees who report activity that is dangerous to workplace health or safety in ten different statutes related to workplace safety and over eight statutes related to transportation safety.

Employees of private sector organizations that provide consumer goods and services or investment vehicles and services receive whistleblowing protection under federal statues such as the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Affordable Care Act, the Consumer Financial Protection Act (CFPA), the Consumer Product Safety Improvement Act (CPSIA), and the FDA Food Safety Modernization Act (FSMA). Many of these statutes can be found at http://www.whistleblowers.gov/statutes_page.html.

Many states also offer whistleblowing protection to public and private sector employees. For example, New Jersey has the Conscientious Employee Protection Act (CEPA) (N.J.S. Stat. § 34:19-1 (2007). This law prohibits a public or private employer from taking retaliatory action against an employee who discloses or threatens to disclose to a supervisor or public body an activity, policy, or practice that the employee reasonably believes is in violation of a law or rule; or provides information or testimony to a public body investigating a violation; or objects to or refuses to participate in an activity, policy or practice that the employee reasonably believes is a violation of law, is fraudulent or criminal, or is incompatible with a clear mandate of public policy related to health, safety, welfare or protection of the environment. The protection does not apply unless the employee has given written notice of the violation to a supervisor and has given reasonable time for correction, except if the employee is reasonably certain the supervisor already knows about the violation or if the employee reasonably fears physical harm and the situation is an emergency.

Whistleblowing protection at the federal and state level upholds public policy initiatives, protects employees, encourages employers to deal fairly with their employees, and discourages illegal, prohibited and dangerous activities and practices in business.

Employee Privacy And The Workplace

The right to privacy is often thought of as the “right to be left alone” and the right to be free from intrusion from others. A full-time employee spends between thirty to sixty or more hours per week at their place of employment creating many interpersonal relationships. Employers adopt workplace manuals and codes of conduct in order to set standards of behavior, to manage employee expectations, and to protect the employer’s business interests. Even so, employee understanding and expectation of privacy in the workplace can be quite different from employer handbooks or federal and state laws.

A variety of federal and state laws relate to privacy, including federal and state constitutions, statutes, common law, as well as some administrative agency rules and regulations. The common law relating to privacy takes various forms. There are at least four separate torts related to privacy. They are: (i) unreasonable intrusion upon the seclusion of another; (ii) misappropriation of another’s name or likeness; (iii) unreasonable publicity given to another’s private life; and (iv) publicity that unreasonably places another in a false light before the public. These torts identify individual “zones of freedom,” which provide privacy expectations and protection to the individual. How these expectations and protections apply to the workplace is ongoing and evolving in response to social development and technology innovations.

The integration of a variety of new technologies into the workplace, particularly those related to social media and information technology, has created a new view of employee privacy rights wherein the employer owns the means of data collection, communication, observation or other forms of employee monitoring. Issues of employee privacy and the right of an employer to monitor the employees’ actions and use of employer owned systems have increased. The fastest growing and most pervasive of new information technologies in the workplace are “Big Data” analytic tools and social media platforms. In the age of “Big Data,” employers have access to almost unlimited information. Employer use of that data, and employer oversight of employee’s social media use, whether private or at the workplace, has provoked considerable controversy.

While federal statutory protections of employee privacy are limited, federal agencies such as the FTC, EEOC and the NLRB have stepped into the void and enacted several rules and regulations protecting employee privacy rights. States, on the other hand, have passed a variety of laws on diverse aspects of employee privacy in the workplace and have come to the forefront in identifying employer and employee rights. Privacy issues in the workplace require a balancing of employee and employer rights and prerogatives to protect their legitimate interests and to address their legitimate concerns. In order for employers to enforce company policies and avoid liability, clear communication of policies and procedures in either an employee handbook or manual must occur.

Employee Surveillance and Searches

Employers use a variety of methods to monitor employee performance for effectiveness and productivity, including “real time” monitoring; visual and audio recording; counting key strokes on computers; inspecting computer files; listening to telephone conversations and messages — both landline and mobile; monitoring instant messages (IMs), blogs, Twitter and social media platforms, such as Facebook; GPS tracking; identification card tracking; and reading emails. Employers monitor employee performance for many reasons including to show compliance with regulations, promote corporate security, protect business reputation, protect trade secrets/proprietary information, reduce product loss, increase employee productivity, and to limit legal liability for improper or illegal acts by their employees.

Electronic Communications Privacy Act (ECPA) of 1986

The FCPA amended the Federal Wiretapping Act, and permits employers to monitor work email and phone calls if (1) the employee consents in advance, (2) monitoring occurs in the ordinary course of business, or (3) in the case of email, if the employer provides the email system.

USA Patriot Act

In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 amended the ECPA to allow the government to compel disclosure of data and information and to provide for employer voluntary disclosure. Prior to monitoring employee communications, employers should first identify the goals of the organization (quality control, training), clearly communicate any electronic monitoring policies to employees, obtain employee consent prior to instituting any monitoring programs and avoid monitoring private employee communications.

Workplace Searches

In addition to monitoring employee communications, employers may also conduct searches of the workplace. Employees have limited protections from employer searches in the workplace, including searches of offices, lockers, company issued vehicles, computers, mobile devices including tablets and telephones, electronic files and email. In O’Connor v. Ortega, 480 U.S. 709 (1987) the U.S. Supreme Court held that an employee did not have any expectation of privacy to their office where the employer retained a key to the office. The court held that in determining an employee’s privacy expectations in the workplace, the “operational realities” should be considered and courts should examine if the employee was provided an exclusive working space, the nature of the employment and whether the employee was on notice that parts of the workplace were subject to employer intrusions. The balance between the employee’s expectation of privacy and the employer’s notice to the employee of policies, practices and procedures frames the issues in the following case in which an employee claimed that employer access and review of his text messages on an employer issued mobile pager, was a violation of his right to privacy.

 

Case Study

City of Ontario v. Quon

560 U.S. 746 (2010)

Procedural Posture

Respondents, an employee and others, filed an action against petitioners, a city and others, alleging, inter alia [among others], that petitioners violated their Fourth Amendment rights by obtaining and reviewing the transcript of the employee’s pager messages. A district court held that petitioners did not violate the Fourth Amendment. The U.S. Court of Appeals for the Ninth Circuit reversed in part. The U.S. Supreme Court granted a petition for certiorari.

Overview

The petition for certiorari challenged the court of appeals’ holding that petitioners violated the Fourth Amendment. The Supreme Court assumed that the employee had a reasonable expectation of privacy in the text messages sent on the pager provided to him by the city. The search was justified at its inception because there were reasonable grounds for suspecting that the search was necessary for a non-investigatory work-related purpose because the search was done in order to determine whether the character limit on the city’s contract was sufficient to meet the city’s needs. Also, the city and a police department had a legitimate interest in ensuring that employees were not being forced to pay out of their own pockets for work-related expenses, or on the other hand that the city was not paying for extensive personal communications. The search was permissible in its scope because reviewing the transcripts was reasonable because it was an efficient and expedient way to determine whether the employee’s overages were the result of work-related messaging or personal use. The search was reasonable. Petitioners did not violate respondents’ Fourth Amendment rights.

Outcome

The judgment of the court of appeals was reversed. The case was remanded for further proceedings.

Employee Speech

Individual’s protected right to free speech under the First Amendment of the U.S. Constitution protects individuals from governmental action. When applied to the workplace, public sector employees are protected, but not private sector employees. However, the type of employee speech, whether political or connected to workplace terms and conditions, may be protected. In Heffernan v. City of Paterson, 136 S. Ct. 1412 (2016) the U.S. Supreme Court held that “when an employer demotes an employee out of a desire to prevent the employee from engaging in political activity that the First Amendment protects, the employee is entitled to challenge that unlawful action under the First Amendment and 42 U.S.C.S. § 1983, even if the employer makes a factual mistake about the employee’s behavior.” Some states have enacted legislation that extends protection to employee speech in connection with political activity outside of the workplace.

Private sector employees’ speech rights may be protected under state law or administrative agency rules and regulations if made in connection with terms and conditions of employment. In 2012, in Hispanics United of Buffalo, Inc. and Carlos Ortiz (Case 03–CA–027872, 2012), the NLRB held that the termination of five co-workers who posted on commentary on Facebook about the workplace and a co-worker was in violation of the National Labor Relations Act, Section 7 regarding “concerted activities.” Comments by workers discussing workplace issues such as “terms and conditions” of employment, such as workload, job performance, wages, and staffing levels are protected speech. But, no protections are afforded to employee speech that violates employers privacy policies, damages the company’s reputation, disparages the employer or other employees, or the employer’s product/service, is rude or profane, is unrelated to workplace terms and conditions, or may be seen clearly as a “rant.”

Drug and Alcohol Testing

Employee testing for drugs and alcohol began in 1986 when President Reagan approved testing of federal employees and was extended in 1988 to federal contracts requiring drug free work environments. The private sector thereafter embraced employee drug testing as a pre-condition to hiring and as an ongoing condition to maintaining employment. Employers adopt drug and alcohol testing policies to maintain a safe working environment, increase productivity, and to ensure quality control of goods and services. Courts have upheld regular and random employer drug testing as a reasonable exercise of an employer’s rights provided the employer has communicated its policy on drug testing to the employees. State statutes, which vary from state to state, govern private sector employees’ privacy rights in drug testing. Employers who choose to drug and alcohol test employees must be aware of state constraints and of protections afforded to employees from disciple or termination under the Americans with Disabilities Act. Employers must also be aware of state protections afforded to employees who use certain drugs under medical prescription.

Recent state statutes legalizing the sale and recreational use of marijuana have direct impact on the workplace. Employees must recognize that although recreational use of marijuana may be legal in some states, it is not legal in all states, and is classified as a federal Schedule I drug. Use and possession of marijuana may subject an employee to state and federal criminal charges and discipline and/or termination under employment policies adopted by employers.

The Employee Polygraph Protection Act of 1988

The Employee Polygraph Protection Act generally prohibits private sector employers engaged in interstate commerce from using or requiring lie detector tests during pre-employment screening or during employment or from using the results of any lie detector tests to discharge, discipline, discriminate against, or to deny promotion or employment to any employee or prospective employee who refuses, declines, or fails to take a lie detector test.

Exemptions include federal employees and contractors, prospective employees of private sector employers in security service businesses, employees of any employer authorized to manufacture, distribute, or dispense a controlled substance as identified in federal law. Private sector employers requesting employees to submit to a polygraph test the employer must show:

  • The test was administered in connection with an ongoing investigation involving economic loss and/or injury to the employer’s business, e.g., theft, embezzlement, misappropriation, industrial espionage or sabotage;
  • The employee had access to the property that is the subject of the investigation; and
  • The employer has a reasonable suspicion that the employee was involved in the incident or activity under investigation.

Additional exemptions are also provided in various state statutes.

Genetic Testing and Health Screening in the Workplace

In 2008, the Genetic Information and Nondiscrimination Act (GINA) was enacted to protect individuals from discrimination in healthcare insurance and employment. GINA specifically prohibits employers from discriminating against prospective and current employees in the hiring, firing, compensation, benefits or others terms and conditions or opportunities because of an individual’s genetic information or genetic profile. Employers are also prohibited from requesting, requiring, or purchasing genetic information of an employee or his or her family member(s) except in limited circumstances such as consent or where the information is used in connection with services offered by an employer wellness program.

Additionally, many states have passed laws prohibiting discrimination against employees on the basis of their genetic information. Employees may have a right of action against their employer for genetic discrimination under the Fourth Amendment, the Americans With Disabilities Act, common law for invasion of privacy, and Title VII of the Civil Rights Act of 1964 (discussed in the chapter on Employment Discrimination).

Employee Assistance Programs (EAPs)

Employee Assistance Programs are employer funded programs to assist employees with personal problems and issues that might affect their performance at work. These programs seek to help employees address financial, medical, emotional, family, and substance abuse issues to name a few. Inherent in many of these programs are issues relating to privacy. Employers must be aware of federal and state laws that apply to the administration of these programs, retention of information and data, and potential liability for employment actions taken, such as discipline and termination, based upon information obtained from employees participating in EAPs.

Personnel Records

During the course of pre-hiring screening and subsequent employment, employers gather extensive private information on individuals often referred to as personnel records. The maintenance, accuracy and security of these records are privacy concerns for individuals. The federal Privacy Act of 1974 and subsequent amendments applied to personnel records of federal employees. However, there is no federal law that provides private sector employees the right to access, review, contest or correct private information contained in the personnel file maintained by their employer. Private sector employees must rely upon state law and employer policies and procedures governing access to these records. Whether a public or private sector employee, individuals must look to federal, state, and common law for remedies for wrongful disclosure or false or defamatory information.

“Off Duty” Employee Actions and Lifestyle Laws

There is a growing trend for employers to prohibit certain employee activities while not at the workplace, or “off duty,” for reasons such as protecting business reputation or company security, or for economic reasons such as to decrease losses in productivity, or to reduce costs of employer offered healthcare. Employers have attempted to prohibit activities such as certain international travel, high-risk sporting activities (motorcycle riding skydiving, helicopter skiing), gun possession, political activity, health related practices (weight maintenance, smoking, alcohol and dietary consumption), and social media communications. Many states have enacted laws that prohibit employer regulation of employee off-duty acts, while other states permit any lawful activity while off-duty. Some administrative agencies such as the NLRB and the EEOC have begun to address concerns of employees that employer control of actions and activities may violate employee’s federal and state privacy rights.

Today, there is often conflict in the workplace between an employer’s right to monitor employee performance and an employee’s expectation of privacy. Issues related to privacy rights, not just those related to the workplace, are a reflection of how society balances the need for individuals to feel secure in their persons with public access to private information. Clearly, as new methods of communication and of collecting, storing, and disseminating information become available, tensions arising from balancing the privacy expectations of employers and employees will continue to grow. Technological, mechanical, and social changes continue to create legal, social and ethical issues in the employment relationship.

Labor Law and Management Relations

Introduction To Labor Law

In order to study the development of labor unions in the United States, one must also study the development of labor legislation – the two are inextricably entwined. Judicial rulings and subsequent legislation have continually tried to strike a balance between the private property rights of employers and employee freedom to associate in organizations for their own mutual benefit.

Early Legal Developments

Early legal developments came as the result of judicial interpretations of laws (both statutory and common) that were not originally drafted to deal specifically with labor relations but were clearly designed to favor the property class. The Cordwainers Case (1806) established the “criminal conspiracy” doctrine as it applied to labor organizations. Workers seeking to better their working conditions could not do so in a concerted manner. If workers joined in collective activities, they could be considered “criminals” and jailed for such behavior. It may be surprising to note that this was not the unanimous view of the legal system—even at this early stage of the development of our capitalist market. The ruling in Commonwealth of Massachusetts v. Hunt (1842) established that labor organizations in and of themselves were not automatically criminal conspiracies. While the ruling in Commonwealth of Massachusetts was not a ruling of the United States Supreme Court, judicial rulings from Massachusetts were highly regarded in other jurisdictions for their precedential value. Thus, while unions were not automatically considered criminal conspiracies, they could nonetheless be liable for civil damages, under the “civil conspiracy” doctrine. Contract law was relied upon to enforce “yellow dog contracts” in which employers demanded assurances that job applicants were not members of unions, nor would they ever consider joining a union, if employed.

Loewe v. Lawler (Danbury Hatters case) (1908) applied the Sherman Antitrust Act of 1890 to labor organizations. Labor organizations were considered “in restraint of trade” when the Hatters union organized a nationwide boycott in conjunction with the AFL-CIO to protest Loewe’s use of nonunion labor to make hats. Clearly, with the exception of Commonwealth of Massachusetts v. Hunt, the pendulum swung in the direction of protecting managerial rights and prerogatives in the workplace.

Specific Labor Legislation

Following these early legal developments, Congress passed legislation specifically aimed at regulating labor in a more balanced fashion. The Clayton Act of 1914 removed unions from the umbrella of the Sherman Antitrust Act. The Clayton Act was initially hailed by organized labor, while in reality it had made it easier for employers to obtain an injunction against threatened or actual concerted labor activities (such as strikes, boycotts, and picketing). These injunctions were not difficult to obtain and were regularly granted by courts in the decade of the 1920’s.

As the Great Depression riddled America with massive unemployment and sometimes violent labor disputes, the Norris-LaGuardia Act (1932) was one of many pieces of progressive (later “New Deal”) legislation enacted to improve the ability of workers to engage in joint activities in support of their right to join a union. Norris-LaGuardia made the “yellow dog” contract unenforceable in courts and limited federal courts’ ability to issue injunctions in labor disputes. However, the law established no enforcement mechanism of the act’s provisions, so many of the law’s guarantees were “on paper only.”

The Wagner Act of 1935 (officially called the National Labor Relations Act), the true “Magna Carta” for the union movement in the United States, guaranteed the rights of individuals to form labor organizations and specifically outlined “unfair labor practices” of employers. The Wagner Act established an administrative agency, the National Labor Relations Board (NLRB) to enforce the act. Congress passed this legislation under its constitutional authority to regulate “interstate commerce.”

Finding that industrial strife impeded the flow of commerce, Congress gave workers the right to form and join unions in hopes that this right would minimize industrial strife. The Wagner Act was ruled constitutional in Jones and Laughlin Steel v. National Labor Relations Board, 301 U.S. 1 (1937). Unions were widely successful in organizing some of the major industries in the United States in the decade of the 1930’s but to many, unions had begun to act irresponsibly in the period immediately following the end of World War II.

Overriding President Truman’s veto, the Taft-Hartley Act of 1947 amended the National Labor Relations Act. Congress, believing that unions had gained too much power, amended the Wagner Act with more “pro-management” provisions. Individuals now not only had the right to join unions, but also to refrain from joining a union as well. Taft-Hartley specifically established unfair labor practices on the part of unions, which had been non-existent before passage of this legislation. Taft-Hartley increased the size of the NLRB from three to five members. The “closed shop”,in which an employer was restricted to hiring union members only, was ruled illegal. A “union shop,” in which an employee was required either to join a union or pay the union dues within a specified time period was still permitted. Taft-Hartley authorized states to adopt “right to work” laws, giving the employee the right to either join or not join a union.. A provision relating to disputes that involved a “national emergency” was established, giving the President the right to intervene in labor disputes that could create a national emergency or “imperil the national health and safety.” In this case, an 80 day “cooling off” period may be required during which the parties are required to return to the bargaining table. The act also established the Federal Mediation and Conciliation Service to help management and unions avoid industrial conflict.

The Landrum-Griffin Act was adopted in 1959. Officially called the Labor Management Reporting and Disclosure Act (LMRDA), the focus of Landrum-Griffin was not to regulate union-management relations but to regulate union-member relations. The act aimed to correct and prevent union corruption (mainly by the Teamsters) and abuses of the power of unions toward their members. It required the reporting of financial statements, mandated the creation of union constitutions, and required that unions meet in membership conventions minimally once every five years. While many unions felt that some abuses needed correction, they objected to Congress interfering in the internal affairs of unions. Landrum-Griffin passed despite the objections of the American union movement.

Unions

Section 7 of the NLRA recognizes the rights of employees to form a union. Management is prohibited from interfering with any employee right guaranteed by Section 7 relative to organizing and maintaining a union. Employees can petition the NLRB for the right to conduct a representational election in an appropriate “bargaining unit” of the workforce. If the union is successful, it will be the exclusive bargaining agent for the workers in the unit. The bargaining unit elects representatives who will negotiate an agreement (the collective bargaining agreement) with management. Management and labor are required by the act to bargain “in good faith” in relation to the mandatory subjects of bargaining which include “wages, hours, and working conditions.” Issues relating to pay, wages, bonuses, hours of employment, seniority, pensions, group insurance, safety practices, grievance procedures, discipline, procedures for discharge, layoff, recall, and union security are often the specific topic of these negotiations. Management is prohibited from threatening, questioning or spying on workers, threatening to close the business or stop giving wage increases, or committing any other action that would serve to threaten or undermine union organizing activities, The failure of the parties to come to an agreement on a contract through collective bargaining may result in a strike called by the union or a lockout imposed by management.

The Functions of the National Labor Relations Board (NLRB)

The NLRB is an administrative agency with two primary functions: 1) the oversight of union organizing activities and representational elections; and 2) the investigation and adjudication of unfair labor practice charge. The NLRB operates within the Executive Branch of the federal government as an independent agency.

Unions can be recognized in the workplace in three ways: voluntary recognition, election, and pursuant to a bargaining order issued by the NLRB. Voluntary recognition occurs where the union gets a majority of the individuals in a given workplace to sign an “authorization card” indicating that they want the union to represent them. In this instance, the employer concedes to the workers’ desires without conducting a representational election.

If the employer decides not to voluntarily recognize the union, the union will file a Representation Petition with the Regional Office of the NLRB. In this petition, the union will ask for an election. The NLRB will first verify that the union has a “showing of interest,” which is defined as at least 30% of the workers in a bargaining unit signing an authorization card seeking to have the union represent them. The NLRB will first verify that the workers who are seeking representation constitute an “appropriate bargaining unit.” Employers tend to seek larger, heterogeneous bargaining units; unions seek to carve out bargaining units that will most quickly result in recognition of their representation rights. The NLRB utilizes the “Globe Principle” where it will rely heavily on the “desires of the employees” as a controlling factor in determining if a unit is appropriate. The NLRB will screen for “ineligibles’ — independent contractors, supervisors, or professionals who opt not to be combined with non-professional employees in a unit. The union is entitled to the “name and address” list of those in the appropriate bargaining unit under the Excelsior Underwear rule.

The NLRA has been modified over the years to determine what is permissible and impermissible election conduct for both union and management during the course of the election campaign. The NLRB will oversee the election. A “simple majority rule” prevails which requires 50% plus 1 of those who voted in the election (not all the workers in the unit) to vote in favor of a union. If the union wins, it is certified as the exclusive bargaining agent for everyone in the appropriate bargaining unit regardless of the individual’s decision to join the union. If the union loses, another election is barred for one year. A union can also be decertified following that same rules for certification (an NLRB election — 30% showing of interest and simple majority voting in favor of decertifying a union). If the employer’s conduct has been so egregious that the NLRB feels that it would be impossible for employees to vote in an election without fear of reprisal, the NLRB will certify the union, absent an election, as the exclusive bargaining agent. This bargaining order will only occur if the union can show that it had, at one point, a simple majority showing of interest (instead of the 30%) via authorization cards.

The NLRB has jurisdiction of any act or practice that is “arguably an unfair labor practice” or ULP, under the “Garmon Rule.” Parties are forbidden to litigate such issues in any forum other than the NLRB. A ULP filed by a union includes any actions, practices, or statements made by an employer that interfere with, restrains, discriminates against, or coerces employees in their exercise of the right to organize and choose their representatives, and to engage in collective bargaining or engage in protected, concerted activities. Such interference, restraint, or coercion can arise through threats, promises, or impermissible offers to employees. An unfair labor practice also can arise when an employer contributes financial or any other support to a labor organization. (In the case where there are multiple unions competing for the right to represent workers in a representational election, an employer must remain neutral between competing unions.) It is also an unfair labor practice for an employer to dominate, create, or interfere with the formation or administration of any labor organization. Employers are also prohibited from retaliating against an employee for filing a charge with, or giving testimony to, the NLRB, or refusing to engage in good-faith collective bargaining.

A union may commit an unfair labor practice when it causes, or attempts to cause, an employer to hire, discharge, or discriminate against an employee for the purpose of encouraging or discouraging union activity. The same is true when a union restrains or coerces employees in the exercise of their rights not to join a union. The refusal of a labor organization to bargain collectively “in good faith” or to refuse to execute a collective bargaining agreement with an employer are examples of potential unfair labor practices on the part of a union.

Individuals (whether or not a member of a union), unions (acting on their own or on behalf of individuals) and employers may file unfair labor practices (ULPs) charges with the Regional Office of the NLRB, having first attempted to resolve the dispute at the workforce level. The Regional Office will investigate the allegation and may settle the case informally or file a complaint against the party alleged to have committed a violation of the NLRA. If not settled informally, a hearing before an Administrative Law Judge (ALJ) will take place. The NLRB’s remedial powers are solely confined to “restoring the status quo” by ordering back pay, the return of individuals to the payroll, and good faith bargaining. The NLRB is not permitted to assess “punitive damages” for violations of the act.

Parties can appeal the decision of the ALJ to the full NLRB. The NLRB, consisting of five members, will hear the case anew in a de novo proceeding. A party can appeal the Board’s decision to the Circuit Court of Appeals. Appeals from the Circuit Court of Appeal can be made to the United States Supreme Court.

As discussed previously in this chapter, recent NLRB decisions continue to address employee use of information technology and social media both at the workplace and outside of the workplace. Other issues with which the NLRB has recently become involved include unionization of student athletes and graduate student RAs and GAs, the future application of the “Yeshiva Principle” to church-related colleges and universities, joint-employer status, successor employer status, the effect of arbitration agreements, class action waivers, and the use of audio and video recording in the workplace. The role of the NLRB in protecting employee rights and balancing employer concerns will no doubt continue to underscore its importance in resolving issues emerging in the employment relationship.

 

Ethical Considerations

Social Media

Is it fair for an employer to monitor the social media choices of an employee or a prospective employee? Should an employer be able to base a decision to hire or fire a prospective employee or an actual employee based on the information gathered from social media?

Critique: “Since its the employer’s property, the employer should be allowed to hire or fire whomever they choose.”

Is it fair to require workers who do not wish to join a union to nevertheless pay union dues in states that are “union shop” states?

Should the government require employers to provide family leave to their employees?

 

Questions

  1. In light of company and personal pension plans, is there a need for social security retirement benefits? Explain why or why not.
  2. Would self-imposed, industry-wide standards protecting the safety and health of a particular industry’s employees be an improvement over OSHA? Substantiate your answer with fact-based reasons.
  3. How did New Deal legislation improve circumstances under which employees worked?
  4. What effect did the Taft-Hartley Act have on the relationship between labor and management?
  5. How does the National Labor Relations Board prevent unfair labor practices?
  6. A company required all of its employees to authorize deductions from their pay to the United Way, a community charity. The employer terminated an employee when she refused to sign the payroll authorization. Was the employee wrongfully discharged? See Ball v. United Parcel Serv., Inc., 602 A.2d 1176 (Md. 1992)
  7. An employer discharged an otherwise exemplary employee because the employee had a continuing relationship with a co-worker during off duty hours. The employer simply objected to the employee’s immoral lifestyle. The employee claimed discrimination. The employer claimed the defense of the employment at will doctrine. Outcome? See Patton v. J.C. Penney Co., 719 P.2d 854 (Or. 1986)
  8. An employee was discharged when her employer learned that she performed volunteer work at an AIDS center. The employer admitted an irrational fear that the employee’s work at the center would place himself, his family, and his employees at risk. Was this an employer’s overcautious or irrational fears a breach of the implied covenant of good faith? See Brunner v. Al Attar, 786 S.W.2d 784 (Tex. App. 1990)

Chapter Twenty One | Intellectual Property: Copyrights

Purpose Of Copyrights

Copyright law, as with all laws made pursuant to the authority granted by Article 1, Section 8 of the Constitution, is “… [t]o promote the Progress of Science and useful Arts …”. Justice Douglas, writing for the majority in U.S. v. Paramount Pictures, wrote “The copyright law, like the patent statutes, makes reward to the owner a secondary consideration.” In Fox Film Corp. v. Doyal, 286 U.S. 123, 127, (1932) Chief Justice Hughes spoke as follows respecting the copyright monopoly granted by Congress, “The sole interest of the United States and the primary object in conferring the monopoly lie in the general benefits derived by the public from the labors of authors.”

Justice Douglas continued, “It is said that reward to the author or artist serves to induce release to the public of the products of his creative genius. But the reward does not serve its public purpose if it is not related to the quality of the copyright. Where a high quality film greatly desired is licensed only if an inferior one is taken, the latter borrows quality from the former and strengthens its monopoly by drawing on the other. The practice tends to equalize rather than differentiate the reward for the individual copyrights.” (See U.S. v. Paramount Pictures, 334 U.S. 131, 158 (1948)).

Copyright law protects “… original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” A work of authorship includes (1) literary works; (2) musical works, including any accompanying words; (3) dramatic works, including any accompanying music; (4) pantomimes and choreographic works; (5) pictorial, graphic, and sculptural works; (6) motion pictures and other audiovisual works; (7) sound recordings; and (8) architectural works (17 U.S.C. §102(a)).

The owner of a copyright has “… the exclusive rights to do and to authorize any of the following: (1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly; (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and (6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.” (17 U.S.C. §106).

Limitations

There are, however, limitations on how far that protection extends beyond the original work. According to the statute, copyright protection does not “… extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied …” that is embodied in such an original work (17 U.S.C. §102(b)).

Subject Matter

The subject matter of a copyright, as described above, includes “… compilations and derivative works …” but protection of “… preexisting material in which copyright subsists does not extend to any part of the work in which such material has been used unlawfully.” Protection of such works only includes material “… contributed by the author …” rather than “… preexisting material employed in the work, and does not imply any exclusive right in the preexisting material.” (17 U.S.C. §103(a) and (b)).

Reproduction And Derivatives

The owner of a copyright has exclusive rights to reproduce, prepare derivative works based upon the copyrighted work, distribute copies by sale or other transfer of ownership, or by rental, lease, or lending, perform the copyrighted work publicly, display the copyrighted work publicly, and perform the copyrighted work publicly by means of a digital audio transmission (17 U.S.C. §106).

Ownership

Anyone who creates a work is considered the author of that work. In the event that the work is created as a “work for hire” then the organization that sponsored the work is considered the author. A “work made for hire” is defined in §101 as “a work prepared by an employee within the scope of his or her employment …” For example, the coders who created the MacOS did so as employees or independent contractors of Apple. As a result, their work and the cumulative product outcome known as MacOS are considered “works made for hire” pursuant to §101 of the Copyright Act. Thus, the “author” of the MacOS is considered to be Apple.

However, remember an important distinction, copyright embraces only the original expression not any extensions of the original idea. The Feist case examines the necessity of originality when granting a copyright.

 

Case Study

Feist Publications, Inc. v. Rural Telephone Service Co., Inc.

Supreme Court Of The United States, 499 U.S. 340 (1991)

Procedural Posture

Petitioner publishing company sought review by certiorari of a judgment of the United States Court of Appeals for the Tenth Circuit, which affirmed a grant of summary judgment in favor of respondent phone company in a suit by respondent against petitioner for copyright infringement that arose after petitioner published a directory compiled with information taken from the white pages compiled and published by respondent.

Overview

Respondent sued petitioner for copyright infringement because petitioner had used information contained in its white pages in the compilation of its own directory. The court reversed a grant of summary judgment in favor of respondent because the selection, coordination, and arrangement of respondent’s white pages did not satisfy the minimum constitutional standards for copyright protection. Specifically, the court found that respondent’s white pages, which contained only factual information, i.e., phone numbers, addresses, and names listed in alphabetical order, lacked the requisite originality because respondent had not selected, coordinated, or arranged the uncopyrightable facts in any original way.

Summary

A telephone company that was a certified public utility providing telephone service to several communities in Kansas, and that was subject to a state regulation requiring all telephone companies operating in the state to issue annually an updated telephone directory, published a typical telephone directory, consisting of white pages and yellow pages. The white pages listed in alphabetical order the names of the telephone company’s subscribers, together with their towns and telephone numbers. The telephone company obtained the data for its white pages from the company’s subscribers, who were required to provide their names and addresses when applying for telephone service from the company. A publishing company, which specialized in areawide telephone directories covering a much larger geographical range than did directories such as that of the telephone company, offered to pay the telephone company for the right to use its white pages listings, but the telephone company refused to license its listings to the publishing company. Subsequently, the publishing company used the telephone company’s white pages listings without the telephone company’s consent. Although the publishing company sought to obtain additional information, such as street addresses, for the listings that it took from the telephone company’s white pages, many of the listings in the publishing company’s areawide directory that covered part of the telephone company’s service area were identical to listings in the telephone company’s white pages. In a copyright infringement suit brought by the telephone company against the publishing company, the United States District Court for the District of Kansas, explaining that courts had consistently held that telephone directories were copyrightable, granted summary judgment to the telephone company (663 F Supp 214). The United States Court of Appeals for the Tenth Circuit, in an unpublished opinion, affirmed the District Court judgment for substantially the reasons given by the District Court (916 F2d 718).

On certiorari, *** it was held that (1) the names, towns, and telephone numbers listed in the white pages were not protected by the telephone company’s copyright in its combined white and yellow pages directory, because the listings in the white pages were not original to the telephone company, since (a) the listings, rather than owing their origin to the telephone company, were uncopyrightable facts, and (b) the telephone company has not selected, coordinated, or arranged these uncopyrightable facts in an original way sufficient to satisfy the minimum standards for copyright protection–under either the Federal Constitution’s Article I, 8, cl 8, which authorizes Congress to secure for limited times to authors the exclusive right to their respective writings, or the Copyright Act of 1976 (17 USCS 101 et seq.), which provides copyright protection for original works of authorship–given that the telephone company’s selection and alphabetical arrangement of the listings lacked the creativity necessary to demonstrate originality; and (2) because the telephone company’s white pages listings lacked the requisite originality for copyright protection, the publishing company’s use of the listings could not constitute copyright infringement.

Decision

Alphabetical listings of names, accompanied by towns and telephone numbers, in telephone book white pages held not copyrightable; thus, nonconsensual copying of listings held not to infringe on copyright.

Outcome

The court reversed the judgment.

The Supreme Court in Feist affirmed that owners’ original expression is not only protected but also that copyright “… encourages others to build freely upon the ideas and information conveyed by a work.” The Court noted that the principle known as the idea/expression or fact/expression dichotomy, is appropriately applied to all works of authorship. And, where applied to a factual compilation, “… assuming the absence of original written expression, only the compiler’s selection and arrangement may be protected; the raw facts may be copied at will. This result is neither unfair nor unfortunate. It is the means by which copyright advances the progress of science and art.” (See Feist, 499 U.S. 340 at 349-350).

Sources of Law

The Copyright Act of 1790, passed by the Second U.S. Congress, was the first federal copyright statute and established U.S. copyright protection with term of 14 years and provided living owners with an option for one 14-year renewal. This act provided protection only to U.S. citizens. The Copyright Act of 1831 was the first major statutory revision of copyright law. It added musical compositions to the list of protected works and extended the initial term of protection to 28 years with an option for one 14 year renewal. The Copyright Act of 1909 represented a substantial revision, extending the initial term to 28 years with the option of renewal for one additional 28-year term. The Townsend Amendment of 1912 added a new form of expression, motion pictures, to the list pf protected works. Although the 1909 Act was revised by the Copyright Act of 1976, it remains the effective for all copyrights granted before the 1976 Act took effect.

The Copyright Act of 1976 (17 U.S.C. §102, et seq.) remains the primary federal law governing copyrights and has been amended several times. The Act regularized the term of copyright protection by eliminating the potential of multiple terms and creating a system of one term running from the work’s creation and continuing for a term consisting of the life of the author plus 70 years after the author’s death. The Act also provides protection for unpublished works and preempts state laws governing copyright. (17 U.S.C. §301, 303).

Two more amendments to the 1976 acre have been adopted by Congress. The Copyright Renewal Act of 1992 eliminated the need for affirmative action by the copyright holder, i.e., filing a renewal application. This amendment had the effect of providing protection for the full term available without the owner’s action. The Copyright Term Extension Act of 1998 (CTEA), often ridiculed as the “Mickey Mouse Protection Act,” extended copyright protection terms to 95/120 years or life plus 70 years. So, the term of protection for works “… created on or after January 1, 1978 …” there is presently “… a term consisting of the life of the author and 70 years after the author’s death.” In the case of a joint work prepared by two or more authors who did not work for hire the Act provides “… a term consisting of the life of the last surviving author and 70 years after such last surviving author’s death.” And, for anonymous works, pseudonymous works, or works made for hire the Act provides “… a term of 95 years from the year of its first publication, or a term of 120 years from the year of its creation, whichever expires first.” (17 U.S.C. §302).

Notice, Registration and Enforcement

Copyright protection of a work arises automatically at the moment of fixation; in other words, as soon as the work appears in some fixed and tangible form. “A work is “fixed” in a tangible medium of expression when its embodiment … is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.” (17 U.S.C. §101).

Pursuant to the Berne Convention, signed by the U.S. in 1989, there is no requirement for completion of a registration process. However, completion of the federal registration process provides some distinct advantages. Certain damages are only available where the work was registered within ninety days of initial publication or prior to any alleged infringement.

Even though a work is protected once it is created and fixed in a tangible form, there are advantages to registration. Registration establishes a public record of the copyright claim and is necessary for works of U.S. origin before an infringement suit may be filed in court. If registration is completed before or within five years of publication, it establishes prima facie evidence in court of the validity of the copyright. Statutory damages and attorney’s fees will be available to the copyright owner in court actions if registration is made within three months after publication of the work or prior to an infringement of the work. If not, only an award of actual damages and profits will be available to the copyright owner.

The inclusion of a copyright notice on materials distributed in the U.S. is optional. If a notice is included on the work, §401 requires that it be “… affixed … in such manner and location as to give reasonable notice of the claim of copyright” and must include:

  1. the symbol © (the letter C in a circle), or
  2. the word “Copyright, or
  3. the abbreviation “Copr.”; and
  4. the year of first publication of the work; in the case of compilations, or derivative works incorporating previously published material, the year date of first publication of the compilation or derivative work is sufficient. The year date may be omitted where a pictorial, graphic, or sculptural work, with accompanying text matter, if any, is reproduced in or on greeting cards, postcards, stationery, jewelry, dolls, toys, or any useful articles; and
    the name of the owner of copyright in the work, or an abbreviation by which the name can be recognized, or a generally known alternative designation of the owner. (17 U.S.C. §401).

Correct examples of copyright notices would include:

  • © 2017, I A.M. Owner, or
  • Copyright 2017, I A.M. Owner, or
  • Copr. 2017, I A.M. Owner

Infringement

Any copyright owner has the right to bring a legal action against an alleged infringer. Copyright infringement arises whenever a work is distributed, copied, displayed, modified, a derivative is prepared work or performed in public. “In order to establish infringement, two elements must be proven: (1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.” (See Feist, 499 U.S. 340, 362).

Direct Infringement

Direct infringement arises when a person deliberately, and without authorization, engages in the activities described above. For example, if you make a copy of this textbook without the copyright owner’s permission, you will have violated the exclusive right to reproduce and have therefore committed copyright infringement. Likewise, if a music listener makes a copy of a digital music file and shares it with friends, a violation of the exclusive right to reproduce and distribute has occurred. (See A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (2001). Of course, proof of infringement may be difficult, particularly with digital materials. For instance, a copyright owner would be required to show that the alleged infringer both had access to the original work and that they were substantially similar.

The Aereo case resolved a dispute between a provider of an innovative rebroadcasting technology and traditional broadcast media providers. Aereo’s service allowed its subscribers to view over-the-air television on Internet-connected devices. The Court found that the service violated the copyrights of the owners.

 

Case Study

American Broadcasting Companies, Inc. v. Aereo, Inc.

Supreme Court Of The United States, 134 S. Ct. 2498 (2014)

Procedural Posture

Petitioners, a group of television producers, distributors, and broadcasters, sued respondent, an entity that streamed petitioners’ programs to subscribers over the Internet, claiming copyright infringement. The district court denied petitioners’ request for an order enjoining respondent from providing copyrighted programs to subscribers, and the U.S. Court of Appeals for the Second Circuit affirmed. The U.S. Supreme Court granted certiorari.

Overview

Petitioners claimed that respondent violated their rights under the Copyright Act by selling a service that allowed subscribers to watch television programs over the Internet at about the same time the programs were broadcast over the air. A divided panel of the Second Circuit found that respondent did not perform “publicly” within the meaning of the Transmit Clause of the Copyright Act, 17 U.S.C.S. § 101, because it used technology which allowed it to stream programs to each subscriber by sending a private transmission that was available only to that subscriber. The U.S. Supreme Court disagreed. Changes Congress made to the Copyright Act in 1976 were intended to overturn the Supreme Court’s decisions in Fortnightly Corp. v. United Artists Television, Inc. and Teleprompter Corp. v. Columbia Broadcasting System, Inc., and under those changes respondent performed petitioners’ copyrighted works publicly when it streamed the works to subscribers.

The Copyright Act of 1976 gives a copyright owner the exclusive right to perform a copyrighted work publicly. 17 U.S.C.S. § 106(4). The Act’s Transmit Clause defines that exclusive right as including the right to transmit or otherwise communicate a performance of a copyrighted work to the public, by means of any device or process, whether the members of the public capable of receiving the performance receive it in the same place or in separate places and at the same time or at different times. 17 U.S.C.S. § 101.

Decision

Business that sold service which allowed subscribers to watch television programs over Internet at about same time programs were broadcast held to violate copyrights of television producers and broadcasters.

Outcome

The Supreme Court reversed the Second Circuit’s judgment and remanded the case. 6-3 Decision; 1 dissent.

The question before the Court in Aereo was whether the copyright clause of the Constitution allows a company to transmit television programs to its paying viewers over the internet without the permission of the broadcasting network being viewed. The Court found that Aereo’s actions violated the rights of the owner of the copyrights in question.

Contributory Infringement

Contributory infringement is really a form of secondary liability for direct infringement. A person need not engage in behavior that directly infringes on another’s copyright, “… one infringes contributorily by intentionally inducing or encouraging direct infringement, (see Gershwin Pub. Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (CA2 1971), and infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it,” (see Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F.2d 304, 307 (CA2 1963)). Although “[t]he Copyright Act does not expressly render anyone liable for infringement committed by another, these doctrines of secondary liability emerged from common law principles and are well established in the law… .” (see Sony Corp. v. Universal City Studios, 464 U.S., at 434, 486).

The Sony case resolved one of the early disputes raised by the introduction of a disruptive technology that posed a challenge to an entrenched system and addressed the issues of contributory infringement.

 

Case Study

Sony Corporation Of America v. Universal City Studios, Inc.

Supreme Court Of The United States, 464 U.S. 417 (1984)

Procedural Posture

Petitioners appealed a judgment of the United States Court of Appeals for the Ninth Circuit holding petitioners liable for contributory infringement in respondents’ suit against petitioners for copyright infringement in violation of the Copyright Act, 17 U.S.C.S. § 101 et seq.

Overview

Petitioners manufactured and sold home video tape recorders. Respondents owned the copyrights to television programs broadcast on public airwaves. Respondents sued petitioners for copyright infringement, alleging that because consumers used petitioners’ recorders to record respondents’ copyrighted works, petitioners were liable for the copyright infringement allegedly committed by those consumers in violation of the Copyright Act, 17 U.S.C.S. § 101 et seq. The district court held in favor of petitioners. The appellate court reversed. The U.S. Supreme Court held that petitioners demonstrated a significant likelihood that substantial numbers of copyright holders that licensed works for broadcast on free television would not object to having such broadcasts recorded for later viewing by private viewers. The recorders were therefore capable of substantial non-infringing uses and respondents’ sale of the recorders to the general public did not constitute copyright infringement.

Decision

Sale of home video tape recorders to the general public did not constitute contributory infringement of copyrights on television programs since there was a significant likelihood that substantial numbers of copyright holders who license their works for broadcast on free television would not object to having their broadcasts time-shifted by private viewers and the plaintiff copyright holders did not demonstrate that time-shifting would cause any likelihood of non-minimal harm to the potential market for, or the value of, their copyrighted works.

Outcome

The judgment in favor of respondents was reversed where petitioners, as manufacturers of video recorders, did not infringe copyrights.

Vicarious Infringement

Vicarious infringement is another form of secondary liability for direct infringement. A party “… is vicariously liable for the actions of a primary infringer where the defendant (1) has the right and ability to control the infringer’s conduct, and (2) receives a direct financial benefit from the infringement.” (see Fonovisa, Inc. v. Cherry Auction, Inc.; Richard Pilegard, Et Al, 76 F.3d 259 (1996)).

Shapiro is a landmark case on vicarious liability. The court there was faced with a copyright infringement suit against the owner of a chain of department stores where a concessionaire was selling counterfeit recordings.

 

Case Study

Shapiro, Bernstein & Co., Inc., Et Al. v. H. L. Green Company, Inc.

United States Court Of Appeals For The Second Circuit, 316 F.2D 304 (1963)

Procedural Posture

Plaintiffs challenged a district court’s dismissal of their claims against defendant, a record seller accused of copyright infringement.

Overview

Plaintiffs were the copyright proprietors of several musical compositions. Defendant was a company with a record department in each of its stores. Third party defendant was a record manufacturer and dealer who sold records in defendant’s stores. Plaintiffs sued third party defendant for manufacturing knock off records, which were copies of plaintiffs’ records, and selling them without a license. Plaintiffs prevailed on their claims against third party defendant but their suit against defendant was dismissed. The appellate court held defendant liable for illegal sales, even in the absence of intent to infringe, on the basis that knowledge was imputed to defendant. The court further stated that defendant’s liability would stem from a finding that third party defendant was also liable for unlawful sales. The case was reversed and remanded.

Outcome

The court granted plaintiffs’ claim for relief from the district court’s dismissal of their claims against defendant, a record seller accused of copyright infringement, and the case was remanded for further proceedings on the issue of illegal sales.

Inducing Infringement

Inducement arises when a person persuades or influences someone to act. Grokster developed a second generation peer-to-peer file sharing software that allowed users to share digital music, and other types of digital files, knowingly providing the means for users to engage in infringing behavior. The Court found that Grokster facilitated copyright infringement. This case addresses an issue raised by the rise of new and different ways to infringe on copyrights.

 

Case Study

Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.

Supreme Court Of The United States, 545 U.S. 913 (2005)

Procedural Posture

Petitioner copyright holders sued respondent software distributors, alleging that the distributors were liable for copyright infringement because the software of the distributors was intended to allow users to infringe copyrighted works. Upon the grant of a writ of certiorari, the holders appealed the judgment of the United States Court of Appeals for the Ninth Circuit which affirmed summary judgment in favor of the distributors.

Summary

Two companies that distributed free software, which allowed computer users to share electronic files through peer-to-peer networks (that is, directly with each other, rather than through central servers), were sued by a group of copyright holders–who (1) alleged that the distributors had knowingly and intentionally distributed their software to enable users to infringe copyrighted works in violation of the Copyright Act (17 U.S.C.S. §§ 101 et seq.), and (2) sought damages and an injunction–where, although the distributors’ software could be used to share any type of digital file, users of the software had mostly used it for unauthorized sharing of copyrighted music and video files.

Discovery revealed that (1) billions of files were shared across peer-to-peer networks each month; and (2) the distributors were aware that users of their software used it primarily to download copyrighted files. Moreover, the record included evidence that the distributors (1) clearly had voiced the objective that software recipients use the software to download copyrighted works; and (2) had actively encouraged infringement by, for example, promoting themselves as alternatives to another file-sharing service that had been sued by copyright holders for allegedly facilitating copyright infringement.

Although the distributors received no revenue from users of their software, the distributors generated income by selling advertising space, and then streaming the advertising to the users (so that, as the number of users increased, the value of the distributors’ advertising opportunities increased). There was no evidence that the distributors had tried to filter copyrighted material from users’ downloads or otherwise to impede the sharing of copyrighted files. ***

Overview

The distributors were aware that users employed their free software primarily to download copyrighted files, but the distributors contended that they could not be contributorily liable for the users’ infringements since the software was capable of substantial noninfringing uses such as downloading works in the public domain. The U.S. Supreme Court unanimously held, however, that the distributors could be liable for contributory infringement, regardless of the software’s lawful uses, based on evidence that the software was distributed with the principal, if not exclusive, object of promoting its use to infringe copyright. In addition to the distributors’ knowledge of extensive infringement, the distributors expressly communicated to users the ability of the software to copy works and clearly expressed their intent to target former users of a similar service which was being challenged in court for facilitating copyright infringement. Further, the distributors made no attempt to develop filtering tools or mechanisms to diminish infringing activity, and the distributors’ profit from advertisers clearly depended on high-volume use which was known to be infringing.

Under the “inducement rule” being adopted, for copyright, by the United States Supreme Court in the case at hand, one who distributed a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, going beyond mere distribution with knowledge of third-party action, was liable for the resulting acts of infringement by third parties using the device, regardless of the device’s lawful uses, as:

(1) One infringed contributorily by intentionally inducing or encouraging direct infringement–and infringed vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it–for, although the Copyright Act (17 U.S.C.S. §§ 101 et seq.) did not expressly render anyone liable for infringement committed by another, these doctrines of secondary liability had emerged from common-law principles and were well established.

(2) Although Sony Corp. of America v. Universal City Studios, Inc. (1984) 464 U.S. 417 *** in which the Supreme Court had absolved a distributor of video cassette recorders (which the court had found capable of substantial noninfringing uses) from copyright liability for third parties’ use of the recorders–limited imputing culpable intent as a matter of law from the characteristics or uses of a distributed product, (a) nothing in Sony required courts to ignore evidence of intent if there was such evidence; and (b) the case had not been meant to foreclose rules of fault-based liability derived from common law.

(3) Thus, where evidence went beyond a product’s characteristics or the knowledge that the product might be put to infringing uses–and showed statements or actions, such as advertising, a directed to promoting infringement–Sony’s “staple-article rule” would not preclude liability.

(4) Because the inducement rule premised liability on purposeful, culpable expression and conduct, the rule did nothing to compromise legitimate commerce or discourage innovation having a lawful promise, for under the rule a distributor would not be subjected to liability for merely (a) knowing of infringing potential or of actual infringing uses; or (b) performing ordinary acts incident to product distribution, such as offering customers technical support or product updates.

Decision

One who distributes product, capable of lawful and unlawful use, with clearly shown object of promoting copyright infringement held liable for copyright infringement by third parties using product.

Outcome

The judgment affirming the grant of summary judgment to the distributors was vacated, and the case was remanded for further proceedings.

Defenses to Infringement

The “Fair Use” and the “First Sale” doctrines are defenses to claims of copyright infringement. §107 of the Copyright Act states that the “… fair use of a copyrighted work … for purposes such as criticism, comment, news reporting, teaching, scholarship, or research …” is not copyright infringement. The determination of fair use must consider:

  1. the purpose and character of the use, including whether such use is commercial,
  2. the nature of the copyrighted work,
  3. the amount and substantiality of the portion used, and
  4. the effect of the use on the potential market for the copyrighted work.

The Campbell case evaluated whether the commercial nature of a parody of a Roy Orbison song was fatal to the application of the fair use standard.

 

Case Study

Campbell v. Acuff-Rose Music, Inc.

Supreme Court of the United States, 510 U.S. 569 (1994)

Procedural Posture

Petitioners, a rap music group being sued by respondent, the corporate owner of an original rock ballad, sought review of the judgment of the United States Court of Appeals for the Sixth Circuit, which reversed a grant of summary judgment in favor of petitioners after finding the commercial purpose of petitioners’ parody of respondent’s song had prevented it from being a fair use under the Copyright Act of 1976, 17 U.S.C.S. § 107.

Overview

Petitioners, a rap music group, were sued by respondent, the corporate owner of an original rock ballad, for copyright infringement. Petitioners claimed the song was a parody entitled to fair use protection under the Copyright Act of 1976, 17 U.S.C.S. § 107. The court below found the commercial purpose of petitioner’s parody had prevented it from being a fair use. That judgment was reversed on appeal because the Court found it was error for the court below to have concluded that the commercial nature of petitioners’ parody had rendered it presumptively unfair. The Court held that no such evidentiary presumption was available to address either § 107(1), the character and purpose of the use, or § 107(4), market harm, in determining whether transformative use, such as parody, was a fair one. The Court held that a parody’s commercial character, which tended to weigh against a finding of fair use, was only one element that should be weighed in a fair use enquiry. Therefore, the court below was found to have given insufficient consideration to the nature of the parody under the fair use factors as set forth in § 107 in weighing the degree of copying.

Outcome

The judgment was reversed and remanded upon the Court’s finding that the court below had erred in concluding the commercial nature of petitioners’ parody had rendered it presumptively unfair. The Court held that a parody’s commercial character was only one element that should be weighed in a fair use enquiry.

The “First Sale” Doctrine also limited the rights of copyright owners. §109(a) of the Act describes an exception to the exclusive right to distribute copies of the protected work. Essentially, this doctrine limits the ability of the copyright owner to its resale, transfer, or use by a purchaser. That said, it only limits the distribution right, not any of the others, including copy, public performance, creation of derivative works, etc. In order for the doctrine to apply ownership is necessary. The doctrine does not “… extend to any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership of it.” (17 U.S.C. §109(d)).

Of course, as with many things, the advent of digital versions of various products present challenges to the existing legal regime. There are two important questions to address when considering the “sale” of a digital work.

First, is it a sale of the original work or just a transfer of a copy. In other words, digital works can be copied easily and at near-zero cost. So, if the purchaser of the physical music record, or physical book for that matter, sells or gifts their copy, they would be delivering their original, and only, owned copy. In the digital space, however, the purchaser of a music file from iTunes or an eBook from Amazon could simply make a copy of that digital file and sell that duplicate rather the original.

The second question that must be addressed relates to whether a “purchaser” of a digital work is actually taking an ownership interest when the work is sold. In the pre-digital age, the purchase of a product, e.g., a book, record, or picture, would actually mean taking possession of a physical manifestation of that product. The sale would represent a transfer of ownership from the seller to the buyer thus meeting the statutory requirement of “ownership” mentioned above. In a digital marketplace, most commercial sellers of digital content use an End User License Agreement (EULA). The use of the EULA means that the transaction grants a license to use the digital product rather than a transfer of ownership. Since the transaction is not a “sale” but the grant of a “license,” the First Sale Doctrine will not apply.

Remedies for Infringement

The Copyright Act prescribes certain remedies for infringement including injunctions and money damages.

§502 authorizes “Any court having jurisdiction of a civil action …” under the Act to “… grant temporary and final injunctions on such terms as it may deem reasonable to prevent or restrain infringement of a copyright.” A plaintiff might seek a temporary injunction in an effort to prevent the infringing behaviors and reduce the damage those behaviors might cause to the plaintiff’s office. The temporary injunction might become permanent if the plaintiff prevails.

While an infringement action is pending, §503 allows a court to take into its custody any infringing copies of the protected works, any articles that may have been used to produce the infringing copies, and any records documenting the manufacture, sale, or receipt of things involved in the alleged infringement.

Infringers are liable for “… actual damages and any additional profits of the infringer … “ or statutory damages under §504. In order to establish to “… the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” These kinds of damages may be difficult to prove so §504 provides for statutory damages “… in a sum of not less than $750 or more than $30,000 as the court considers just.” In the event that the infringement is committed willfully, the court in its discretion “… may increase the award of statutory damages to a sum of not more than $150,000.” Further, §505 authorizes the court, in its discretion, to allow “… the recovery of full costs by or against any party …” and reasonable attorney’s fees as part of the costs.

The Act also provides for criminal penalties where the infringement was committed willfully:

  • for purposes of commercial advantage or private financial gain;
  • by the reproduction or distribution, including by electronic means, during any 180–day period, of 1 or more copies or phonorecords of 1 or more copyrighted works, which have a total retail value of more than $1,000; or
  • by the distribution of a work being prepared for commercial distribution, by making it available on a computer network accessible to members of the public, if such person knew or should have known that the work was intended for commercial distribution. (17 U.S.C. §506).

Digital Issues in Copyright

The transition to a digital economy has, and will, continue to impact copyright law. There are several statutes that address these digital developments.

No Electronic Theft Act of 1997 (NET Act)

Congress, in an effort to address increasing claims of “piracy”, i.e., infringement of digital copyright protected works, amended the Copyright Act with passage of the NET Act. These amendments addressed a loophole in the criminal penalties available under the Copyright Act by amending §506 to make criminal prosecution available even where there was no “… commercial advantage or private financial gain …” shown. (17 U.S.C. §506). It is a federal crime to reproduce, distribute, or share copies of electronic copyrighted works even if the person acts without commercial purpose and/or receives no private financial gain. Prior to the NET Act, intentional infringers of digital works over the Internet did not face criminal penalties unless they enjoyed “… commercial advantage or private financial gain …” (17 U.S.C. §506). Copyright infringement by electronic means now carries a maximum penalty of three years in prison and a $250,000 fine.

Digital Millennium Copyright Act of 1998 (DMCA)

The DMCA addressed several issues of importance in the digital space. It amended the Copyright Act to bring it into conformance with two World Intellectual Property Organizations (WIPO) treaties, the Copyright Treaty and the WIPO Performances and Phonograms Treaty.

It also added Chapter 12, Copyright Protection and Management Systems to the Copyright Act. This chapter prohibits person(s) from circumventing “… a technological measure that effectively controls access to a work …” and producing and sharing “… any technology, product, service, device, component, or part thereof, that is primarily designed or produced for the purpose of circumventing a technological measure that effectively controls access to a work …” protected by the Act. The term “… to “circumvent a technological measure” means to descramble a scrambled work, to decrypt an encrypted work, or otherwise to avoid, bypass, remove, deactivate, or impair a technological measure, without the authority of the copyright owner …”

In other words, the revisions make the creation or uses of anything that allows a person to hack the Digital Rights Management (DRM) controls that limit access to digital products subject to civil and criminal penalties, even if no actual infringement occurs.

Most notable, though, is the creation of “safe harbors” for online service providers (OSP) and internet service providers (ISP). One of the great strengths of the internet is its use as a platform to share information. Of course, that strength provides nearly unlimited opportunities for infringement of copyright protected works.

Pursuant to the DMCA, a service provider is “… an 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…” or “… a provider of online services or network access, or the operator of facilities therefor …“ (17 U.S.C. §512(k)).

Service providers “… shall not be liable for monetary relief, or … for injunctive or other equitable relief, for infringement of copyright by reason of the provider’s transmitting, routing, or providing connections for, material through a system or network controlled or operated by or for the service provider …” (17 U.S.C. §512(a)). For example, if an OSP or ISP acts only as a conduit, meaning they do modify the user’s traffic, they are free from liability.

Service providers will also not be liable where they provide “… storage at the direction of a user of material that resides on a system or network controlled or operated by or for the service provider, if the service provider does not have actual knowledge that the material or an activity using the material on the system or network is infringing … is not aware of facts or circumstances from which infringing activity is apparent; or upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material …” Note, the service provider cannot receive a financial benefit directly related to the infringing activity. If or when a service provider is notified of claimed infringement, pursuant to the “notice and takedown” provision in the Act, the provider must respond “… expeditiously to remove, or disable access to, the material that is claimed to be infringing …” (17 U.S.C. §512(c)).

 

Ethical Considerations

Blackwood’s Book

Professor Blackwood has worked all summer to curate the supplementary materials for her new course, Climate Change: Hoax or Catastrophe. She has, to a large degree, relied on only two sources for her curation work. She has reproduced, and plans to use, materials that are only remotely related to the specific subject matter of her course. Also, unfortunately, she has not made a concerted effort to accurately source those materials and will likely be unable to offer attribution for most of the curated materials. What ethical issues are present in these circumstances?

 

Questions

  1. What is the purpose of a copyright?
  2. What are the exclusive rights of the owner of a copyright?
  3. When does a work become fixed?
  4. What is the difference between direct and contributory infringement of a copyright?
  5. Why is the DMCA important?

Chapter Twenty Two | Intellectual Property: Trademarks & Trade Secrets

Trademarks

A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. There are many famous trademarks including the Nike swoosh, Disney’s Mickey Mouse and the golden arches of McDonalds. A service mark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of a service rather than goods. The lion’s roar used by Metro-Goldwyn-Mayer is an example of a service mark. An unregistered service mark is symbolized by the service mark symbol (℠). A trade name is a fictitious name, often different from the registered name of a business entity, that is used as an alternative for identification.

Since the law considers a trademark to be property, ownership can reside in an individual or any legal entity. Rights to a trademark can be created by registering the mark with the appropriate trademark registry or through its use in commerce. The United States Patent and Trademark Office (USPTO) is the registry in the United States.

An unregistered trademark is symbolized by the trademark symbol (™) and a registered trademark is symbolized by the letter “R” in a circle (®). The purpose of a trademark is to support the brand identity (brand name) of an individual, company and/or product in order to provide differentiation in the marketplace.

Trade dress refers to those characteristics of a product that are related to the visual appearance of a product or its packaging that symbolize the source of the product to consumers. It includes its size, shape, color, design, and texture as well as its packaging and labeling. It also includes advertising, including marketing strategies and distinctive graphics.

Sources of Law

Lanham Act

The primary federal law on trademarks is the Trademark Act of 1946 (Lanham Act) (15 U.S.C. §1051 et seq.).

The Lanham Act established the remedies available when a trademark is infringed upon. These remedies include damages and block imports of goods that infringe on registered trademarks, and authorized the use of injunctions to prevent the use of false descriptions and trademark dilution.

The Act has been amended several times:

  • the Trademark Counterfeiting Act of 1984 (TCA) (18 U.S. Code §2320),
  • the Federal Trademark Dilution Act (FTDA) (Pub. L. No. 104-98, 109 Stat. 985 (1996))
  • the Anticybersquatting Consumer Protection Act of 1999 (ACPA) (15 U.S.C. § 1125(d))
  • the Trademark Dilution Revision Act (TDRA) (Pub. L. No. 109–312, 120 Stat. 1730 (2006)

Registration

The registration process in the United States requires that the trademark owner:

  • file an application to register the trademark with the USPTO
  • the application is then reviewed by the USPTO to assure compliance with the rules included in the Trademark Manual of Examination Procedure (TMEP)
  • if the application is approved it will be “published for opposition”, a thirty day period when those who would be affected by the registration can object by filing an opposition proceeding that will result in a hearing by the Trademark Trial and Appeal Board (TTAB) to resolve questions related to the grounds for opposition and the applicant’s ability to register the mark
  • the mark will be approved if no objection is filed or if the TTAB finds for the applicant

Distinctiveness

There are various categories of trademarks depending on the mark’s distinctiveness. The court, in Abercrombie & Fitch, 537 F.2D 4 (1976), pointed out that registration requires a mark to be distinctive and then described both four different categories that supported trademark protection and a “spectrum of distinctiveness”. As the court noted:

“… Arrayed in an ascending order which roughly reflects their eligibility to trademark status and the degree of protection accorded, these classes are (1) generic, (2) descriptive, (3) suggestive, and (4) arbitrary or fanciful.”

Generic

A generic mark will never be protected because the identifying term is a common, hence generic, name for the product, or service, in question. For example, generic terms would include elevator, salt and aspirin.

Descriptive

A descriptive mark speaks to the specific characteristics of the product or service in question. A mark “… which (1) when used on or in connection with the goods of the applicant is merely descriptive or deceptively misdescriptive of them …” will not be protected. (15 U.S.C. § 1052(e)(1)). So, “salty” crackers would not be protected. In order to gain protection for a descriptive mark it must develop a “secondary meaning”. In other words, over a period of years consumers may come to identify a product or service with a particular trademark.

Suggestive

Suggestive trademarks are the most common category and merely evoke the quality or characteristics of goods and services. These trademarks require a customer exercise some amount of imagination in order to understand the nature of the goods. Of course, there is a fine line between what qualifies as “descriptive” or “suggestive” because the difference is “in the eye of the beholder” leading to different interpretations of the same mark. Examples of suggestive trademarks include Tesla for electric autos and 7-Eleven that identifies the hours of operation for a convenience store.

Arbitrary

An arbitrary trademark is one whose meaning is unrelated to the goods or services identified by the mark. It is often a word with a common meaning. Among the most well known arbitrary trademarks is Apple, the technology firm. Apple, the fruit, does not usually evoke a computer, at least until Apple was launched by the Steves (Jobs and Wozniak) became a global brand.

Fanciful

A fanciful trademark is one that is created only to be used as a trademark. Its very lack of meaning is its greatest strength. Since the mark is created for a singular purpose, i.e., to be a trademark it cannot be confused with something else which is a weakness in the other categories of mark. Examples of fanciful trademarks include Kodak, Starbucks, Exxon and Verizon.

It is also important to note that the categories are fluid and that the kind of usage of a particular mark over time may result in a change in the appropriateness of the mark’s assigned category.

The Zatarains case discusses the “spectrum of distinctiveness” and secondary meaning discussed above.

 

Case Summary

Zatarains, Inc. v. Oak Grove Smokehouse, Inc. and Visko’s Fish Fry, Inc.

United States Court Of Appeals For The Fifth Circuit, 698 F.2D 786 (1983)

GOLDBERG, Circuit Judge:

This appeal of a trademark dispute presents us with a menu of edible delights sure to tempt connoisseurs of fish and fowl alike. At issue is the alleged infringement of two trademarks, “Fish-Fri” and “Chick-Fri,” held by appellant Zatarain’s, Inc. (“Zatarain’s”). The district court held that the alleged infringers had a “fair use” defense to any asserted infringement of the term “Fish-Fri” and that the registration of the term “Chick-Fri” should be cancelled. We affirm.

I. FACTS AND PROCEEDINGS BELOW

A. THE TALE OF THE TOWN FRIER

Zatarain’s is the manufacturer and distributor of a line of over one hundred food products. Two of these products, “Fish-Fri” and “Chick-Fri,” are coatings or batter mixes used to fry foods. These marks serve as the entree in the present litigation. *** Zatarain’s products are not alone in the marketplace. At least four other companies market coatings for fried foods that are denominated “fish fry” or “chicken fry.” Two of these competing companies are the appellees here, and therein hangs this fish tale.

Appellee Oak Grove Smokehouse, Inc. (“Oak Grove”) began marketing a “fish fry” and a “chicken fry” in March 1979. Both products are packaged in clear glassine packets that contain a quantity of coating mix sufficient to fry enough food for one meal. The packets are labelled with Oak Grove’s name and emblem, along with the words “FISH FRY” OR “CHICKEN FRY.” Oak Grove’s “FISH FRY” has a corn flour base seasoned with various spices; Oak Grove’s “CHICKEN FRY” is a seasoned coating with a wheat flour base.

Appellee Visko’s Fish Fry, Inc. (“Visko’s”) entered the batter mix market in March 1980 with its “fish fry.” Visko’s product is packed in a cylindrical eighteen-ounce container with a resealable plastic lid. The words “Visko’s FISH FRY” appear on the label along with a photograph of a platter of fried fish. Visko’s coating mix contains corn flour and added spices. ***

B. OUT OF THE FRYING PAN, INTO THE FIRE

Zatarain’s first claimed foul play in its original complaint filed against Oak Grove on June 19, 1979, in the United States District Court for the Eastern District of Louisiana. The complaint alleged trademark infringement and unfair competition under the Lanham Act ***

The case was tried to the court without a jury. Treating the trademark claims first, the district court classified the term “Fish-Fri” as a descriptive term identifying a function of the product being sold. The court found further that the term “Fish-Fri” had acquired a secondary meaning in the New Orleans geographical area and therefore was entitled to trademark protection, but concluded that the defendants were entitled to fair use of the term “fish fry” to describe characteristics of their goods. Accordingly, the court held that Oak Grove and Visko’s had not infringed Zatarain’s trademark “Fish-Fri.”

With respect to the alleged infringement of the term “Chick-Fri,” the court found that “Chick-Fri” was a descriptive term that had not acquired a secondary meaning in the minds of consumers. Consequently, the court held that Zatarain’s claim for infringement of its trademark “Chick-Fri” failed and ordered that the trademark registration of “Chick-Fri” should be cancelled.

Turning to Zatarain’s unfair competition claims, the court observed that the evidence showed no likelihood of or actual confusion on the part of the buying public. Additionally, the court noted that the dissimilarities in trade dress of Zatarain’s, Oak Grove’s, and Visko’s products diminished any possibility of buyer confusion. For these reasons, the court found no violations of federal or state unfair competition laws.
***

II. ISSUES ON APPEAL

The district court found that Zatarain’s trademark “Fish-Fri” was a descriptive term with an established secondary meaning, but held that Oak Grove and Visko’s had a “fair use” defense to their asserted infringement of the mark. The court further found that Zatarain’s trademark “Chick-Fri” was a descriptive term that lacked secondary meaning, and accordingly ordered the trademark registration cancelled. Additionally, the court concluded that Zatarain’s had produced no evidence in support of its claims of unfair competition on the part of Oak Grove and Visko’s. Finally, the court dismissed Oak Grove’s and Visko’s counterclaims for antitrust violations, unfair trade practices, misbranding of food products, and miscellaneous damages.

Battered, but not fried, Zatarain’s appeals from the adverse judgment on several grounds. First, Zatarain’s argues that its trademark “Fish-Fri” is a suggestive term and therefore not subject to the “fair use” defense. Second, Zatarain’s asserts that even if the “fair use” defense is applicable in this case, appellees cannot invoke the doctrine because their use of Zatarain’s trademarks is not a good faith attempt to describe their products. Third, Zatarain’s urges that the district court erred in cancelling the trademark registration for the term “Chick-Fri” because Zatarain’s presented sufficient evidence to establish a secondary meaning for the term. For these reasons, Zatarain’s argues that the district court should be reversed. *** We now turn to an appraisal of these issues.

III. THE TRADEMARK CLAIMS

A. BASIC PRINCIPLES

1. Classifications of Marks

The threshold issue in any action for trademark infringement is whether the word or phrase is initially registerable or protectable. *** Courts and commentators have traditionally divided potential trademarks into four categories. A potential trademark may be classified as (1) generic, (2) descriptive, (3) suggestive, or (4) arbitrary or fanciful. These categories, like the tones in a spectrum, tend to blur at the edges and merge together. The labels are more advisory than definitional, more like guidelines than pigeonholes. Not surprisingly, they are somewhat difficult to articulate and to apply. ***

A generic term is “the name of a particular genus or class of which an individual article or service is but a member.” *** A generic term connotes the “basic nature of articles or services” rather than the more individualized characteristics of a particular product. *** Generic terms can never attain trademark protection. *** Furthermore, if at any time a registered trademark becomes generic as to a particular product or service, the mark’s registration is subject to cancellation. *** Such terms as aspirin and cellophane have been held generic and therefore unprotectable as trademarks. ***

A descriptive term “identifies a characteristic or quality of an article or service,” *** Descriptive terms ordinarily are not protectable as trademarks, *** they may become valid marks, however, by acquiring a secondary meaning in the minds of the consuming public. *** Examples of descriptive marks would include “Alo” with reference to products containing gel of the aloe vera plant, *** and “Vision Center” in reference to a business offering optical goods and services ***. As this court has often noted, the distinction between descriptive and generic terms is one of degree. *** The distinction has important practical consequences, however; while a descriptive term may be elevated to trademark status with proof of secondary meaning, a generic term may never achieve trademark protection. ***

A suggestive term suggests, rather than describes, some particular characteristic of the goods or services to which it applies and requires the consumer to exercise the imagination in order to draw a conclusion as to the nature of the goods and services. *** A suggestive mark is protected without the necessity for proof of secondary meaning. The term “Coppertone” has been held suggestive in regard to sun tanning products. ***

Arbitrary or fanciful terms bear no relationship to the products or services to which they are applied. Like suggestive terms, arbitrary and fanciful marks are protectable without proof of secondary meaning. The term “Kodak” is properly classified as a fanciful term for photographic supplies, ***; “Ivory” is an arbitrary term as applied to soap. ***

2. Secondary Meaning

As noted earlier, descriptive terms are ordinarily not protectable as trademarks. They may be protected, however, if they have acquired a secondary meaning for the consuming public. The concept of secondary meaning recognizes that words with an ordinary and primary meaning of their own “may by long use with a particular product, come to be known by the public as specifically designating that product.” *** In order to establish a secondary meaning for a term, a plaintiff “must show that the primary significance of the term in the minds of the consuming public is not the product but the producer.” *** The burden of proof to establish secondary meaning rests at all times with the plaintiff; this burden is not an easy one to satisfy, for ” ‘ [a] high degree of proof is necessary to establish secondary meaning for a descriptive term.’ ” *** Proof of secondary meaning is an issue only with respect to descriptive marks; suggestive and arbitrary or fanciful marks are automatically protected upon registration, and generic terms are unprotectible even if they have acquired secondary meaning. ***

3. The “Fair Use” Defense

Even when a descriptive term has acquired a secondary meaning sufficient to warrant trademark protection, others may be entitled to use the mark without incurring liability for trademark infringement. When the allegedly infringing term is “used fairly and in good faith only to describe to users the goods or services of [a] party, or their geographic origin,” a defendant in a trademark infringement action may assert the “fair use” defense. The defense is available only in actions involving descriptive terms and only when the term is used in its descriptive sense rather than its trademark sense. *** In essence, the fair use defense prevents a trademark registrant from appropriating a descriptive term for its own use to the exclusion of others, who may be prevented thereby from accurately describing their own goods. *** The holder of a protectable descriptive mark has no legal claim to an exclusive right in the primary, descriptive meaning of the term; consequently, anyone is free to use the term in its primary, descriptive sense so long as such use does not lead to customer confusion as to the source of the goods or services. ***.

4. Cancellation of Trademarks

Section 37 of the Lanham Act, ***, provides as follows:

“In any action involving a registered mark the court may determine the right to registration, order the cancelation of registrations, in whole or in part, restore canceled registrations, and otherwise rectify the register with respect to the registrations of any party to the action. Decrees and orders shall be certified by the court to the Commissioner, who shall make appropriate entry upon the records of the Patent Office, and shall be controlled thereby.”

This circuit has held that when a court determines that a mark is either a generic term or a descriptive term lacking secondary meaning, the purposes of the Lanham Act are well served by an order cancelling the mark’s registration.

We now turn to the facts of the instant case.

B. “FISH-FRI”

1. Classification

Throughout this litigation, Zatarain’s has maintained that the term “Fish-Fri” is a suggestive mark automatically protected from infringing uses by virtue of its registration in 1962. Oak Grove and Visko’s assert that “fish fry” is a generic term identifying a class of foodstuffs used to fry fish; alternatively, Oak Grove and Visko’s argue that “fish fry” is merely descriptive of the characteristics of the product. The district court found that “Fish-Fri” was a descriptive term identifying a function of the product being sold. Having reviewed this finding under the appropriate “clearly erroneous” standard, we affirm. ***

We are mindful that ” [t]he concept of descriptiveness must be construed rather broadly.” *** Whenever a word or phrase conveys an immediate idea of the qualities, characteristics, effect, purpose, or ingredients of a product or service, it is classified as descriptive and cannot be claimed as an exclusive trademark. *** Courts and commentators have formulated a number of tests to be used in classifying a mark as descriptive.

A suitable starting place is the dictionary, for ” [t]he dictionary definition of the word is an appropriate and relevant indication ‘of the ordinary significance and meaning of words’ to the public.” *** Webster’s Third New International Dictionary 858 (1966) lists the following definitions for the term “fish fry”: “1. a picnic at which fish are caught, fried, and eaten; …. 2. fried fish.” Thus, the basic dictionary definitions of the term refer to the preparation and consumption of fried fish. This is at least preliminary evidence that the term “Fish-Fri” is descriptive of Zatarain’s product in the sense that the words naturally direct attention to the purpose or function of the product.

The “imagination test” is a second standard used by the courts to identify descriptive terms. This test seeks to measure the relationship between the actual words of the mark and the product to which they are applied. If a term “requires imagination, thought and perception to reach a conclusion as to the nature of goods,” *** it is considered a suggestive term. Alternatively, a term is descriptive if standing alone it conveys information as to the characteristics of the product. In this case, mere observation compels the conclusion that a product branded “Fish-Fri” is a prepackaged coating or batter mix applied to fish prior to cooking. The connection between this merchandise and its identifying terminology is so close and direct that even a consumer unfamiliar with the product would doubtless have an idea of its purpose or function. It simply does not require an exercise of the imagination to deduce that “Fish-Fri” is used to fry fish. *** Accordingly, the term “Fish-Fri” must be considered descriptive when examined under the “imagination test.”

A third test used by courts and commentators to classify descriptive marks is “whether competitors would be likely to need the terms used in the trademark in describing their products.” *** A descriptive term generally relates so closely and directly to a product or service that other merchants marketing similar goods would find the term useful in identifying their own goods. *** Common sense indicates that in this case merchants other than Zatarain’s might find the term “fish fry” useful in describing their own particular batter mixes. While Zatarain’s has argued strenuously that Visko’s and Oak Grove could have chosen from dozens of other possible terms in naming their coating mix, we find this position to be without merit. As this court has held, the fact that a term is not the only or even the most common name for a product is not determinative, for there is no legal foundation that a product can be described in only one fashion. *** There are many edible fish in the sea, and as many ways to prepare them as there are varieties to be prepared. Even piscatorial gastronomes would agree, however, that frying is a form of preparation accepted virtually around the world, at restaurants starred and unstarred. The paucity of synonyms for the words “fish” and “fry” suggests that a merchant whose batter mix is specially spiced for frying fish is likely to find “fish fry” a useful term for describing his product.

A final barometer of the descriptiveness of a particular term examines the extent to which a term actually has been used by others marketing a similar service or product. *** This final test is closely related to the question whether competitors are likely to find a mark useful in describing their products. As noted above, a number of companies other than Zatarain’s have chosen the word combination “fish fry” to identify their batter mixes. Arnaud’s product, “Oyster Shrimp and Fish Fry,” has been in competition with Zatarain’s “Fish-Fri” for some ten to twenty years. When companies from A to Z, from Arnaud to Zatarain’s, select the same term to describe their similar products, the term in question is most likely a descriptive one.

The correct categorization of a given term is a factual issue, *** consequently, we review the district court’s findings under the “clearly erroneous” standard of Fed. R. Civ. P. 52. *** The district court in this case found that Zatarain’s trademark “Fish-Fri” was descriptive of the function of the product being sold. Having applied the four prevailing tests of descriptiveness to the term “Fish-Fri,” we are convinced that the district court’s judgment in this matter is not only not clearly erroneous, but clearly correct.

2. Secondary Meaning

Descriptive terms are not protectable by trademark absent a showing of secondary meaning in the minds of the consuming public. To prevail in its trademark infringement action, therefore, Zatarain’s must prove that its mark “Fish-Fri” has acquired a secondary meaning and thus warrants trademark protection. The district court found that Zatarain’s evidence established a secondary meaning for the term “Fish-Fri” in the New Orleans area. We affirm.

The existence of secondary meaning presents a question for the trier of fact, and a district court’s finding on the issue will not be disturbed unless clearly erroneous. *** The burden of proof rests with the party seeking to establish legal protection for the mark–the plaintiff in an infringement suit. *** The evidentiary burden necessary to establish secondary meaning for a descriptive term is substantial. ***

In assessing a claim of secondary meaning, the major inquiry is the consumer’s attitude toward the mark. The mark must denote to the consumer “a single thing coming from a single source,” *** to support a finding of secondary meaning. Both direct and circumstantial evidence may be relevant and persuasive on the issue.

Factors such as amount and manner of advertising, volume of sales, and length and manner of use may serve as circumstantial evidence relevant to the issue of secondary meaning. *** While none of these factors alone will prove secondary meaning, in combination they may establish the necessary link in the minds of consumers between a product and its source. It must be remembered, however, that “the question is not the extent of the promotional efforts, but their effectiveness in altering the meaning of [the term] to the consuming public.”***

Since 1950, Zatarain’s and its predecessor have continuously used the term “Fish-Fri” to identify this particular batter mix. Through the expenditure of over $400,000 for advertising during the period from 1976 through 1981, Zatarain’s has promoted its name and its product to the buying public. Sales of twelve-ounce boxes of “Fish-Fri” increased from 37,265 cases in 1969 to 59,439 cases in 1979. From 1964 through 1979, Zatarain’s sold a total of 916,385 cases of “Fish-Fri.” The district court considered this circumstantial evidence of secondary meaning to weigh heavily in Zatarain’s favor. ***

In addition to these circumstantial factors, Zatarain’s introduced at trial two surveys conducted by its expert witness, Allen Rosenzweig. In one survey, telephone interviewers questioned 100 women in the New Orleans area who fry fish or other seafood three or more times per month. Of the women surveyed, twenty-three percent specified Zatarain’s “Fish-Fri” as a product they “would buy at the grocery to use as a coating” or a “product on the market that is especially made for frying fish.” In a similar survey conducted in person at a New Orleans area mall, twenty-eight of the 100 respondents answered “Zatarain’s ‘Fish-Fri’ ” to the same questions.

The authorities are in agreement that survey evidence is the most direct and persuasive way of establishing secondary meaning. *** The district court believed that the survey evidence produced by Zatarain’s, when coupled with the circumstantial evidence of advertising and usage, tipped the scales in favor of a finding of secondary meaning. Were we considering the question of secondary meaning de novo, we might reach a different conclusion than did the district court, for the issue is close. Mindful, however, that there is evidence in the record to support the finding below, we cannot say that the district court’s conclusion was clearly erroneous. Accordingly, the finding of secondary meaning in the New Orleans area for Zatarain’s descriptive term “Fish-Fri” must be affirmed.

3. The “Fair Use” Defense

Although Zatarain’s term “Fish-Fri” has acquired a secondary meaning in the New Orleans geographical area, Zatarain’s does not now prevail automatically on its trademark infringement claim, for it cannot prevent the fair use of the term by Oak Grove and Visko’s. The “fair use” defense applies only to descriptive terms and requires that the term be “used fairly and in good faith only to describe to users the goods or services of such party, or their geographic origin.” Lanham Act Sec. 33(b), 15 U.S.C. § 1115(b) (4) (1976). The district court determined that Oak Grove and Visko’s were entitled to fair use of the term “fish fry” to describe a characteristic of their goods; we affirm that conclusion.

Zatarain’s term “Fish-Fri” is a descriptive term that has acquired a secondary meaning in the New Orleans area. Although the trademark is valid by virtue of having acquired a secondary meaning, only that penumbra or fringe of secondary meaning is given legal protection. Zatarain’s has no legal claim to an exclusive right in the original, descriptive sense of the term; therefore, Oak Grove and Visko’s are still free to use the words “fish fry” in their ordinary, descriptive sense, so long as such use will not tend to confuse customers as to the source of the goods. ***

The record contains ample evidence to support the district court’s determination that Oak Grove’s and Visko’s use of the words “fish fry” was fair and in good faith. Testimony at trial indicated that the appellees did not intend to use the term in a trademark sense and had never attempted to register the words as a trademark. *** Oak Grove and Visko’s apparently believed “fish fry” was a generic name for the type of coating mix they manufactured. *** In addition, Oak Grove and Visko’s consciously packaged and labelled their products in such a way as to minimize any potential confusion in the minds of consumers. *** The dissimilar trade dress of these products prompted the district court to observe that confusion at the point of purchase–the grocery shelves–would be virtually impossible. Our review of the record convinces us that the district court’s determinations are correct. We hold, therefore, that Oak Grove and Visko’s are entitled to fair use of the term “fish fry” to describe their products; accordingly, Zatarain’s claim of trademark infringement must fail.

C. “CHICK-FRI”

1. Classification

Most of what has been said about “Fish-Fri” applies with equal force to Zatarain’s other culinary concoction, “Chick-Fri.” “Chick-Fri” is at least as descriptive of the act of frying chicken as “Fish-Fri” is descriptive of frying fish. It takes no effort of the imagination to associate the term “Chick-Fri” with Southern fried chicken. Other merchants are likely to want to use the words “chicken fry” to describe similar products, and others have in fact done so. Sufficient evidence exists to support the district court’s finding that “Chick-Fri” is a descriptive term; accordingly, we affirm.

2. Secondary Meaning

The district court concluded that Zatarain’s had failed to establish a secondary meaning for the term “Chick-Fri.” We affirm this finding. The mark “Chick-Fri” has been in use only since 1968; it was registered even more recently, in 1976. In sharp contrast to its promotions with regard to “Fish-Fri,” Zatarain’s advertising expenditures for “Chick-Fri” were mere chickenfeed; in fact, Zatarain’s conducted no direct advertising campaign to publicize the product. Thus the circumstantial evidence presented in support of a secondary meaning for the term “Chick-Fri” was paltry.

Allen Rosenzweig’s survey evidence regarding a secondary meaning for “Chick-Fri” also “lays an egg.” The initial survey question was a “qualifier:” “Approximately how many times in an average month do you, yourself, fry fish or other seafood?” Only if respondents replied “three or more times a month” were they asked to continue the survey. This qualifier, which may have been perfectly adequate for purposes of the “Fish-Fri” questions, seems highly unlikely to provide an adequate sample of potential consumers of “Chick-Fri.” This survey provides us with nothing more than some data regarding fish friers’ perceptions about products used for frying chicken. As such, it is entitled to little evidentiary weight.

It is well settled that Zatarain’s, the original plaintiff in this trademark infringement action, has the burden of proof to establish secondary meaning for its term. *** This it has failed to do. The district court’s finding that the term “Chick-Fri” lacks secondary meaning is affirmed.

3. Cancellation

Having concluded that the district court was correct in its determination that Zatarain’s mark “Chick-Fri” is a descriptive term lacking in secondary meaning, we turn to the issue of cancellation. The district court, invoking the courts’ power over trademark registration as provided by section 37 of the Lanham Act, 15 U.S.C. § 1119 (1976), ordered that the registration of the term “Chick-Fri” should be cancelled. The district court’s action was perfectly appropriate in light of its findings that “Chick-Fri” is a descriptive term without secondary meaning. We affirm. ***

IV. THE COUNTERCLAIMS

The last morsels on our plate are the counterclaims filed against Zatarain’s by Oak Grove and Visko’s. One group of counterclaims alleges violations of federal antitrust statutes and Louisiana law prohibiting the restraint of trade. In addition, the counterclaims pray for awards of attorneys’ fees under the Lanham Act Sec. 35, 15 U.S.C. § 1117 (1976), due to Zatarain’s alleged bad faith in instituting this infringement action. The district court found these allegations to be clearly without merit, noting that Oak Grove and Visko’s had introduced absolutely no evidence at trial to support the counterclaims. Our review of the record fully supports the district court’s judgment in this regard, and it is hereby affirmed.

Finally, Oak Grove and Visko’s assert a counterclaim based on the federal regulations governing the identity labelling of packaged foods, 21 C.F.R. Sec. 101.3 (1982). The counterclaim alleges that Zatarain’s sale of 100% corn flour under the name “Fish-Fri” is deceptive and misleading to the public. In particular, Oak Grove and Visko’s maintain that the size of the product identification “corn flour” on the “Fish-Fri” box is not reasonably related to the most predominate words on the box as required by the regulations. After examining the “Fish-Fri” package, the district court found this counterclaim to be without merit. The court initially noted that the size of the words “corn flour” complies with the specifications of 21 C.F.R. Sec. 101.2(c) (1982), which sets a minimum requirement for information appearing on the principal display panel of packaged foods. The court then found that the identification of Zatarain’s “Fish-Fri” as a corn flour product was reasonably related in size to the words “Fish-Fri.” This finding is not clearly erroneous and therefore is affirmed.

We agree with the district court that this smorgasbord of counterclaims by Oak Grove and Visko’s is without merit, and we affirm their dismissal by the district court. Sadly, for Oak Grove and Visko’s at least, these are “the ones that got away.”

V. CONCLUSION

And so our tale of fish and fowl draws to a close. We need not tarry long, for our taster’s choice yields but one result, and we have other fish to fry. Accordingly, the judgment of the district court is hereby and in all things

AFFIRMED.

Infringement

According to the USPTO, trademark infringement is the unauthorized use of a trademark or service mark on or in connection with goods and/or services in a manner that is likely to cause confusion, deception, or mistake about the source of the goods and/or services. Essentially, infringement occurs when an infringing party uses a trademark identical to one that is protected. Infringement can also occur where the infringing trademark is similar enough to a protected trademark that it confuses consumers.

The Lanham Act also established the “likelihood of confusion” standard for infringement of an unregistered trademark or trade dress allowing for a civil action:

  1. Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which:

(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or

(B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. (15 U.S.C. §1125)The Federal Trademark Dilution Act (FTDA) (15 U.S.C. § 1125(c) and the Trademark Dilution Revision Act (TDRA) (15 U.S.C. § 1125(c) are the primary federal statutes governing dilution.

Dilution

Trademark dilution arises when a famous mark is used in a way that damages the mark through blurring or tarnishment. The capacity of a famous mark to serve its purpose, i.e., to identify and distinguish products or services is in some way reduced. A mark is famous “… if it is widely recognized by the general consuming public of the United States as a designation of source of the goods or services of the mark’s owner.” (15 U.S.C. §1125(c)(2)(A)). Dilution by blurring is an “… association arising from the similarity between a mark or trade name and a famous mark that impairs the distinctiveness of the famous mark.” (15 U.S.C. §1125(c)(2)(B)). Dilution by tarnishment is an “… association arising from the similarity between a mark or trade name and a famous mark that harms the reputation of the famous mark.” (15 U.S.C. §1125(c)(2)(C)).

Remedies include injunctive relief and actual damages. The court has discretion to award the owner attorneys’ fees and profits in addition to actual damages where there is proof that the infringing party willfully intended to trade on the owner’s reputation or to cause dilution of the famous mark. (15 U.S.C. §1125(c)(5)).

The Starbucks case examines whether, and under what circumstances, the owner of a “famous, distinctive” mark can recover damages for dilution.

 

Case Study

Starbucks Corp. v. Wolfe’s Borough Coffee, Inc.

588 F.3d 97 (2d Cir. 2009)

Procedural Posture

Plaintiffs, including a trademark owner, sued defendant competitor, alleging federal trademark infringement, dilution, and unfair competition under the Lanham Act, state trademark dilution under N.Y. Gen. Bus. Law § 360-l, and unfair competition under New York common law. The United States District Court for the Southern District of New York entered judgment in favor of the competitor. Plaintiffs appealed.

Overview

The trademark owner sold coffee products in retail locations and supplied coffees to restaurants, supermarkets, and other businesses. The competitor was a relatively small company that began selling a coffee with a name similar to the trademark owner’s mark. The appellate court determined that remand was warranted as to plaintiffs’ claim of trademark dilution by blurring under 15 U.S.C.S. § 1125(c)(2)(B) because (1) the district court erred to the extent it required “substantial” similarity between the marks, and (2) the determination of an “intent to associate” did not require the additional consideration of whether bad faith corresponded with that intent. However, the claim for dilution by tarnishment failed because the competitor’s line of coffee was marketed as a product of “very high quality,” which was inconsistent with the concept of “tarnishment.” The trademark infringement and unfair competition claims failed under the Polaroid test because, inter alia, (1) the “bridging the gap” factor was irrelevant and thus did not favor plaintiffs where the two products were in direct competition with each other, and (2) there was no likelihood that consumers would confuse the marks.

Outcome

The appellate court vacated, in part, the district court’s decision and remanded for further proceedings on the issue of whether plaintiffs demonstrated a likelihood of dilution by “blurring” under federal trademark law. The appellate court affirmed the district court’s judgment in all other respects.

Defenses

There are defenses to trademark infringement available. The “fair use” defense finds its basis in the freedom of speech guarantees of the First Amendment. Since trademark protection is generally limited, “… the “fair use” defense applies only to descriptive terms and requires that the term be “used fairly and in good faith only to describe to users the goods or services of such party, or their geographic origin.”” (See Zatarains, Inc. v. Oak Grove Smokehouse, Inc., et al, 698 F.2D 786 (1983), discussed earlier).

“Nominative fair use” is a defense to a claim of infringement. The nominative use test essentially states that one party may use or refer to the trademark of another if:

  1. The product or service cannot be readily identified without using the trademark (e.g. trademark is descriptive of a person, place, or product attribute).
  2. The user only uses as much of the mark as is necessary for the identification (e.g. the words but not the font or symbol).
  3. The user does nothing to suggest sponsorship or endorsement by the trademark holder. (New Kids on the Block v. News America Publishing, Inc., 971 F.2d 302 (9th Cir. 1992))

When describing a business, it is permissible to identify services or products that may be used by that business. It is not permissible to use the reputation of those products or services in an effort to trade on their reputation for the benefit of the business using the referenced services or products.

Domain Name Issues

The rise of the internet saw an increase in cybersquatters who registered, and frequently, warehoused domain names. They did so, not for the purpose of creating an authentic website, but to essentially hold the legitimate owner of a trademark hostage for a higher price. In response, Congress adopted the Anticybersquatting Consumer Protection Act (ACPA) that targeted those who “… registered, trafficked in, or used a domain name …” that is “… is identical or confusingly similar …” to a trademark or personal name and has “… bad faith intent to profit from the mark.” The ACPA also allows a prevailing plaintiff to “… recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.” (15 U.S.C. §1117(d)). The Zuccarini case is an excellent example of the activities the ACPA addresses.

 

Case Study

Electronics Boutique Holdings Corp. v. John Zuccarini

United States District Court For The Eastern District Of Pennsylvania, 2000 U.S. Dist. LEXIS 15719 (2000)

Procedural Posture

Plaintiff brought an action against defendant, alleging violations of the Anticybersquatting Consumer Protection Act of 1999, 15 U.S.C.S. § 1125(d), violations of § 43(a) of the Lanham Act, 15 U.S.C.S. § 1125(a), dilution, common law service mark infringement, and unfair competition.

Overview

Plaintiff filed a complaint against defendant, alleging Internet cybersquatting. Plaintiff alleged that defendant purchased several Internet domain names similar to its trademarked names, in violation of the Anticybersquatting Consumer Protection Act of 1999 (ACPA), 15 U.S.C.S. § 1125(d). After it became apparent that defendant had knowledge of the lawsuit but was avoiding service, the court held a hearing on the merits in defendant’s absence. The court found that plaintiff was entitled to a permanent injunction under the ACPA. Plaintiff’s marks were distinctive and famous, defendant’s domain misspellings were confusingly similar to plaintiff’s marks, and defendant registered the domain misspellings with a bad-faith intent to profit form them. Defendant registered the domain misspellings in order to generate advertising revenue for himself, and did not sell any product. Plaintiff was also entitled to statutory damages of $100,000 per infringing domain name, attorney’s fees, and costs. Defendant’s conduct was particularly egregious; he continued to register domain misspellings after being enjoined from doing so in other cases.

Outcome

Judgment was entered in favor of plaintiff on its claims under the Anticybersquatting Consumer Protection Act. Defendant was required to transfer the misspelled domain names to plaintiff, and was enjoined from using any domain name substantially similar to plaintiff’s marks. Plaintiff’s remaining claims, brought under other federal statutes and common law, were dismissed without prejudice.

Trade Secrets

A trade secret is any information that a business controls that gives it an advantage over its competition. Protecting trade secrets is relatively straightforward. When a business seeks to protect a trade secret, it must keep it a secret. The owner should create a process that identifies the information as private, limits access, and maintains the appropriate level of security necessary to prevent misappropriation. Unlike most other intellectual property rights, protection of trade secrets does not require completion of a lengthy and/or complicated application process.

There are many examples of famous trade secrets, including the secret recipes for Coca-Cola, Kentucky Fried Chicken, and Krispy Kreme donuts. Trade secrets need not be famous and may include lists of suppliers and clients, manufacturing processes, consumer profiles, sales and distribution methodologies.

§1.4 of the Uniform Trade Secrets Act defines a “trade secret” as information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(i) 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
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

According to the World Intellectual Property Organization (WIPO), a trade secret is “… any confidential business information which provides an enterprise a competitive edge…”

In fact, trade secret law is presumed to encourage societal benefit as described by the U.S. Supreme Court which stated that trade secret law “… promotes the sharing of knowledge, and the efficient operation of industry; it permits the individual inventor to reap the rewards of his labor by contracting with a company large enough to develop and exploit it.” (Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470)

The Supreme Court of Ohio, in Plain Dealer (80 Ohio St.3d, 687 N.E.2d 661), established a six-factor test for determining whether information constitutes a trade secret:

  1. The extent to which the information is known outside the business;
  2. the extent to which it is known to those inside the business, i.e., by the employees;
  3. the precautions taken by the holder of the trade secret to guard the secrecy of the information;
  4. the savings effected and the value to the holder in having the information as against competitors;
  5. the amount of effort or money expended in obtaining and developing the information; and
  6. the amount of time and expense it would take for others to acquire and duplicate the information.”

Review the Nowogroski case carefully. The court differentiates between customer lists that are memorized, and those that are physically available, addressing the question of what constitutes a trade secret.

 

Case Study

Ed Nowogroski Insurance, Inc. v. Rucker

Supreme Court Of Washington, 137 Wash.2D 427 (1999)

Procedural Posture

Defendant former employees and competitor appealed from a decision of the Washington Court of Appeals, which reversed the judgment of the trial court in an action, brought by plaintiff former employer, alleging misappropriation of memorized customer lists, in violation of the Uniform Trade Secrets Act, Wash. Rev. Code §19.108, and ruled that memorized confidential information was protected by the Act.

Overview

Defendant former employees were hired by defendant competitor after leaving their jobs with plaintiff former employer, an insurance company. Plaintiff then sued defendants for misappropriation of plaintiff’s trade secrets by retaining and using its confidential client lists. The trial court found that, while the lists were trade secrets, defendants did not violate the Uniform Trade Secrets Act, Wash. Rev. Code § 19.108, by using information that they had memorized, as opposed to taking written information. The court of appeals disagreed and reversed.

Defendants appealed, not contesting that the lists themselves were trade secrets or that the lists were “appropriated” by memory. Rather, they argued that information in the memory of an employee about the lists was not a trade secret. In affirming, the court rejected defendants’ arguments and ruled that the protections of § 19.108 and the common law applied not only to written information, but to memorized information as well. The “memory rule” of agency law, which allowed use of memorized information, was rejected as inconsistent with promoting commercial ethics and fair dealing.

Outcome

The judgment in favor of plaintiff was affirmed because the protections of the Act were not limited to written information, as asserted by defendants; there was no legal distinction, under the Act or common law, between written and memorized trade secrets; each was protected from disclosure by defendant former employees to defendant competitor.

Sources of Trade Secret Law

Sources of law related to trade secrets are primarily found in state law through the common law (Restatement of Torts (First) and the Restatement (Third) of Unfair Competition), uniform laws (Uniform Trade Secrets Act (UTSA)). At the federal level, the Economic Espionage Act (EEA) (1996) and the Defend Trade Secrets Act (DTSA) (2016) provide for both civil and criminal actions.

Restatement (First) of Torts (1939)

§757, comment b, states that a trade secret “… may consist of any formula, pattern, device, or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for chemical compound, treating or preserving materials, a pattern for machine or other device, or a list of customers.”

Restatement (Third) of Unfair Competition

§39 states that “A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.”

Uniform Trade Secrets Act (UTSA)

Like most uniform statutes, the UTSA, adopted by most states codifies the common law related to trade secrets as it has developed in various jurisdictions. The UTSA regularizes the standards and remedies available at common law.

The UTSA provides for several civil remedies including injunctive relief, damages, and attorney’s fees.

Economic Espionage Act (EEA) (18 U.S.C. §§1831–1839)

The EEA provides for the protection of trade secrets by criminalizing the misappropriation of trade secrets for the benefit a foreign power. §1839 of the Act defines “trade secret” to include “… all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing …”

Defend Trade Secrets Act (DTSA) (18 U.S.C. §§1839 et seq.)

The DTSA provides a basis in federal law for trade secret misappropriation and gives the federal courts jurisdiction over those actions. It does not eliminate remedies available in state courts. Remedies include:

  • injunctive relief “… to prevent any actual or threatened misappropriation …” (18 U.S.C. §1836(b)(3)(A) et seq.)
  • damages for “actual loss” or “unjust enrichment” caused by the misappropriation of the trade secret (18 U.S.C. §1836(b)(3)(B) et seq.)
  • “ … seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” (18 U.S.C. §1836(b)(2)(A)(i))

Misappropriation

The owner of a trade secret must take reasonable measures to protect its secrecy. Owners may use a variety of mechanisms to secure trade secrets. They will frequently include work-for-hire and non-compete clauses in employment agreements and will require their employees to sign non-disclosure agreements (NDAs) in an effort to protect these valuable assets. Of course, these employment related initiatives are subject to the constraints of employment law discussed in Chapter 17.

§1.2 of the UTSA defines “Misappropriation” as:

(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(ii) disclosure or use of a trade secret of another without express or implied consent by a person who

(A) used improper means to acquire knowledge of the trade secret; or

(B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was

(I) derived from or through a person who had utilized improper means to acquire it;

(II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

(III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

The Rivendell case examines whether a trade secret is a question of fact.

 

Case Study

Rivendell Forest Products, Ltd. v. Georgia-Pacific Corporation And Timothy L. Cornwell

United States Court Of Appeals For The Tenth Circuit, 28 F.3D 1042 (1994)

Procedural Posture

Plaintiff sought review of the decision of the United States District Court for the District of Colorado, granting defendant’s motion for summary judgment in plaintiff’s action for wrongful appropriation of a trade secret.

Summary

Rivendell brought suit against G.P. for wrongful appropriation of a trade secret. The suit was also against Cornwell for a violation of confidence. The suit centers on a computer software system which Rivendell had developed over the years, and which system it asserted to be a trade secret under Colorado law. It asserts that this system enabled Rivendell to provide its customers with special service, and to manage its distribution centers as no competitor could do. This was a computer system which enabled Rivendell employees to give immediate answers to customers’ questions and phone inquiries as to prices, quantities, places, and delivery time as to various lumber sizes and types without any computations which required a delay and a call back to the customer. It asserted that at the pertinent time no other wholesaler could provide such service and management, and this gave Rivendell a large advantage over its competitors including G.P. It is this software system that Rivendell asserts was its trade secret.

Overview

Plaintiff and defendant were competitors in the lumber business. Over nine years, plaintiff developed a unique computer system that enabled its employees to immediately answer customers’ questions about inventory. Defendant hired away one of plaintiff’s employees, who was not a computer expert but had helped develop plaintiff’s system. Within four months, defendant had a virtually identical computerized inventory system.

Plaintiff sued for wrongful appropriation of a trade secret under Colorado’s Trade Secret Act, Colo. Rev. Stat. § 7-74-102(4) (1986). The district court granted defendant summary judgment. On appeal, the court held that, unlike with patents, novelty and invention were not elements of a trade secret claim. A trade secret could consist of a combination of elements that were, separately, in the public domain. Plaintiff’s computer system was arguably a trade secret since the evidence showed the system gave plaintiff a competitive advantage. The court reversed and remanded for trial.

Outcome

The court reversed defendant’s grant of summary judgment and remanded for trial because the issue of whether plaintiff’s computer system for managing inventory was a trade secret was genuine and material.

The court in Rivendell found that there were essential disputed issues of fact that were unresolved by the trial court. These were “… the value of the information to the plaintiff company …” and “… the reasonable precautions taken by the holder of the trade secret to guard the secrecy of the information.” The failure to resolve those issues resulted in the court’s reversal of the lower court’s decision.

Ethical Considerations

The Special (Secret) Rocky Road Recipe

Mary is CEO of Ice Cream Heaven (ICH), a manufacturer of specialty ice cream products. ICH is known internationally for its extraordinary Magnificent Rocky Road ice cream which is a registered ICH trademark. ICH has worked for years to refine the recipe and considers the recipe a trade secret. Mary and ICH’s chief flavor developer are the only individuals who know, and have access, to the recipe.

Larry, an assistant in the flavor development department, recently gained access to the Rocky Road recipe. Larry has decided to share it by posting it to his social media accounts. Are Larry’s actions ethical?

Analytics And Ethics: Perfect Together?

Boron Systems Corp. develops data analytics tools for corporate clients. Boron has just hired a new software engineer, Jeanine Patrick. Jeanine is considered to be one of the best coders of her generation and was heavily recruited by several companies. She was a key employee on several highly confidential projects while at her previous employer, Secret Systems, Inc. Those projects were focused on the development of analytics tools that represent significant advances in the field.

While Jeanine is absolutely thrilled to be working on bleeding edge analytics tools she is unaware that one of the primary reasons that Boron hired her was her work on Secret Systems’ confidential projects. While working diligently on Boron’s application, Jeanine realizes that the knowledge she gained while at Secret Systems would be enormously beneficial to Boron. Jeanine is really uncertain about using the knowledge she acquired at Secret Systems to benefit Boron. Of course, she is not aware that Boron was hoping that she would do exactly that when they hired her.

What are the ethical challenges facing both Jeanine and Boron?

 

Questions

Trademarks

  1. Can catch phrases can be trademarked?
  2. Describe the differences between trademarks and trade dress.
  3. What is the Lanham Act?
  4. What are the four classes of distinctiveness required for protection?
  5. What is the “likelihood of confusion” standard for infringement of an unregistered trademark?
  6. What is the “fair use” defense” to trademark infringement?

Trade Secrets

  1. What is a trade secret?
  2. How can a company protect a trade secret?
  3. What are the primary sources of trade secret law?

Chapter Nineteen | Antitrust

Introduction and Overview

The United States economy relies heavily on the free market system to allocate resources fairly and wisely. However, many believe that if left to their own devices, markets will tend to be monopolized where the presence of a single supplier of a product or service will dominate. To prevent this possibility of monopolization, antitrust laws were designed in order to ensure the maximization of consumer welfare and that competition in the market would remain in a healthy state.

There are two major competing schools of thought concerning the proper purpose of antitrust law. The Chicago School sees as the primary purpose of antitrust law the promotion of the maximization of consumer welfare using market principles and efficiency criteria. This ideology results in less striking prohibitive conduct “on its face,” but seeks a factual, case-by-case specific analysis in order to determine if the conduct at issue is illegal. In contrast, the Harvard School believes that antitrust laws are important for the preservation of small businesses in an economy characterized by many sellers in competition with each other; the prevention of concentration of political and economic power in the hands of a few sellers in each industry; and the preservation of essentially local control of business and protection against the effects of labor dislocation.

At their essence, antitrust laws are primarily concerned with regulating private economic power through fostering competition. Competition is desirable for many reasons. Supporters of antitrust legislation believe that competition will guaranty efficiency in resource allocation; foster consumer choice; assure avoidance of concentration of political power; and guaranty fairness in economic behavior. The various antitrust laws focus generally on conduct or business activity, as opposed to more generalized market structure, although an analysis of monopolization will involve both conduct and market structure. To determine whether particular conduct violates antitrust laws requires an understanding of the body of statutes that are generally considered to constitute the antitrust laws.

Antitrust Enforcement

The Antitrust Division of United States Department of Justice and the Federal Trade Commission are primarily responsible for enforcement of antitrust laws in the public sector. Individuals or businesses that claim that they have been injured by anti-competitive behavior may bring a private action under one or more of the federal statutes discussed below. Sometimes an individual suit may be filed in a class action format, brought by a member of a group of persons on behalf of the entire group or class. A parens patriae suit may be brought by the Attorney General of a state on behalf of consumers or taxpayers of a state. These suits protect the rights of citizens who generally cannot protect themselves, and may also further public policy.

Generally, the Antitrust Division has exclusive jurisdiction of the Sherman Act; the Antitrust Division has concurrent jurisdiction with the FTC to enforce the Clayton Act; and the FTC has exclusive jurisdiction to enforce the FTC Act.

Antitrust Remedies

Penalties for violating antitrust laws include criminal and civil penalties:

  • Violations of the Sherman Act: individuals can be fined up to $350,000 and sentenced to up to 3 years in prison. Companies can be fined up to $10 million.
  • Violations of the Clayton Act: individuals injured by antitrust violations can sue the violators in court for three times the amount of damages actually suffered. These are known as treble-damages, and can also be sought in class-action antitrust lawsuits. Damages also include attorneys’ fees and other litigation costs.
  • Violations of the Federal Trade Commission Act: the FTC has the authority to issue an order that the violator stop its anticompetitive practices.
  • Violations of State Antitrust Laws: state antitrust laws often prohibit the same kinds of conduct as the federal antitrust laws. As a result, the penalties state laws impose are also similar and can range from criminal to civil sanctions. (See http://www.legalmatch.com/law-library/article/penalties-for-violating-antitrust-laws.html#sthash.5fUxwaCr.dpuf.)
  • In order to avoid the cost of litigation or further administrative actions, parties may enter into a consent decree, which today is a major source of a resolution of an antitrust case.

Other equitable remedies available to courts include:

  • Divestiture of a unit of a company or of a subsidiary;
  • The requirement that a company license a patent or a trademark that has been used in an anticompetitive manner;
  • Division of a company into smaller components or divisions (AT&T);
  • The requirement that a business cancel a contract that evidences anticompetitive aspects or practices.

In certain cases, a party found to have engaged in anticompetitive practices may be forced to pay three-times the actual damages, called punitive damages, incurred in order to punish that party for its intentional conduct. (MCI v AT&T).

The Statutory Framework

There are three principle statutes operating in the area of antitrust enforcement. The Sherman Act, enacted in 1890, was the first and most important of the federal antitrust laws. The Sherman Act prohibits “contracts, combination, and conspiracies in restraints of trade” and certain monopolistic acts. In 1914, Congress passed the Clayton Act to supplement the general prohibitions of the Sherman Act. The Clayton Act applies to certain forms of price discrimination, certain mergers and acquisitions, certain tying arrangements, and makes certain “exclusive dealing” arrangements illegal. Lastly, the Federal Trade Commission Act (FTC Act), though technically not one of the exclusive antitrust laws, was also passed by Congress in 1914 to strengthen the federal government’s authority when proceeding against business practices, termed “deceptive acts or practices,” that pose a threat to free competition.

The Sherman Act

“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.” Northern Pacific Railway Co. v United States, 1, 4 (1958). The Sherman Act rests on the premise that the interaction of competitive forces will yield the best allocation of 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.

Section 1 of the Sherman Act — Restraint of Trade

Section 1 of the Sherman Act, found at 15 U.S.C. §1 (1988), provides that “every contract, combination, in the form of a trust or otherwise, or conspiracy, in restraint of trade … is declared to be illegal.” However, since every agreement between an individual and corporation or between individuals involved in a commercial activity restrains trade to a certain degree, the Supreme Court has consistently interpreted the broad language of Section 1 to prohibit restraints which unreasonably restrict competition. There are, however, some practices that are so pernicious that they will be deemed illegal under all circumstances under a per se analysis. The Act prohibits only concerted (i.e., joint) action by two or more parties in restraint of trade. Thus, in determining whether a particular restraint or activity is unlawful, courts apply two tests, namely the rule of reason and the per se rule, both of which are discussed below.

The Rule of Reason

A rule of reason analysis, outlined by Justice Louis Brandeis in Board of Trade of Chicago v. United States (1918), and previously enunciated in Standard Oil of New Jersey v. United States (1911) tests the legality of a particular business practice by examining whether the practice promotes or suppresses competition. Some of the factors considered by the courts in applying the rule of reason includes (i) the positive and negative competitive impacts; business conditions before and after the restraint is imposed; the purpose and nature of the restraint; the intent of the party imposing the restraint; and the existence of less restrictive alternatives which could achieve the same goals.

 

Case Summary

The Standard Oil Company Of New Jersey Et Al v. U.S.

Supreme Court of the United States, 221 U.S. 1 (1911)

The facts, which involve the construction of the Sherman Anti-trust Act of July 2, 1890, and whether defendants had violated its provisions, are stated in the opinion.

Here is a brief statement of the facts of the case as found in the Court’s opinion:

That during said first period, the said individual defendants, in connection with the Standard Oil Company of Ohio, purchased and obtained interests through stock ownership and otherwise in, and entered into agreements with, various persons, firms, corporations, and limited partnerships engaged in purchasing, shipping, refining, and selling petroleum and its products among the various States for the purpose of fixing the price of crude and refined oil and the products thereof, limiting the production thereof, and controlling the transportation therein, and thereby restraining trade and commerce among the several States, and monopolizing the said commerce.

The Court decided that the Sherman Anti-trust Act of July 2, 1890, should be construed in the light of a rule of reason; and, as so construed, it prohibits all contracts and combination which amount to an unreasonable or undue restraint of trade in interstate commerce.

The Court decided that the combination of the defendants in this case was an “unreasonable and undue restraint of trade” in petroleum and its products moving in interstate commerce, and falls within the prohibitions of the act as so construed.

The Court looked at the history of the Sherman Act. It stated: “The terms “restraint of trade,” and “attempts to monopolize,” as used in the Anti-trust Act, took their origin in the common law and were familiar in the law of this country prior to and at the time of the adoption of the act, and their meaning should be sought from the conceptions of both English and American law prior to the passage of the act.”

Further, the Court noted that “At common law monopolies were unlawful because of their restriction upon individual freedom of contract and their injury to the public and at common law; and contracts creating the same evils were brought within the prohibition as impeding the due course of, or being in restraint of, trade.”

In its decision the Supreme Court ruled that the Sherman Act was not intended to restrain the right to make and enforce contracts, whether resulting from combinations or otherwise, which do not “unduly restrain interstate or foreign commerce,” but to protect commerce from contracts or combinations by methods, whether old or new, which would constitute an interference with, or an undue restraint upon, it.

The Sherman Act intended that the standard of the rule of reason which had been applied at the common law should be applied in determining whether particular acts were within its prohibitions.

In apply the Sherman Act to the actual facts of the case, the Supreme Court stated:

The unification of power and control over a commodity such as petroleum, and its products, by combining in one corporation the stocks of many other corporations aggregating a vast capital gives rise, of itself, to the prima facie presumption of an intent and purpose to dominate the industry connected with, and gain perpetual control of the movement of, that commodity and its products in the channels of interstate commerce in violation of the Anti-trust Act of 1890, and that presumption is made conclusive by proof of specific acts such as those in the record of this case.

The Court also commented about the remedy to be applied once the Courts decide that an antitrust violation has been determined:

The remedy to be administered in case of a combination violating the Anti-trust Act is two-fold: first, to forbid the continuance of the prohibited act, and second, to so dissolve the combination as to neutralize the force of the unlawful power.

Finally, the Court made a general comment regarding the relationship of antitrust law to normal business practices.

The constituents of an unlawful combination under the Anti-trust Act should not be deprived of power to make normal and lawful contracts, but should be restrained from continuing or recreating the unlawful combination by any means whatever; and a dissolution of the offending combination should not deprive the constituents of the right to live under the law but should compel them to obey it.

In determining the remedy against an unlawful combination, the court must consider the result and not inflict serious injury on the public by causing a cessation of interstate commerce in a necessary commodity.

Now, look carefully at a case which was decided under a rule of reason analysis:

 

Case Summary

CALIFORNIA DENTAL ASSOCIATION v. FTC

Supreme Court of the United States, 526 U.S. 756 (1999)

Petitioner California Dental Association (CDA), a nonprofit association of local dental societies to which about three-quarters of the State’s dentists belong, provides desirable insurance and preferential financing arrangements for its members, and engages in lobbying, litigation, marketing, and public relations for members’ benefit. Members agree to abide by the CDA’s Code of Ethics, which, inter alia, prohibits false or misleading advertising. The CDA has issued interpretive advisory opinions and guidelines relating to advertising. Respondent Federal Trade Commission brought a complaint, alleging that the CDA violated §5 of the Federal Trade Commission Act (Act), 15 U .S. C. §45, in applying its guidelines so as to restrict two types of truthful, nondeceptive advertising: price advertising, particularly discounted fees, and advertising relating to the quality of dental services. An Administrative Law Judge (ALJ) held the Commission to have jurisdiction over the CDA and found a §5 violation. As relevant here, the Commission held that the advertising restrictions violated the Act under an abbreviated rule-of-reason analysis. In affirming, the Ninth Circuit sustained the Commission’s jurisdiction and concluded that an abbreviated or “quick look” rule-of-reason analysis was proper in this case.

Held:

1. The Commission’s jurisdiction extends to an association that, like the CDA, provides substantial economic benefit to its for-profit members. The Act gives the Commission authority over a “corporatio[n],” 15 U. S. C. §45(a)(2), “organized to carry on business for its own profit or that of its members,” §44. The Commission’s claim that the Act gives it jurisdiction over nonprofit associations whose activities provide substantial economic benefits to their for-profit members is clearly the better reading of the Act, which does not require that a supporting organization must devote itself entirely to its members’ profits or say anything about how much of the entity’s activities must go to raising the members’ bottom lines. There is thus no apparent reason to let the Act’s application turn on meeting some threshold percentage of activity for this purpose or even a softer formulation calling for a substantial part of the entity’s total activities to be aimed at its members’ pecuniary benefit. The Act does not cover all membership organizations of profit-making corporations without more. However, the economic benefits conferred upon CDA’s profit-seeking professionals plainly fall within the object of enhancing its members’ “profit,” which is the Act’s jurisdictional touchstone. The Act’s logic and purpose comport with this result, and its legislative history is not inconsistent with this interpretation.

2. Where any anticompetitive effects of given restraints are far from intuitively obvious, the rule of reason demands a more thorough enquiry into the consequences of those restraints than the abbreviated analysis the Ninth Circuit performed in this case.

(a) An abbreviated or “quick-look” analysis is appropriate when an observer with even a rudimentary understanding of economics could conclude that the arrangements in question have an anticompetitive effect on customers and markets. See, e.g., National Collegiate Athletic Assn. v. Board of Regents of Univ. of Okla., 468 U. S. 85. This case fails to present a situation in which the likelihood of anticompetitive effects is comparably obvious, for the CDA’s advertising restrictions might plausibly be thought to have a net procompetitive effect or possibly no effect at all on competition.

(b) The discount and nondiscount advertising restrictions are, on their face, designed to avoid false or deceptive advertising in a market characterized by striking disparities between the information available to the professional and the patient. The existence of significant challenges to informed decision making by the customer for professional services suggests that advertising restrictions arguably protecting patients from misleading or irrelevant advertising call for more than cursory treatment. In applying cursory review, the Ninth Circuit brushed over the professional context and described no anticompetitive effects from the discount advertising bar. The CDA’s price advertising rule appears to reflect the prediction that any costs to competition associated with eliminating across-the-board advertising will be outweighed by gains to consumer information created by discount advertising that is exact, accurate, and more easily verifiable. This view may or may not be correct, but it is not implausible; and neither a court nor the Commission may initially dismiss it as presumptively wrong. The CDA’s plausible explanation for its nonprice advertising restrictions, namely that restricting unverifiable quality claims would have a procompetitive effect by preventing misleading or false claims that distort the market, likewise rules out the Ninth Circuit’s use of abbreviated rule-of-reason analysis for those restrictions. The obvious anticompetitive effect that triggers such analysis has not been shown.

(c) Saying that the Ninth Circuit’s conclusion required a more extended examination of the possible factual underpinnings than it received is not necessarily to call for the fullest market analysis. Not every case attacking a restraint not obviously anticompetitive is a candidate for plenary market examination. There is generally no categorical line between restraints giving rise to an intuitively obvious inference of anticompetitive effect and those that call for more detailed treatment. What is required is an enquiry meet for the case, looking to a restraint’s circumstances, details, and logic. Here, a less quick look was required for the initial assessment of the CDA’s advertising restrictions.

Vacated and remanded.

The Per Se Rule

Under a per se analysis, courts exercise limited analysis and focus on whether the conduct in question falls within a category which is deemed to be manifestly anticompetitive under all or most circumstances. Under this approach, the business activity or practice is presumed illegal and the courts will not inquire as to the precise harm the conduct may have caused.

Horizontal Restraints of Trade

Horizontal restraints are those among competitors at the same level of the market structure (among manufacturers, distributors, wholesalers, or sellers who are competitors in the marketplace). The most common forms of horizontal restraints are discussed below.

Horizontal Price Fixing

Horizontal price fixing is considered to be one of the most serious antitrust offenses. Price fixing involves agreements between competitors for the purpose, and with the effect, of raising, depressing, fixing, pegging, or stabilizing the price of products or services. Horizontal price fixing is a per se violation of the antitrust laws. In order to constitute per se illegal price fixing, prices do not have to be fixed at a uniform rate. A violation can occur even in situations where competitors agree on a price range, a pricing formula, or an arrangement aimed at stabilizing current prices. Agreements to fix prices among competitors are not excused by any defense or justification. “Whatever economic justification particular price fixing agreements may be thought to have, the law does not permit inquiry into their reasonableness. They are all banned because of their actual or potential threat to the central nervous system of the economy.” United States v. Socony-Vacuum Oil Co., 310 U.S. at 225 n.59. [However, in its 1997 term, the Supreme Court ruled that the setting of a maximum price by a manufacturer would henceforth be judged under a rule of reason rather than a per se analysis. This would seem to be a major break from nearly a half-century of its prior case analysis—although the circumstances involved a vertical restraint.]

Note, certain businesses which are subject to government regulation (for example, airlines, railroads, shipping, stock exchanges, insurance companies, banks) may be permitted to “fix” or set prices or rates without violating the antitrust laws if the appropriate governmental agency has determined that the rates set are in the “public interest.” There are also several other general exemptions from antitrust law including: agricultural marketing cooperatives; bona fide labor union activities; bona fide collective bargaining activities; and professional baseball, through the operation of precedent or stare decisis as determined in Federal Baseball Club v. National League (1922).

The following case illustrates horizontal price fixing.

 

Case Summary

FTC v. Superior Court Trial Lawyers Association

Supreme Court of the United States, 493 U.S. 411 (1990)

Lawyers in private practice who acted as court-appointed counsel for indigent defendants in criminal cases in District of Columbia Superior Court petitioned for review of determination by Federal Trade Commission that lawyers violated antitrust law by organizing and participating in boycott aimed at forcing increase of compensation paid to them.

A group of lawyers in private practice who regularly acted as court-appointed counsel for indigent defendants in District of Columbia criminal cases agreed at a meeting of the Superior Court Trial Lawyers Association (SCTLA) to stop providing such representation until the District increased group members’ compensation. The boycott had a severe impact on the District’s criminal justice system, and the District government capitulated to the lawyers’ demands. After the lawyers returned to work, petitioner Federal Trade Commission (FTC) filed a complaint against SCTLA and four of its officers (respondents), alleging that they had entered into a conspiracy to fix prices and to conduct a boycott that constituted unfair methods of competition in violation of §5 of the FTC Act. Declining to accept the conclusion of the Administrative Law Judge (ALJ) that the complaint should be dismissed, the FTC ruled that the boycott was illegal per se and entered an order prohibiting respondents from initiating future such boycotts. The Court of Appeals, although acknowledging that the boycott was a “classic restraint of trade” in violation of §1 of the Sherman Act, vacated the FTC order. Reasoning that this test could not be satisfied by the application of an otherwise appropriate per se rule, but instead requires the enforcement agency to prove rather than presume that the evil against which the antitrust laws are directed looms in the conduct it condemns, the court remanded for a determination whether respondents possessed “significant market power.”

Held:

Respondents’ boycott constituted a horizontal arrangement among competitors that was unquestionably a naked restraint of price and output in violation of the antitrust laws. Respondents’ proffered social justifications for the restraint of trade do not make the restraint any less unlawful. Nor is respondents’ agreement outside the coverage of the antitrust laws under simply because its objective was the enactment of favorable legislation. The undenied objective of this boycott was to gain an economic advantage for those who agreed to participate.

Division of Markets

Agreements among competitors to divide markets are illegal per se. The per se rule applies regardless of whether the division is based upon geography, customers, the type of transaction, the product involved, or the sequence, e.g., only Firm-A will participate in the first bid and only Firm-B will participate in the second bid. This rule also applies to reciprocal agreements among potential customers; it is per se illegal to agree not to enter a competitor’s market in exchange for its not entering your market.

Case Summary

Palmer v. BRG Of Georgia, Inc.

Supreme Court of the United States, 48 U.S. 46 (1990)

A former law student brought action against providers of bar review courses, alleging that arrangement between the providers pursuant to which one of them withdrew from the Georgia market was violative of the Sherman Act.

In preparation for the 1985 Georgia Bar Examination, petitioners contracted to take a bar review course offered by respondent BRG of Georgia, Inc. (BRG). In this litigation they contend that the price of BRG’s course was enhanced by reason of an unlawful agreement between BRG and respondent Harcourt Brace Jovanovich Legal and Professional Publications (HBJ), the Nation’s largest provider of bar review materials and lecture services. The central issue is whether the 1980 agreement between respondents violated §1 of the Sherman Act. HBJ began offering a Georgia bar review course on a limited basis in 1976, and was in direct, and often intense, competition with BRG during the period from 1977 to 1979. BRG and HBJ were the two main providers of bar review courses in Georgia during this time period. In early 1980, they entered into an agreement that gave BRG an exclusive license to market HBJ’s material in Georgia and to use its trade name “Bar/Bri.” The parties agreed that HBJ would not compete with BRG in Georgia and that BRG would not compete with HBJ outside of Georgia. Under the agreement, HBJ received $100 per student enrolled by BRG and 40% of all revenues over $350. Immediately after the 1980 agreement, the price of BRG’s course was increased from $150 to over $400.

In United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 60 S.Ct. 811, 84 L.Ed. 1129 (1940), we held that an agreement among competitors to engage in a program of buying surplus gasoline on the spot market in order to prevent prices from falling sharply was unlawful, even though there was no direct agreement on the actual prices to be maintained. We explained that “[u]nder the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.” Id., at 223, 60 S.Ct., at 844.

The revenue-sharing formula in the 1980 agreement between BRG and HBJ, coupled with the price increase that took place immediately after the parties agreed to cease competing with each other in 1980, indicates that this agreement was “formed for the purpose and with the effect of raising” the price of the bar review course.

In United States v. Topco Associates, Inc., 405 U.S. 596, 92 S.Ct.1126, 31 L.Ed.2d 515 (1972), we held that agreements between competitors to allocate territories to minimize competition are illegal: “One of the classic examples of a per se violation of §1 is an agreement between competitors at the same level of the market structure to allocate territories in order to minimize competition…. This Court has reiterated time and time again that ‘[h]orizontal territorial limitations … are naked restraints of trade with no purpose except stifling of competition.’ Such limitations are per se violations of the Sherman Act.” Id. at 608, 92 S.Ct., at 1133-34. The defendants in Topco had never competed in the same market, but had simply agreed to allocate markets. Here, HBJ and BRG had previously competed in the Georgia market; under their allocation agreement, BRG received that market, while HBJ received the remainder of the United States. Each agreed not to compete in the other’s territories. Such agreements are anticompetitive regardless of whether the parties split a market within which both do business or whether they merely reserve one market for one and another for the other.

The petition for a writ of certiorari is granted, the judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

Group Boycotts (Concerted Refusals to Deal)

A group boycott, also called a concerted refusal to deal, exists when a group of companies agree to refrain from dealing with another company or companies in order to gain a competitive advantage by forcing the acceptance of certain conditions or by forcing another company or companies out of business. Traditionally, concerted refusals to deal were per se illegal. However, recent decisions of the United States Supreme Court have determined that not all cases involving a refusal to deal would be judged under the per se rule. Although the Supreme Court has not articulated a precise rule, the Court has suggested that the per se rule would be applicable only where the refusal to deal denies the plaintiff access to a supply or facility necessary to be a viable competitor. Since 1985, the majority of the cases involving group boycotts have been analyzed under the rule of reason. The per se approach has generally been limited to cases in which firms with market power boycott suppliers or customers to discourage them from doing business with a competitor.

An important defense to a claim of a group boycott or a concerted refusal to deal is the “business judgment rule.” This defense may be used where a defendant can prove that a decision not to deal with a particular party was based on sound business reasons including business experience, financial ability, or “moral character,” especially as this term may relate to the intangible element of “good will” in a business. The business judgment rule is a frequent defense offered in cases involving franchising or in a variety of labor disputes.

Other Horizontal Agreements

Other agreements among competitors are analyzed under the rule of reason, which balances the pro-competitive and anticompetitive effects of any agreement. Examples of such agreements include, but are not limited to, exchange of information, trade association activities, and joint venture activities.

Vertical Restraints of Trade

Vertical restraints are those that involve firms at different levels of the distribution or marketing chain — in particular between suppliers and customers. Antitrust laws involve two basic categories of vertical restraints: (a) vertical price restraints; and (b) non-price vertical restraints.

Vertical Price Restraints

Vertical price restraints are directed at independent wholesalers and retailers who sell the manufacturer’s products. A vertical price restraint involves an agreement between a manufacturer and a wholesaler or retailer where the manufacturer fixes or sets the price at which the wholesaler or retailer may resell the product. Until recently, such agreements were judged to be illegal per se. Today, however, courts have begun to utilize a rule of reason approach in cases where a franchisor sets a uniform price in order to assure quality control or to support a national advertising campaign.

One exception to a finding of a vertical price restraint occurs in a consignment sale. In a situation where there is a consignment of products in which the manufacturer retains the title, ownership, and risk of loss, and the seller has the right of return of any unsold goods, establishing the resale price may not be unlawful. United States v. General Elec. Co., 272 U.S. 476 (1926). In addition, a seller may advertise or print on the product a “suggested resale price.” Suggesting a resale prices is currently not a violation of the antitrust laws where a retailer is free to charge a higher or a lower price so long as the seller does no more than merely “suggest the price.” A practice called “active exhortation” may run afoul of the “mere suggestion” exception.

Price fixing — both horizontal (between competitors) or vertically (businesses within a marketing chain) may be difficult to prove through overt actions or direct proof. Thus, the Department of Justice often relies on a theory called conscious parallelism in order to make out its case. The doctrine of conscious parallelism may be found in Interstate Circuit where the court held that evidence of a conspiracy between filmmakers was able to be inferred through the unanimity of agreements between the parties and not necessarily through direct evidence. At its essence, conscious parallelism permits the plaintiff to prove price fixing through circumstantial evidence where there is:

  • Knowledge of pricing of competitors;
  • Motivation to keep prices high; and
  • Substantial unanimity (roughly +/-5 %) of the prices of each of the parties involved.

 

Case Summary

Interstate Circuit v. U.S.

Supreme Court of the United States, 306 U.S. 208 (1938)

PER CURIAM.

The Government brought this suit for an injunction against the carrying out of an alleged conspiracy, in restraint of interstate commerce, between distributors and exhibitors of motion picture films. The restraint was alleged to consist in provisions in license agreements which prevented any ‘feature picture’ of the distributors, which had been shown ‘first-run’ in a theater of the defendant exhibitor at an admission price of 40 cents or more, from thereafter being exhibited in the same locality at an admission price of less than 25 cents or on the same program with another feature picture. [304 U.S. 55, 56] The evidence was presented by an agreed statement of certain facts and by oral testimony on behalf of each party. The District Court entered a final decree adjudging that in making the restrictive agreements the distributors had engaged in a conspiracy with the exhibitor, Interstate Circuit, Inc., and its officers in violation of the Anti-Trust Act, 15 U.S. C.A. 1 et seq., and granting a permanent injunction against the enforcement of the restrictions. 20 F.Supp. 868. The case comes here on direct appeal.

Equity Rule 70 1/2, 28 U.S.C.A. following section 723, provides: ‘In deciding suits in equity, including those required to be heard before three judges, the court of first instance shall find the facts specially and state separately its conclusions of law thereon; …

‘Such findings and conclusions shall be entered of record and, if an appeal is taken from the decree, shall be included by the clerk in the record which is certified to the appellate court under rules 75 and 76.’

The District Court did not comply with this rule. The court made no formal findings. The court did not find the facts specially and state separately its conclusions of law as the rule required. The statements in the decree that in making the restrictive agreements the parties had engaged in an illegal conspiracy were not ultimate conclusions and did not dispense with the necessity of properly formulating the underlying findings of fact.

The opinion of the court was not a substitute for the required findings. A discussion of portions of the evidence and the court’s reasoning in its opinion do not constitute the special and formal findings by which it is the duty of the court appropriately and specifically to determine all the issues which the case presents. This is an essential aid to the appellate court in reviewing an equity case, Railroad Commission v. Maxcy, 281 U.S. 82, cited, and compliance with the rule is particularly important in an anti-trust case which comes to this Court by direct appeal from the trial court.

The Government contends that the distributors were parties to a common plan constituting a conspiracy in restraint of commerce; that each distributor would benefit by unanimous action, whereas otherwise the restrictions would probably injure the distributors who imposed them, and that prudence dictated that ‘no distributor agree to impose the restrictions in the absence of agreement or understanding that his fellows would do likewise’; that the restraints were unreasonable, and that they had the purpose and effect of raising and maintaining the level of admission prices; that even if the distributors acted independently and not as participants in a joint undertaking, still the restraints were unreasonable in their effect upon the exhibitor’s competitors.

Appellants, asserting copyright privileges, contend that the restrictions were reasonable; that they were intended simply to protect the licensee from what would otherwise be an unreasonable interference by the distributors with the enjoyment of the granted right of exhibition; that there was no combination or conspiracy among the distributors; that it was to the independent advantage of each distributor to impose the restrictions in its own agreement and that the contention that less than substantially unanimous action would have injured the distributors in making such agreements was contrary to the evidence; and that the restrictions did not have an injurious effect.

We intimate no opinion upon any of the questions raised by these rival contentions, but they point the importance of special and adequate findings in accordance with the prescribed equity practice.

The decree of the District Court is set aside, and the cause is remanded, with directions to the court to state [304 U.S. 55, 58] its findings of fact and conclusions of law as required by Equity Rule 70 1/2, 28 U.S.C.A. following section 723.

It is so ordered.

Decree set aside, and cause remanded.

Non-Price Vertical Restraints

Non-price vertical restraints are generally subject to the rule of reason analysis. Non-price vertical restraints include practices such as termination or non-renewal of a dealer or of a franchise contract, reciprocal dealing, or other vertical territorial restrictions. The legality of such practices depends on a detailed review of the factual circumstances surrounding the restraint to determine whether a practice unreasonably restrains trade.

Section 2 of the Sherman Act — Monopolization

Section 2 of the Sherman Act, found at 15 U.S.C. §2 (1988), states: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire … to monopolize … shall be deemed guilty of a felony.” Thus, Section 2 addresses three offenses: monopolization, attempted monopolization, and conspiracy to monopolize. The focus of attention in this Chapter will be solely on the offense of monopolization.

The monopolization offense has two elements: (i) the possession of monopoly power in a relevant market; and (ii) the willful anticompetitive conduct that creates or perpetuates the monopoly power. Monopoly power is traditionally defined as the power to control market prices or exclude competition. Modern cases, while repeating that formulation, recognize that controlling price and excluding competition are interrelated sources of monopoly power. A relevant market involves both a product or a service and a geographic dimension. The relevant product market is determined principally by considering the reasonable interchangeability of use of the products or can include products interchangeable in production (i.e., if producers can swiftly and inexpensively switch from producing one product to producing the other). The relevant geographic market comprises the locations in which customers can reasonably turn to secure he product. Determining the geographic market depends upon such factors as transportation costs, the need for local sales or service operations, the presence of tariffs or other trade barriers, and the correlation in price movements between different areas.

Because of the difficulty of directly assessing whether a firm has the ability to control price, courts generally appraise monopoly power indirectly, starting with an analysis of market share. A high share of the relevant market will support a presumption of market power. Today, market shares in excess of 70% usually lead to a presumption of monopoly power; market shares below 50% virtually never do, and market shares between 50% and 70% sometimes do, especially as the market share approaches 70%.

In addition to possessing market power, a potential monopolist must also have willfully obtained or maintained that monopoly power in order to violate antitrust laws. However, the nature of the conduct is more important than the monopolist’s intent. Thus, a monopolist that intentionally attains or preserves its power through otherwise fair means, such as low prices, high quality, or clever advertising, does not ordinarily violate Section 2. A violation requires that the means chosen be “predatory” or “anticompetitive.” For example, predatory pricing consists of pricing a product below its relevant cost in order to drive competitors from the market in the short run and then recoup the short-run losses in the long run through monopoly pricing after the competition has bee vanquished. In international business, this practice is sometimes termed as “dumping.” (See Brooke Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993)).

 

Case Summary

United States v. Grinnell Corporation Et Al.

Supreme Court of the United States, 384 U.S. 563 (1966)

Grinnell manufactures plumbing supplies and fire sprinkler systems. It also owns 76% of the stock of ADT, 89% of the stock of AFA, and 100% of the stock of Holmes. ADT provides both burglary and fire protection services; Holmes provides burglary services alone; AFA supplies only fire protection service. Each offers a central station service under which hazard-detecting devices installed on the protected premises automatically transmit an electric signal to a central station. The central station is manned 24 hours a day. Upon receipt of a signal, the central station, where appropriate, dispatches guards to the protected premises and notifies the police or fire department direct. There are other forms of protective services. But the record shows that subscribers to accredited central station service (i.e., that approved by the insurance underwriters) receive reductions in their insurance premiums that are substantially greater than the reduction received by the users of other kinds of protection service. In 1961 accredited companies in the central station service business grossed $65,000,000. ADT, Holmes, and AFA are the three largest companies in the business in terms of revenue: ADT (with 121 central stations in 115 cities) has 73% of the business; Holmes (with 12 central stations in three large cities) has 12.5%; AFA (with three central stations in three large cities) has 2%. Thus the three companies that Grinnell controls have over 87% of the business.

Over the years ADT purchased the stock or assets of 27 companies engaged in the business of providing burglar or fire alarm services. Holmes acquired the stock or assets of three burglar alarm companies in New York City using a central station. Of these 30, the officials of seven agreed not to engage in the protective service business in the area for periods ranging from five years to permanently. After Grinnell acquired control of the other defendants, the latter continued in their attempts to acquire central station companies offers being made to at least eight companies between the years 1955 and 1961, including four of the five largest nondefendant companies in the business. When the present suit was filed, each of those defendants had outstanding an offer to purchase one of the four largest nondefendant companies.

In 1906, prior to the affiliation of ADT and Holmes, they made a written agreement whereby ADT transferred to Holmes its burglar alarm business in a major part of the Middle Atlantic States and agreed to refrain forever from engaging in that business in that area, while Holmes transferred to ADT its watch signal business and agreed to limit its activities to burglar alarm service and night watch service for financial institutions. While this agreement was modified several times and terminated in 1947, in 1961 Holmes still restricted its business to burglar alarm service and operated only in those areas which had been allocated to it under the 1906 agreement. Similarly, ADT continued to refrain from supplying burglar alarm service in those areas earlier allocated to Holmes. In 1907 Grinnell entered into a series of agreements with the other defendant companies and with Automatic Fire Protection Co. to the following effect: AFA received the exclusive right to provide central station sprinkler supervisory and waterflow alarm and automatic fire alarm service in New York City, Boston and Philadelphia, and agreed not to provide burglar alarm service in those cities or central station service elsewhere in the United States. Automatic Fire Protection Co. obtained the exclusive right to provide central station sprinkler supervisory and waterflow alarm service everywhere else in the United States except for the three cities in which AFA received that exclusive right, and agreed not to engage in burglar alarm service. ADT received the exclusive right to render burglar alarm and nightwatch service throughout the United States. (Under ADT’s 1906 agreement with Holmes, however, it could not provide burglar alarm services in the areas for which it had given Holmes the exclusive right to do so.) It agreed not to furnish sprinkler supervisory and waterflow alarm service anywhere in the country and not to furnish automatic fire alarm service in New York City, Boston or Philadelphia (the three cities allocated to AFA). ADT agreed to connect to its central stations the systems installed by AFA and Automatic. Grinnell agreed to furnish and install all sprinkler supervisory and waterflow alarm actuating devices used in systems that AFA and Automatic would install, and otherwise not to engage in the central station protection business. AFA and Automatic received 25% of the revenue produced by the sprinkler supervisory waterflow alarm service which they provided in their respective territories; ADT and Grinnell received 50% and 25%, respectively, of the revenue which resulted from such service. The agreements were to continue until February 1954. The agreements remained substantially unchanged until 1949 when ADT purchased all of Automatic Fire Protection Co.’s rights under it for $13,500,000. After these 1907 agreements expired in 1954, AFA continued to honor the prior division of territories; and ADT and AFA entered into a new contract providing for the continued sharing of revenues on substantially the same basis as before. In 1954 Grinnell and ADT renewed an agreement with a Rhode Island company which received the exclusive right to render central station service within Rhode Island at prices no lower than those of ADT and which agreed to use certain equipment supplied by Grinnell and ADT and to share its revenues with those companies. ADT had an informal agreement with a competing central station company in Washington, D.C., ‘that we would not solicit each other’s accounts.’ ADT over the years reduced its minimum basic rates to meet competition and renewed contracts at substantially increased rates in cities where it had a monopoly of accredited central station service. ADT threatened retaliation against firms that contemplated inaugurating central station service. And the record indicates that, in contemplating opening a new central station, ADT officials frequently stressed that such action would deter their competitors from opening a new station in that area.

Held: The entire accredited central station service business, including such services as automatic burglar alarms, automatic fire alarms, sprinkler supervisory service, and watch signal service, was properly treated as a single ‘relevant market’ in determining existence of monopolization, warranting judgment against defendants who exercised monopoly power over 87% of the business.

The Clayton Act

The primary antitrust statute applicable to mergers is Section 7 of the Clayton Act. A merger may occur when one corporation purchases the stock or assets of another corporation to give the acquiring corporation control over the acquired corporation. The combination of two or more corporations to form a new corporation is called a consolidation. A merger occurs when two or more corporations combine, but one of the combining firms remains in existence, and the other becomes part of or merges into the survivor corporation. Another situation exists where one corporation buys another corporation’s stock and both continue to exist. The buyer is the parent and the acquired corporation becomes the subsidiary. In some cases, a smaller corporation may be successful in “swallowing up” a larger corporation.

Section 7 of the Clayton Act prohibits mergers and acquisitions “in any line of commerce or in any activity affecting commerce in any section of the country, [where] the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” The term “line of commerce” refers to products or services offered by the companies involved in the merger and the term “section of the country” refers to the geographic location where the products or services of the merging companies are made available. Once the relevant line of commerce and section of the country are defined, the court will evaluate the acquisition to determine whether it is likely to substantially lessen competition or create a monopoly.

The most common types of mergers are horizontal mergers, vertical mergers, and conglomerate mergers. A horizontal merger occurs when the merging companies are actual competitors in the relevant product and geographic markets (e.g., between direct competitors such as Google and Facebook). By definition, a horizontal merger will eliminate actual competition; however, a horizontal merger does not automatically result in a violation of the antitrust laws. In evaluating its legality, courts will focus on market share and market concentration. If analysis reveals a high market share, a presumption of illegality is created which may be rebutted. The company would have to produce evidence of “other factors” which demonstrates that the market statistics do not reflect the current or future state of competition in the industry or that consumers would actual benefit by permitting the merger.

A vertical merger involves a merger of companies that have a supplier-customer relationship within a potential marketing chain, e.g., Disney and Pixar or by McDonald’s and the supplier of its straws or other paper products. A vertical merger raises antitrust concerns where the merger may eliminate either a source of supply or a purchaser of supplies and which may have the effect of foreclosing the competitive viability of the remaining companies in the market.

Factors considered by courts in determining the legality of vertical mergers will include trends in the industry, entry barriers, the number of competing suppliers, and the number of purchasers in the relevant market.

Conglomerate mergers are mergers that are neither horizontal nor vertical in nature, e.g., Walt Disney Pictures and American Broadcasting Company (ABC). They are categorized into three classifications: pure conglomerate mergers; product extension mergers; and market extension mergers. A pure conglomerate merger involves the merger of companies that are totally unrelated and have no core economic relationship, e.g., oil company merging with a garment company. A product extension merger occurs when two companies produce and sell non-competitive yet complementary products and the addition of the acquired company’s products reflects a logical extension the acquiring company’s product line. A market extension merger is a merger between two companies that manufacture and sell the same product but do not compete with each other in the same geographic market.

Various theories that have been relied on to successfully challenge conglomerate mergers such as entrenchment, reciprocity, and a foreclosure of potential competition. Entrenchment is premised on the theory that when a large company with substantial resources acquires a dominant company in a different market, the acquired firm will become entrenched in the market causing entry barriers and creating a monopoly situation.

The reciprocity theory has been applied in situations where one company agrees to purchase products from a second company if the second company agrees to purchase certain products it needs from the first company. This creates a situation where competitors of the merged company will be foreclosed from markets that are essential to their competitive viability. As a result, a Section 7, Clayton Act analysis may be invoked to ensure against possible violations.

The potential competition doctrine is based on the premise that the elimination of a potential competitor from a target market may lead to substantial lessening of competition. As a general rule, the threat of new competition keeps businesses more competitive. Ordinarily, the potential of a new entrant exerts a pro-competitive effect on companies doing business in a market. However, when a company enters a new market by acquiring another company already in that market, the perceived potential competition is lost (the new company now has an edge over the other existing companies). It is this perception that Section 7 of the Clayton Act seeks to enjoin.

If it can be established that one of the companies to the merger is a failing company, the fact will be considered by the courts as a possible justification for the otherwise anticompetitive merger. The parties seeking protection of the failing company defense have to prove that the company faces a grave probability of business failure and that the failing company has made a good faith effort to find alternative purchasers. The failing company defense reflects the view that the possible threat to competition by a merger is preferable to the impact on competition that would be caused if the failing company were to go out of business.

 

Case Summary

Cargill, Inc. & Excel Corporation v. Monfort Of Colorado, Inc.

Supreme Court of the United States, 479 U.S. 2014 (1986)

The Nation’s fifth largest beef packer brought action under Clayton Act to enjoin merger between second and third largest beef packers.

Section 16 of the Clayton Act entitles a private party to sue for injunctive relief against “threatened loss or damage by a violation of the antitrust laws.” Respondent, the country’s fifth-largest beef packer, brought an action in Federal District Court under §16 to enjoin the proposed merger of petitioner Excel Corporation, the second-largest packer, and Spencer Beef, the third-largest packer. Respondent alleged that it was threatened with a loss of profits by the possibility that Excel, after the merger, would lower its prices to a level at or above its costs in an attempt to increase its market share. During trial, Excel moved for dismissal on the ground that respondent had failed to allege or show that it would suffer antitrust injury, but the District Court denied the motion. After trial, the District Court held that respondent’s allegation of a “price-cost squeeze” that would severely narrow its profit margins constituted an allegation of antitrust injury. The Court of Appeals affirmed, holding that respondent’s allegation of a “price-cost squeeze” was not simply one of injury from competition but was a claim of injury by a form of predatory pricing in which Excel would drive other companies out of the market.

Held: 1.

A private plaintiff seeking injunctive relief under section 16 must show a threat of injury “of the type the antitrust laws were designed to prevent and that flows from that which makes defendants’ acts unlawful.” Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701. 2. The proposed merger does not constitute a threat of antitrust injury. A showing, as in this case, of loss or damage due merely to increased competition does not constitute such injury. And while predatory pricing is capable of inflicting antitrust injury, here respondent neither raised nor proved any claim of predatory pricing before the District Court, and thus the Court of Appeals erred in interpreting respondent’s allegations as equivalent to allegations of injury from predatory conduct. 3. This Court, however, will not adopt in effect a per se rule denying competitors standing to challenge acquisitions on the basis of predatory-pricing theories. Nothing in the Clayton Act’s language or legislative history suggests that Congress intended this Court to ignore injuries caused by such anticompetitive practices as predatory pricing.

Section 3 of the Clayton Act (15 USC §§12-27), reflects standards similar to those found in Section 1 of the Sherman Act in that it prohibits exclusive dealing arrangements and tying arrangements that may substantially lessen competition or tend to create a monopoly.

A tie-in agreement may occur when a supplier agrees to sell one product only on the condition that the buyer will also purchase a second product. (In franchising, the tying “product” may be a trademark or a service mark.) Tying is an important issue in the business format called franchising. The first product is referred to as the “tying product” while the second product is referred to as the “tied product.” The seller must have an economic interest in the tied product. Tie-in agreements are normally challenged under a rule of reason analysis. As a practical matter, courts will examine the likely effects that the tie-in will have on competition in the relevant market.

For example, a tie-in arrangement may be upheld in a franchise relationship where the franchisor attempts to justify the practice because of sophistication regarding specifications; issues relating to quality control; the necessity of product uniformity; where the product and the franchise is “practically indistinguishable” justification (in essence, there is only “one product”); or under the “new business” exception (usually, for no more than a 6-month period).

A tying arrangement may also be justified in a true “turn key” operation—where a franchisee purchases a fully equipped business operation—but stocked with no more “tied products” than might be required to do business for a limited period of time (normally, no more than a 3-month period).

An exclusive dealership is a situation where a manufacturer agrees with a dealer not to sell its products to other competing dealers within a certain geographic area. Generally, such arrangements are not in violation of antitrust laws absent an anticompetitive purpose. The law recognizes a manufacturer’s right to distribute his products to specific dealers of its own choice.

 

Case Summary

Illinois Tool Works, Inc. v. Independent Ink, Inc.

Supreme Court of the United States, 547 U.S. 28 (2006)

Petitioners manufacture and market printing systems that include a patented printhead and ink container and unpatented ink, which they sell to original equipment manufacturers who agree that they will purchase ink exclusively from petitioners and that neither they nor their customers will refill the patented containers with ink of any kind. Respondent developed ink with the same chemical composition as petitioners’ ink. After petitioner Trident’s infringement action was dismissed, respondent filed suit seeking a judgment of noninfringement and invalidity of Trident’s patents on the ground that petitioners are engaged in illegal “tying” and monopolization in violation of §§ 1 and 2 of the Sherman Act. Granting petitioners summary judgment, the District Court rejected respondent’s argument that petitioners necessarily have market power as a matter of law by virtue of the patent on their printhead system, thereby rendering the tying arrangements per se violations of the antitrust laws. After carefully reviewing this Court’s tying-arrangements decisions, the Federal Circuit reversed as to the §1 claim, concluding that it had to follow this Court’s precedents until overruled by this Court.

Held:

Because a patent does not necessarily confer market power upon the patentee, in all cases involving a tying arrangement, the [***31] plaintiff must prove that the defendant has market power in the tying product.

(a) Over the years, this Court’s strong disapproval of tying arrangements has substantially diminished, as the Court has moved from relying on assumptions to requiring a showing of market power in the tying product. The assumption in earlier decisions that such “arrangements serve hardly any purpose beyond the suppression of competition,” Standard Oil Co. of Cal. v. United States, 337 U.S. 293, 305-306, 69 S. Ct. 1051, 93 L. Ed. 1371, was rejected in United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 622, 97 S. Ct. 861, 51 L. Ed. 2d 80 (Fortner II), and again in Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 104 S. Ct. 1551, 80 L. Ed. 2d 2, both of which involved unpatented tying products. Nothing in Jefferson Parish suggested a rebuttable presumption of market power applicable to tying arrangements involving a patent on the tying good.

(b) The presumption that a patent confers market power arose outside the antitrust context as part of the patent misuse doctrine, and migrated to antitrust law in Inter- national Salt Co. v. United States, 332 U.S. 392, 68 S. Ct. 12, 92 L. Ed. 20. See also Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 62 S. Ct. 402, 86 L. Ed. 363, 1942 Dec. Comm’r Pat. 733; United States v. Loew’s Inc., 371 U.S. 38, 83 S. Ct. 97, 9 L. Ed. 2d 11.

(c) When Congress codified the patent laws for the first time, it initiated the untwining of the patent misuse doctrine and antitrust jurisprudence. At the same time that this Court’s antitrust jurisprudence continued to rely on the assumption that tying arrangements generally serve no legitimate business purpose, Congress began chipping away at that assumption in the patent misuse context from whence it came. Then, four years after Jefferson Parish repeated the presumption that patents confer market power, Congress amended the Patent Code to eliminate it in the patent misuse context. While that amendment does not expressly refer to the antitrust laws, it invites reappraisal of International Salt’s per se rule. After considering the congressional judgment reflected in the amendment, this Court concludes that tying arrangements involving patented products should be evaluated under the standards of cases like Fortner II and Jefferson Parish rather than the per se rule in Morton Salt and Loew’s. Any conclusion that an arrangement is unlawful must be supported by proof of power in the relevant market rather than by a mere presumption thereof.

(d) Respondent’s alternatives to retention of the per se rule–that the Court endorse a rebuttable presumption that patentees possess market power when they condition the purchase of the patented product on an agreement to buy unpatented goods exclusively from the patentee, or differentiate between tying arrangements involving requirements ties and other types of tying arrangements–are rejected.

(e) Because respondent reasonably relied on this Court’s prior opinions in moving for summary judgment without offering evidence of the relevant market or proving petitioners’ power within that market, respondent should be given a fair opportunity to develop and introduce evidence on that issue, as well as other relevant issues, when the case returns to the District Court. 396 F.3d 1342, vacated and remanded.

The Federal Trade Commission Act

The Federal Trade Commission Act (15 USC §§41-51) was enacted in 1914. Section 5(a)(1) prohibits “unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce.” The Act also created the Federal Trade Commission (FTC), an administrative agency with broad powers of enforcement of antitrust laws. The FTC is charged with exclusive authority to enforce Section 5 of the FTC Act or to seek damages for such violations. The public has no right to bring an action under the FTC Act; although FTC actions frequently arise on the basis of consumer complaints, often posted on the FTC website.

 

Case Study

Lippa’s, Inc. v. Lenox, Inc.

United States District Court for the District of Vermont, 305 F. Supp. 182 (1969)

Procedural Posture

Defendant moved to dismiss plaintiff’s private antitrust action on the grounds that service was improper and the statute of limitations had run.

Overview

Plaintiff retailer brought a private antitrust action against defendant manufacturer over its resale price maintenance system, a part of which prohibited transshipping. Defendant filed a motion to dismiss contending service was improper and the statute of limitations had run. The court denied defendant’s motion. Defendant was properly served under the Clayton Act §12, 15 U.S.C.S. §22, and under § 5(b) a pending Federal Trade Commission (FTC) proceeding brought under the Federal Trade Commission Act (FTCA) for retail price maintenance against defendant tolled the statute of limitations. Section 5(b) tolls the statute of limitations in a private action during the pendency of a related proceeding instituted by the United States and for one year after. Proceedings have tolling effect if they are brought to restrain, punish or prevent antitrust law violations. There was no doubt that the FTC complaint was brought either to prevent or restrain violations of any of the antitrust laws. The private action need be only substantially the same, not identical, to satisfy the statute.

Outcome

Defendant’s motion to dismiss was denied because plaintiff’s private antitrust action was substantially similar to the government’s pending proceeding, and the statute of limitations was tolled.

Other Important Statutes

Several other statutes are relevant to the discussion of antitrust. While they will not be discussed in detail, they are nevertheless important in determining proper or improper behavior on the part of market participants.

  • The Robinson-Patman Act (1936), amending Section 2 of the Clayton Act, dealing with price discrimination;
  • The Miller-Tydings Act (1937), amending Section 1 of the Sherman Act, exempting resale price maintenance agreements (so-called “fair trade” agreements which are no longer valid) between a manufacturer and a dealer;
  • The Cellar-Kefauver Act (1952), dealing with anti-merger provisions;
  • The Bank Merger Act of 1966, requiring that all bank mergers must be approved in advance by the banking regulatory agency having jurisdiction, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Comptroller of the Currency;
  • The Hart-Scott-Rodino Act of 1976 introduced a pre-merger requirement into the area of mergers, requiring that both the acquiring company with sales of $100 million and the acquired firm with sales of $10 million or more, must file a notice of merger with the Department of Justice and the FTC 30 days before the merger is finalized.

 

Ethical Considerations

Use Of “Likeness”

Is it ethical for a university to profit from using the “likeness” of one its its athletes without compensating the athlete? Should the award of a scholarship be considered “enough” compensation? Several courts have ruled that such practices violate the Sherman Act’s prohibition against “contracts, combinations or conspiracies” in restraint of trade.

Per Se Rule

Should the “per se” rule in antitrust cases be eliminated? Why shouldn’t the government be required to prove anti-competitive effects in all cases arising under the antitrust laws?

Antitrust v. Labor Law

Do some research on the “non-statutory labor exemption” from antitrust. Do you agree that the collective bargaining process should “trump” the application of antitrust rules to a specific transaction? Under what circumstances?

 

Questions

  1. What rule did the Court enunciate in the Standard Oil case, found above.
  2. What is the import of the Court’s finding that Microsoft “did not export the copies of Windows installed on the foreign-made computers in question”?
  3. What are treble damages in antitrust enforcement cases? When is it appropriate for a court to order treble damages?
  4. Why doesn’t a court analyze antitrust cases under a “per se” rule?
  5. Find a case in the area of sports law involving antitrust. What rule did the court employ in its analysis.
  6. What types of conduct might certain business, otherwise exempted from antitrust scrutiny, engage in that would be a violation if committed by another business entity not so exempted?
  7. Outline the three areas of analysis under the “business judgment rule.”
  8. What is the danger of permitting a car manufacturer to purchase business that supply parts necessary to the final construction of an automobile?
  9. Provide an example of the “practically indistinguishable” exception to the rule against an illegal tie-in.
  10. Find the website of the FTC and cite some recent examples of consumer complaints regarding dangerous products.

Chapter Eighteen | Employment Discrimination

Introduction

Title VII of the Civil Rights Act of 1964 (Title VII) (and amendments) applies to employers with 15 or more employees involved in interstate commerce. Title VII prohibits employers from discriminating against prospective and current employees in the workplace in hiring, upgrading, compensating, firing, promoting, training, transferring, appraising; and in relation to “other terms and conditions of employment” based on race, sex, color, religion, and national origin. Title VII also applies to employment agencies and to employers in charge of training or apprenticeship programs.

The Civil Rights Act Of 1964

Title VII

Specifically Title VIII of the act provides:
“It shall be an unlawful employment practice for an employer —
  • to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin; or
  • to limit, segregate, or classify his employees or applicants for employment in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s race, color, religion, sex, or national origin.”
Title VII does not apply to every employer but rather, it is limited to the following:
  • Employers with at least 15 employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year
  • Labor Unions with at least 15 employees;
  • State and local government entities;
  • Employment agencies who provide workers to companies covered by Title VII; and
  • US citizens employed in foreign countries by a US employer or a US controlled employer.
Certain employment situations are not subject to Title VII, including employment of aliens outside the U.S., religious entities (including educational institutions) when employing individuals of a particular religion to perform work connected with carrying on of the entity’s activities, the Congress of the United States, and elected state representatives.
 
Even though Title VII has a minimum threshold requirement on the number of employees, employers who fall below the 15 employee requirement are generally not free from employment regulation in the area of discrimination. Many states have passed laws prohibiting discrimination in employment for employers with less than fifteen employees. State anti-discrimination statutes may afford employees additional protections beyond Title VII, but may not reduce the protections of the Act. For example, the New Jersey Law Against Discrimination (LAD) (N.J.S.A. 10:5-1 et seq.) prohibits discrimination against the protected classes in Title VII relating to race, sex, color, religion and national origin without respect to minimum employer numbers and in fact offers additional protections extending to sexual orientation and gender identity.
 
In 1991, Title VII was amended to protect U.S. citizens employed in foreign countries by a U.S. employer or a U.S. “controlled” employer.
 
Employers are prohibited from retaliating against employees who bring charges of discrimination, testify, assist, or participate in enforcement proceedings. 42 U.S. Code § 2000e-3(a)

Title VII Enforcement 

The Equal Employment Opportunity Commission (EEOC), created pursuant to the Equal Employment Opportunity Act of 1972, and the Department of Justice enforce the provisions of the Civil Rights Act. Members of the EEOC are appointed by the President, by and with the advice and consent of the Senate, for a term of five years. The Department of Justice enforces Civil Rights actions against state and local governments upon referral from the EEOC.
 
In seeking redress under the law, an individual alleging violation of Title VII must file a complaint with the local office of the EEOC within 180 days of any adverse job action.
In actions instituted at the state level, the EEOC works with, and generally defers to, state Equal Employment Opportunity (EEO) agencies for up to 60 days at the end of which the EEOC will commence a preliminary investigation. During and immediately after the investigation, the EEOC is required by statute to engage in conciliation negotiations in an attempt to settle the case. If efforts at conciliation fail, the EEOC may choose to file suit in U.S. District Court against the employer on the employee’s behalf, or may decide not to take any action at all. After 180 days have passed from the time of the complaint, the employee may demand that the EEOC issue a “right to sue letter,” entitling the employee to file a lawsuit in U.S. District Court.

Title VII Damages and Remedies

Depending on the nature of the complaint, and whether it involves intentional or unintentional discrimination, employees claiming discrimination under Title VII may seek monetary damages and equitable remedies. All claimants under Title VII can seek court costs, expert’s fees, and attorney fees.
 
Monetary damages can include both compensatory and punitive damages. Compensatory damages include back pay — lost wages and benefits; front pay, if it is unreasonable for the employee to continue to work for the employer — including costs associated with job searches; reputational harm; emotional distress; pain and suffering; and medical expenses. Compensatory damages are capped as follows based upon the number of employees in the previous year:
  • 15 to 100 employees — $50,000.00
  • 101 to 200 employees — $100,000.00
  • 201 to 500 employees — $200,000.00
  • 501 or more employees — $300,000.00
Punitive damages may be awarded if the employer “engaged in a discriminatory practice or discriminatory practices with malice or with reckless indifference to the federally protected rights of an aggrieved individual.” (42 U.S. Code § 1981a(b)). The award of punitive damages is not automatic. The courts will look to several factors including the intent of the employer; whether the employer was aware of the discrimination; the policies of the employer; and whether the employer disregarded its own policies.
 
Equitable remedies seek to put the employee in the economic position he/she would have been had the discrimination not occurred. Equitable remedies include hiring, reinstatement, promotion, and a possible injunction — enjoining the alleged discriminatory employment practice(s) and any future conduct of the employer.
 
The awarding of damages and remedies are dependent upon the type of discrimination claim. Disparate treatment (intentional discrimination) claims include requests for monetary damages and equitable remedies discussed above. In disparate treatment or mixed motives discrimination claims, the damages and remedies of the plaintiff may be limited. If the employer can prove that it acted with mixed motives and that it would have made the same employment decision in any case, the employee may receive declaratory relief, injunctive relief, attorney’s fees and costs, but may not receive monetary damages (compensatory or punitive) or the equitable remedies of reinstatement, hiring, promotion, or payment. In disparate impact discrimination claims, remedies include equitable relief and attorney’s fees, but no compensatory or punitive damages. The different types of discrimination claims are discussed in the following sections.

Title VII Discrimination Theories 

There are three primary theories for proving discrimination under Title VII: (1) disparate treatment, (2) mixed motives discrimination, and (3) disparate impact discrimination.

Disparate Treatment Discrimination

Considered as overt or intentional discrimination, disparate treatment discrimination occurs when an employee can show that he/she was treated differently because of race, color, sex, religion, or national origin. Disparate treatment discrimination applies to hiring, firing, promotions, post-employment references, transfers, or any term or condition of employment.
 
In McDonnell Douglas Corp. v. Green, 421 U.S. 792 (1973), the Supreme Court heard the case of an African-American mechanic who had been laid off during a workforce reduction and was not rehired. Green claimed that he was not rehired because he protested alleged racial inequality at the plant. The Supreme Court established the following elements necessary to prove disparate treatment discrimination:
 
First, the plaintiff-employee must prove a “prima facie” case of discrimination by establishing the following four steps: (1) Plaintiff belongs to a racial minority (or some protected class); (2) Plaintiff applied for and was qualified for the position; (3) Plaintiff, despite his/her job qualifications, was rejected for employment; (4) After plaintiff’s rejection, someone else was hired for the position.
 
Second, once these four elements are satisfied, the burden of proof shifts to the employer-defendant. The employer must present evidence that its decision was based upon a legitimate, non-discriminatory reason. These reasons may include educational requirements, merit, productivity, the presence of a valid seniority system, or a number of other non-discriminatory reasons used to reach a hiring decision. Employers may also raise affirmative defenses such as a bona fide occupational qualification (BFOQ) and business necessity. These defenses are more fully discussed in the next section.
 
Third, the burden of proof then shifts back to the employee to show that the employer illegally discriminated against him/her and to show that the employer’s reasons were a mere pretext for discrimination. (McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)).

Mixed Motives Discrimination

Title VII was amended after the 1989 decision in Price Waterhouse v. Hopkins, 490 U.S. 222 (1989), in order to recognize that in some employment discrimination cases, the employer will mix permissible and impermissible reasons for a otherwise discriminatory employment decision or practice. Title VII specifically provides:
“an unlawful employment practice is established when the complaining party demonstrates that race, color, religion, sex, or national origin was a motivating factor for any employment practice, even though other factors also motivated the practice.” (42 U.S. Code § 2000e– 2(m)).
 
 

Case Study

Price Waterhouse v. Hopkins

490 U.S. 228 (1989)

Procedural Posture

Defendant employer appealed from the decision of the United States Court of Appeals for the District of Columbia Circuit, which affirmed the lower court’s ruling in favor of plaintiff employee in her sex discrimination claim under Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq.

Overview

Defendant employer appealed a judgment in favor of plaintiff employee in her action under Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq. The courts below held that an employer who had allowed a discriminatory impulse to play a motivating part in an employment decision could avoid liability by showing by clear and convincing evidence that it would have made the same decision in the absence of discrimination. Title VII of the Civil Rights Act of 1964 forbids an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate with respect to his compensation, terms, conditions, or privileges of employment, or to limit, segregate, or classify his employees or applicants for employment in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s sex. **** Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq., condemns employment decisions based on a mixture of legitimate and illegitimate considerations. Therefore, when an employer considers both gender and legitimate factors at the time of making a decision, that decision was “because of” sex and the other, legitimate considerations. **** After a plaintiff has made out a prima facie case of discrimination under Title VII of the Civil Right Act of 1964, 42 U.S.C.S. § 2000e et seq., the burden of persuasion does not shift to the employer to show that its stated legitimate reason for the employment decision was the true reason. The plaintiff retains the burden of persuasion on the issue whether gender played a part in the employment decision. **** If an employer allows gender to affect its decision-making process, then it must carry the burden of justifying its ultimate decision. **** In the specific context of sex stereotyping, an employer who acts on the basis of a belief that a woman cannot be aggressive, or that she must not be, has acted on the basis of gender. **** Remarks at work that are based on sex stereotypes do not inevitably prove that gender played a part in a particular employment decision. The plaintiff must show that the employer actually relied on her gender in making its decision. In making this showing, stereotyped remarks can certainly be evidence that gender played a part. **** As to the employer’s proof in sex discrimination suits, in most cases, the employer should be able to present some objective evidence as to its probable decision in the absence of an impermissible motive. Moreover, proving that the same decision would have been justified is not the same as proving that the same decision would have been made. An employer may not, in other words, prevail in a mixed-motives case by offering a legitimate and sufficient reason for its decision if that reason did not motivate it at the time of the decision. Finally, an employer may not meet its burden in such a case by merely showing that at the time of the decision it was motivated only in part by a legitimate reason. **** An employer who had allowed a discriminatory impulse to play a motivating part in an employment decision must prove by a preponderance of the evidence that it would have made the same decision in the absence of discrimination. **** When a plaintiff in a Title VII, 42 U.S.C.S. § 2000e et seq., case proves that her gender played a motivating part in an employment decision, the defendant may avoid a finding of liability only by proving by a preponderance of the evidence that it would have made the same decision even if it had not taken the plaintiff’s gender into account.

Outcome

The Court reversed and remanded the case to the lower court, holding that defendant employer had to prove by a preponderance of the evidence that its employment decision relating to plaintiff employee was not motivated by a discriminatory purpose.

Disparate Impact Discrimination

Disparate impact discrimination occurs when an employer uses an employment practice, rule, or policy that appears to be non-discriminatory, or facially neutral, but, when applied, has a different and negative impact on a protected class. (For example: “House person wanted; must be six-feet-three or better and have a moustache; all sexes may apply.”)
 
Similar to disparate treatment discrimination, disparate impact discrimination is proven in three steps.
  • The plaintiff-employee must make out a prima facie case by pointing to an employment practice, and showing that the practice excludes a disproportionate number of people in a protected class;
  • The defendant-employer must then respond to the plaintiff’s allegations by either disproving the plaintiffs showing of a disparate exclusion of a protected group or showing that the practice in question is job related and necessary for the business, that is, proving the existence of a bona fide occupational qualification or BFOQ.
  • The plaintiff must then prove that the employer’s reason was a mere pretext or that other employment practices would achieve the same results without discrimination.

Discrimination Based on Race, Color, and National Origin

Title VII prohibits discrimination on the basis of an applicant’s or employee’s race, color, or national origin. Recent court cases have included challenges to employers’ policies on interracial association, “English Only” workplace requirements, and other employment policies. Interestingly, the EEOC has stated that “English Only” rules in the workplace violate federal discrimination laws unless the employer can justify the rule as a business necessity. The Monsanto case, 770 F.2d 719 (1985), deals with the requirement that an employment rule must be uniformly applied to all employees regardless of their race.
 
Case Study

Smith v. Monsanto Chemical Co.

770 F.2d 719 (8th Cir. 1985)
 
Procedural Posture
 
Appellant employer sought review of the order of the District Court for the Eastern District of Missouri, which entered judgment in favor of appellee employee in his racially-based employment discrimination action alleging violations of Title VII, 42 U.S.C.S. § 2000e(5), and 42 U.S.C.S. § 1981.
 
Overview
 
After the employee took three rag towels from the employer’s plant and locked them in the trunk of his car, the employee was terminated for the theft of company property. The employee filed a complaint with the Equal Employment Opportunity Commission (EEOC), alleging his termination was racially motivated. The EEOC disagreed, but provided the employee a Notice of Right to Sue. The employee filed an action in the district court, and a jury returned a verdict in favor of the employee on the §1981 claim and the district court found in favor of the employee on the Title VII claim. The employer appealed, and the court reversed the judgment of the district court. The employer had a policy that all employees who had less than five years seniority would be discharged for stealing, without consideration of other factors, which was uniformly applied. In connection with the 42 U.S.C.S. § 1981 claim, the court concluded that no reasonable jury could find that the employer disciplined white employees more leniently than the employee. In regard to the Title VII claim, the district court’s finding that the employee’s termination was motivated by racial discrimination was clearly erroneous.
 
Outcome
 
The court reversed the order of the district court, which had entered judgment in favor of the employee.

Discrimination Based on Religion

Discrimination based on religion is prohibited in the workplace under Title VII. Religion is defined in Title VII as including “…all aspects of religious observance and practice, as well as belief, unless an employer demonstrates that he is unable to reasonably accommodate to an employee’s or prospective employee’s religious observance or practice without undue hardship on the conduct of the employer’s business.” Title VII requires that employers must make reasonable accommodations to permit employees to observe their religious practices. These may include giving employees time off without pay to observe religious holidays, permitting workers “early release” in order to attend services, and permitting employees to dress according to the dictates of the religion. The burden of proof is on the employer to show that such an accommodation would create an “undue hardship” for the employer.
 
Recent cases involving religious discrimination in the workplace requiring employers to provide contraceptive care under the Affordable Care Act, and employer rules on body art and piercings.
 
Case Study

EEOC v. Abercrombie & Fitch Stores, Inc.

135 S. Ct. 2028 (2015)
 
Procedural Posture
 
Whether an employer was entitled to summary judgment on a claim that it violated Title VII of the Civil Rights Act of 1964 by refusing to hire a practicing Muslim applicant on the ground that the headscarf she wore would violate the employer’s dress policy. 
 
Overview
 
Respondent (Abercrombie) refused to hire Samantha Elauf, a practicing Muslim, because the headscarf that she wore pursuant to her religious obligations conflicted with Abercrombie’s employee dress policy. The Equal Employment Opportunity Commission (EEOC) filed suit on Elauf’s behalf, alleging a violation of Title VII of the Civil Rights Act of 1964, which, inter alia, prohibits a prospective employer from refusing to hire an applicant because of the applicant’s religious practice when the practice could be accommodated without undue hardship. The EEOC prevailed in the District Court, but the Tenth Circuit reversed, awarding Abercrombie summary judgment on the ground that failure-to-accommodate liability attaches only when the applicant provides the employer with actual knowledge of his need for an accommodation.
 
Outcome
 
It was not necessary to show that the employer had actual knowledge of the applicant’s need for an accommodation in order to establish disparate treatment under 42 U.S.C.S. § 2000e-2(a)(1). Instead, it was only necessary to show that the applicant’s need for an accommodation was a motivating factor in the employer’s decision; [2]-A claim based on failure to accommodate a religious practice did not have to be raised as a disparate impact claim rather than a disparate treatment claim, as religious practice was a protected characteristic that could not be accorded disparate treatment.****
 
The rule for disparate-treatment claims based on a failure to accommodate a religious practice is straightforward: An employer may not make an applicant’s religious practice, confirmed or otherwise, a factor in employment decisions.**** Title VII of the Civil Rights Act of 1964 does not limit disparate-treatment claims to only those employer policies that treat religious practices less favorably than similar secular practices. Title VII does not demand mere neutrality with regard to religious practices—that they be treated no worse than other practices. Rather, it gives them favored treatment, affirmatively obligating employers not to fail or refuse to hire or discharge any individual because of such individual’s religious observance and practice. An employer is surely entitled to have, for example, a no-headwear policy as an ordinary matter. But when an applicant requires an accommodation as an aspect of religious practice, it is no response that the subsequent failure to hire was due to an otherwise-neutral policy. Title VII requires otherwise-neutral policies to give way to the need for an accommodation.
 
Judgment reversed; case remanded.
In Cloutier v. Costco, 390 F.3d 126 (1st Cir. 2004), the employee, who wore an eyebrow ring, claimed that her employer’s dress code ban on any visible facial or tongue jewelry and failure to accommodate her request to do so was religious discrimination due to her religious practice as a member of the Church of Body Modification. The District Court held that the employer had accommodated the employee by offering to reinstate her if she covered the piercing with a band-aid or replaced it with a clear retainer (as per the company policy). The Court held the employee’s request for a complete waiver of the policy would place an undue burden on the employer, precluding it from exercising its managerial discretion and presenting a professional public image to the public.
 
A different outcome was found in EEOC v. Red Robin Gourmet Burgers, Inc., 2005 U.S. Dist. LEXIS 36219 (W.D. Wash. Aug. 29, 2005), in which the Federal District Court found that the employer had failed to provide sufficient evidence of undue hardship in accommodating the employee’s religious beliefs. The employee had two tattoos on his wrists in connection with his Kemetecism (ancient Egyptian) religion. The employee worked for six months for the employer before he was asked to cover the tattoos; when he refused, his employment was terminated. The employer did not have a dress code or grooming policy, had never received any customer complaints regarding the employee’s tattoos, and did not provide any other evidence that accommodating the employee would be an undue hardship.

Sex Discrimination

Title VII of the Civil Rights Act specifically prohibits discrimination in employment decisions and practices on the basis of sex. The Civil Rights Act of 1964 act was amended in 1978 by the Pregnancy Discrimination Act to include prohibitions on discrimination related to pregnancy, childbirth, and related medical conditions. Why would an employer discriminate based on sex? Some argue sex discrimination is grounded in historical perceptions of the sexes, misuse of power, the economics of women in the workforce, a form of workplace control, or in response to threats to previously male-dominated workplaces. In Ellison v. Brady, the 9th Circuit held that Title VII was designed by Congress “to prevent the perpetuation of stereotypes and a sense of degradation which serve to close or discourage employment opportunities for women.”
 
There is one major problem: The Civil Rights Act does not explicitly define “sex” and recent social developments have led to a debate as to what the term “sex” means or should mean in the Act. Does “sex” mean gender (i.e., male and female), or does the term include sexual preference, gender identity, etc.? [The World Health Organization defines “sex” as “the biological and physiological characteristics that define men and women” whereas “gender” “refers to the socially constructed roles, behaviors, activities, and attributes that a given society considers appropriate for men and women.”] The EEOC, as the agency that interprets and enforces the Act, has stated that the meaning of “sex” includes gender identity and sexual orientation. As such, the agency has provided protections for lesbian, gay, bisexual, and transgender (LGBT) applicants and employees, regardless of state or local laws to the contrary. In Oncale v. Sundowner Offshore Services., 523 U.S. 75 (1998) the U.S. Supreme Court recognized same-sex sexual harassment as sex discrimination under Title VII. Despite the views of the EEOC, there may be need for Congress to clarify these issues.
 
Other issues related to sex discrimination include fetal protection policies (where the policy seeks to protect a fetus from workplace hazards), discrimination based on “family responsibility,” and issues relating to Title IX of the Education Amendments of 1972 [20 U.S.C. 1681 et seq.] which prohibits discrimination on the basis of sex in any federally funded education program or activity. In Int’l Union v. Johnson Controls, 499 U.S. 187 (1991), the U.S. Supreme Court held a fetal protection policy restricting all fertile females from certain jobs was too restrictive because the female employee did not have any choice and there was no BFOQ asserted as to safety. In Asad v. Cont’l Airlines, Inc., 328 F. Supp. 2d 772 (N.D. Ohio 2004), the District Court held that the Pregnancy Protection Act did not prevent an employer from transferring a pregnant employee at her request. In Childers v. Trustees of the University of Pennsylvania, No. 14-2439, 2016 U.S. Dist. LEXIS 35827 (E.D. Pa. Mar. 21, 2016), the District Court found that improper comments related to plaintiff’s family responsibilities created a prima facie case of discrimination.
 
Issues in the workplace that can potentially create liability for employers include employer policies relating to office romances, dress codes, displays of sexually explicit or suggestive pictures or calendars, jokes, email, information posted on social media platforms, and sexual innuendoes.

Wage Discrimination

The Civil Rights Act prohibits employer decisions and practices related to wages and benefits that discriminate on the basis of sex (42 U.S. Code Sec. 2000e-5(e)(3)(A).
 
The Lilly Ledbetter Fair Pay Act of 2009 was passed in response to the U.S. Supreme Court’s decision in Ledbetter v. Goodyear Tire & Rubber Co., Inc., 550 U.S. 618 (2007). In this case, Ledbetter discovered that she was paid less than men in substantially same positions. The Court held in favor of the employer based upon the 180-day statute of limitations in the CRA, which required claims to be filed from the original date of the pay decision or first pay date. The Lilly Ledbetter Fair Pay Act amends Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act of 1967, and modifies the operation of the Americans with Disabilities Act of 1990 and the Rehabilitation Act of 1973, “to clarify that a discriminatory compensation decision or other practice that is unlawful under such Acts occurs each time compensation is paid pursuant to the discriminatory compensation decision or other practice, and for other purposes.” The Act includes a retroactivity provision that provides the employee may “obtain relief as provided in subsection (g)(1), including recovery of back pay for up to two years preceding the filing of the charge, where the unlawful employment practices that have occurred during the charge filing period are similar or related to unlawful employment practices with regard to discrimination in compensation that occurred outside the time for filing a charge.”

Sexual Harassment

Sexual harassment is prohibited under Title VII because it is considered a form of sex discrimination. Sexual harassment is the perpetration of unwelcome sexual advances, requests for favors, or other physical or verbal conduct of a sexual nature conducted in the workplace. Two types of sexual harassment exist in the workplace: “quid pro quo” and hostile environment.
 
Quid pro quo (meaning “something for something”; in Latin: “this for that”) sexual harassment is harassment tied to job performance. This type of harassment occurs when any aspect of a job or employment decision is conditioned upon receiving sexual favors or engaging in sexual activity. Classic examples include when a boss tells his employee, “sleep with me or you are fired” or “if you don’t date me, your chances of promotion are poor.” The quid pro quo offer must be unwelcome.
 
Until 1986, only “quid pro quo” was considered a violation of Title VII. Then, in Vinson v. Meritor Savings Bank, the United States Supreme Court ruled that if the harassment is sufficiently pervasive or severe to create a hostile work environment, it is a violation of Title VII even if the unwelcome conduct is not linked to concrete employment benefits. Hostile environment sexual harassment is far more common, but may be harder to eradicate from the workplace. Hostile environment sexual harassment can occur when sexual talk and innuendo is so pervasive in the workplace that it interferes with employees’ ability to work. Conduct that could lead to a hostile environment includes, but is not limited to, sexual advances; requests for sexual favors; verbal statements or physical actions of a sexual nature; offensive jokes; comments about body parts or clothes; emails of a sexual nature; pornography; non-sexual gender based verbal or physical conduct; inflammatory and patently offensive epithets, slurs, or demeaning comments relating to gender; touching of intimate body parts; pictures; staring; work rules relating to dress codes) sexually suggestive e-mail; and perceived favoritism based on sex.
 
The standard for determining a hostile work environment is based on the persona of a “reasonable victim” (female or male) wherein the court reviews the particular plaintiff’s perceptions as to whether the situation is sufficiently severe or pervasive so as to alter the conditions of employment and create an abusive working environment. (Ellison v. Brady, 924 F.2d 872 (9th Cir. 1991).
 
The employee must show conduct that is verbal, physical, frequent, hostile and patently offensive:
  1. that is gender based;
  2. that effects the terms/conditions of employment;
  3. that is unwelcome (a subjective test); and
  4. that is severe/pervasive so as to alter the conditions of the employee’s work environment and create a hostile environment.

The conduct can be that of a coworker, supervisor, client, a customer, or a supplier. In a hostile work environment case, it is the effect of the behavior, not the intent of the person acting that will be judged.

When is an employer responsible for the sexual harassment perpetrated by its employees? Under the legal doctrine of respondeat superior employers are liable for the sexual harassment of their employees if they knew or had reason to know of the sexually offensive atmosphere and they provided no reasonably available means of bringing complaints and seeking redress. Courts have also determined that an employer bears an absolute liability for acts committed by a supervisory employee.
 
In Ellison, the Ninth Circuit held:
“Employers should impose sufficient penalties on employees to assure a workplace free from sexual harassment. In essence, the reasonableness of an employer’s remedy will depend on its ability to stop harassment by the person who engaged in harassment. In evaluating the adequacy of the remedy, the court may also take into account the remedy’s ability to persuade potential harassers to refrain from unlawful conduct. Indeed, meting out punishments that do not take into account the need to maintain a harassment-free working environment may subject the employer to suit by the Equal Employment Opportunity Commission.” 
In Burlington Indus. v. Ellerth, 524 U.S. 742 (1998), and Faragher v. Boca Raton, 524 U.S. 775 (1998),the Supreme Court defined the conditions necessary for employer liability:
  1. The victimized employee must have suffered a “tangible employment action” (Ellereth defined this as termination of employment, a demotion evidenced by a decrease in wage or salary, a less distinguished title, a material loss of benefits, or significantly diminished material responsibilities); or
  2. If the victimized employee has not suffered a tangible negative employment action (under Ellereth “usually economic harm”), the employer can shield itself from liability by showing that:
    • the employer took reasonable care to prevent and correct sexual harassment in its workplace, and
    • the employee unreasonably failed to take advantage of complaint and resolution procedures available to the employee provided by the company as found in Faragher.
 
Case Study

Faragher v. City of Boca Raton

524 U.S. 775 (1998)
 
Procedural Posture
 
Petitioner lifeguard, who worked for respondent city, sought a writ of certiorari to review the judgment of the United States Court of Appeals for the Eleventh Circuit, which reversed a judgment entered in favor of petitioner in an action against respondent under Title VII of the Civil Rights Act of 1964 (Title VII), 42 U.S.C.S. § 2000e et seq., for a sexually hostile work environment created by her supervisors.

 
Overview
 
Petitioner worked as a lifeguard for respondent city. Petitioner lifeguard brought an action against respondent and her two immediate supervisors, asserting a claim under Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq. The complaint alleged that the two supervisors had created a sexually hostile atmosphere at the beach by repeatedly subjecting petitioner and other female lifeguards to uninvited and offensive touching and lewd remarks. Petitioner asserted that the supervisors were agents of respondent and that their conduct amounted to discrimination in the terms, conditions, and privileges of her employment. The judgment of the trial court, which entered judgment in favor of petitioner and held respondent liable, was reversed by the court below. The judgment of the court below was reversed and remanded for reinstatement of the trial court’s judgment. The court’s judgment was based on an application of its holding that an employer may be held vicariously liable for actionable discrimination caused by a supervisor, but subject to an affirmative defense looking to the reasonableness of the employer’s conduct as well as that of a plaintiff victim.
 
In order to be actionable under Title VII of the Civil Rights Act of 1964, 42 UY.S.C.S. § 2000e et seq., a sexually objectionable environment must be both objectively and subjectively offensive, one that a reasonable person would find hostile or abusive, and one that the victim in fact did perceive to be so. Courts are directed to determine whether an environment is sufficiently hostile or abusive by looking at all the circumstances, including the frequency of the discriminatory conduct; its severity; whether it is physically threatening or humiliating, or a mere offensive utterance; and whether it unreasonably interferes with an employee’s work performance.*** Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq., does not prohibit genuine but innocuous differences in the ways men and women routinely interact with members of the same sex and of the opposite sex. Simple teasing, offhand comments, and isolated incidents, unless extremely serious, will not amount to discriminatory changes in the terms and conditions of employment.***
 
The requirement to show that the employee has failed in a coordinate duty to avoid or mitigate harm reflects an equally obvious policy imported from the general theory of damages, that a victim has a duty to use such means as are reasonable under the circumstances to avoid or minimize the damages that result from violations of the statute. An employer may, for example, have provided a proven, effective mechanism for reporting and resolving complaints of sexual harassment, available to the employee without undue risk or expense. If the plaintiff unreasonably failed to avail herself of the employer’s preventive or remedial apparatus, she should not recover damages that could have been avoided if she had done so. If the victim could have avoided harm, no liability should be found against the employer who had taken reasonable care, and if damages could reasonably have been mitigated no award against a liable employer should reward a plaintiff for what her own efforts could have avoided.*** the general rule that an employer is subject to vicarious liability, under Title VII of Civil Rights Act of 1964, 42 USCS 2000e et seq., for a supervisor’s actionable sexual harassment, but may raise an affirmative defense looking to reasonableness of the conduct of the employer and the victim…***

 
Outcome
 
Reversed and remanded for reinstatement of the original judgment after the court held that employers may be held liable for actionable discrimination, subject to a defense based on reasonableness of the employer’s conduct.
Employees who are unsuccessful in bringing federal or state claims under the Title VII or under state anti-discrimination statutes may bring a common law tort action or a criminal or civil complaint for assault and battery, rape, intentional infliction of emotional distress, defamation, contractual interference with an employment contract, intrusion of privacy, and wrongful discharge.
 
What can an employer do to satisfy the requirement that it take reasonable care to correct and prevent sexual harassment? First, employers should provide regular and thorough training for all of its employees regarding discrimination and sexual harassment. Second, employers should have a clearly communicated and visible policy regarding the prohibition of discrimination based on sex and the prohibition of sexual harassment. Third, a viable complaint procedure should be in place to handle any complaints, such as a designated employee as a contact for handling sexual harassment complaints, or an anonymous 1-800 complaint telephone line. Fourth, a company should take annual surveys of its employees to ensure that its sexual harassment policy is understood in order to learn whether the current workplace is free of sexual harassment. Last, employers should regularly review policies for compliance with federal, state, and local laws, changing social trends, and developing case law.

Title VII Defenses 

Employers charged with Title VII violations have a limited number of affirmative defenses including business necessity, bona fide occupational qualification, seniority and merit systems, and after-acquired evidence of actions of the employee.

Business Necessity

In order to assert the affirmative defense of business necessity to a claim of disparate impact, the employer must demonstrate that the practice or requirement is related to successful job performance and is necessary for the job. The employer may still face liability if the employee shows “an alternative employment practice and the respondent refuses to adopt such alternative employment practices.” (42 U.S. Code § 2000e–2(k)(1)(i)(ii)). Business necessity is a defense to a claim of disparate impact, but is not a defense against a claim of intentional discrimination. (42 U.S. Code § 2000e–2 (k) (2)). If the employer can show that the employment practice does not cause a disparate impact, the employer does not need to prove a business necessity.

Bona fide Occupational Qualifications (BFOQs)

A second affirmative defense that an employer can raise against a claim of disparate treatment discrimination is the existence of a bona fide occupational qualification (or BFOQ). An employer may discriminate in the workplace based on national origin, religion or sex, but not race or color, where the employer is able to argue affirmatively that national origin, religion, or sex is a bona fide occupational qualification (BFOQ) under 42 U.S. Code § 2000e–2. The burden of proof is on the employer to prove that the subject classification is reasonably necessary for the normal operation of the business—that is, it is “directly related to successful job performance.”
 
Instances where discrimination may be permissible include employment positions where privacy is a critical consideration in hiring (ex: rest room attendants; nursing home attendants); actor/actress or modeling roles which are gender specific; and certain faculty at religious institutions. Mere customer preference for a particular gender, i.e. airline passengers preferring female airline attendants, is never sufficient to establish a BFOQ defense.
 
In the area of job tests (involving paper and paper tests, minimum height requirements, etc.), any testing that is administered or any criteria applied must likewise be related to “successful job performance.”
 
Case Study

Griggs v. Duke Power Co.

401 U.S. 424, (1971)
 
Procedural Posture
 
Petitioner employees sought certiorari to review a decision of the United States Court of Appeals for the Fourth Circuit, which held that respondent employer’s requirement of a high school education or the passing of an intelligence test as a condition of employment did not violate Title VII of the Civil Rights Act, 42 U.S.C.S. § 2000e-2, because there was no showing of a discriminatory purpose in the adoption of the requirements.
 
Overview
 
The employees sought review of the lower court’s decision, which concluded that the requirements of a high school education or the passing of a general intelligence test as a condition of employment in or transfer to jobs did not violate Title VII. The Court reversed on the basis that practices, procedures, or tests that were neutral on their face could not be maintained if they operated to freeze the status quo of prior discriminatory employment practices. The Court found that it was significant that the requirements were not shown to bear a demonstrable relationship to the successful performance of the jobs for which the standards were used and that the requirements operated to disqualify black applicants at a substantially higher rate than white applicants for jobs that were formerly filled only by white employees. The employer’s lack of discriminatory intent was not controlling because courts were required to look to the consequences of the employment practices, not simply the motivation. Tests could be used to measure job performance if they measured the person for the job and not the person in the abstract.
 
Under Civil Rights Act of 1964, 42 U.S.C.S. § 2000e, practices, procedures, or tests neutral on their face, and even neutral in terms of intent, cannot be maintained if they operate to “freeze” the status quo of prior discriminatory employment practices.**** Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e, proscribes not only overt discrimination but also practices that are fair in form, but discriminatory in operation. The touchstone is business necessity.**** If an employment practice that operates to exclude members of one racial group cannot be shown to be related to job performance, the practice is prohibited by Title VII of the Civil Rights Act of 1964,.**** Good intent or absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as “built-in headwinds” for minority groups and are unrelated to measuring job capability.**** Section 703(h) of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e-2, authorizes the use of any professionally developed ability test that is not designed, intended, or used to discriminate because of race.
 
Outcome
 
The Court reversed the lower court’s judgment in favor of the employer.

Seniority and Merit Systems

A third defense available to employers against a claim of discrimination applies to a bona fide seniority system or merit system (one based on quality or quantity of production), provided these criteria are not intended, designed, or used to discriminate on the basis of race, color, religion, sex, or national origin. (SEC. 2000e-2(h) and (l)).

After-Acquired Evidence of Employee Actions

Evidence of employee misconduct that is discovered during preparations of the employer’s defense to a claim of discrimination is an affirmative defense used to limit the employer’s liability for a claim of employment discrimination. In order to use the “after acquired evidence” to show nondiscriminatory intent in an employee’s termination, the employer must show that the wrongdoing occurred; the employer was previously unaware of the misconduct; and the employer would have terminated the employee for the wrongdoing in any event having now learned about the employee’s misconduct. (See McKennon v. Nashville Banner Publ’g Co., 513 U.S. 352 (1995)).
 
Case Study

Ricci v. DeStefano 

557 U.S. 557 (2009)
 
Procedural Posture
 
Petitioners, white and Hispanic firefighters, brought actions against respondent city alleging that the city’s refusal to certify promotion examination results based on disparate racial impact of the examination deprived the firefighters of promotions on the basis of their race. Upon grants of writs of certiorari, the firefighters appealed the judgment of the U.S. Court of Appeals for the Second Circuit which upheld the city’s action.
 
Overview
 
On the basis of the examination results, no black candidates were eligible for immediate promotion, and the city determined not to certify the examination results to avoid potential liability for discrimination based on a disparate impact against the black candidates. The white and Hispanic firefighters contended that they were subjected to disparate treatment in the denial of promotions on the basis of their races in violation of Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq. The U.S. Supreme Court held that the city improperly discarded the examination to achieve a more desirable racial distribution of promotion-eligible candidates, since there was no strong basis in evidence that the examination was deficient and that discarding the examination was necessary to avoid disparate impact. The threshold showing of statistical disparity in the examination results was insufficient by itself to constitute a strong basis in evidence of unlawful disparate impact, the extensively analyzed examinations were job-related and consistent with business necessity, and there was no strong basis in evidence of an equally valid, less-discriminatory testing alternative.
 
Outcome
 
The judgment upholding the city’s refusal to certify the examination results was reversed, and the cases were remanded for further proceedings.

Age Discrimination In Employment Act (ADEA) Of 1967

The ADEA prevents employers from making employment decisions based upon the age of job applicants or employees if those job applicants or employees are over the age of 40. The original legisla­tion had an age cap of 65 that was subsequently raised to age 70. Today, pursuant to an amendment offered by Representative Claude Pepper (who had been in Congress when the original Social Security Act was adopted), unless otherwise provided for, an employer may not require an employee to retire at any age. Exceptions apply relating to certain government employees, judges, police, employees such as airline pilots and others where age may be a BFOQ, and certain “top-level executives” who may be forced to retire at a certain age. The ADEA covers all employers with 20 or more employees. State laws prohibiting age discrimination may also apply.
 
The elements of proof in an age discrimination claim are the same as those used to judge a claim brought under Title VII. Plaintiff must make out a prima facie case; defendant responds with a legitimate, non-discriminatory reason; and plaintiff then shows that the defendant’s reason was merely a pretext for discrimination. The EEOC enforces the provisions of the ADEA.

Americans With Disabilities Act (ADA) of 1990 

The Americans With Disabilities Act (ADA) prohibits discrimination in employment decisions and employment practices on the basis of disability. The ADA is divided into five titles: Title I covers employment matters; and Titles II-IV address access to public walkways, streets, buildings and transportation. The ADA applies to all companies with 15 or more employees. The EEOC enforces the provisions of the ADA.
 
The ADA provides that employers cannot discriminate in any decision, practice, term or condition of employment based on a physical or mental disability. The ADA defines disability as:
“ a physical or mental impairment that substantially limits one or more major life activities; a record of such impairment; or being regarded as having such an impairment. Examples of major life activities include caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, operation of a major bodily function, learning, reading, concentrating, thinking, communicating, and working.”
Conditions such as kleptomania, pyromania, current use of illegal drugs, and sexual disorders are not included as disabilities.
 
Like Title VII and the ADEA, proving disparate treatment discrimination under the ADA uses the three-step proof mechanism articulated McDonnell Douglas v. Green. However, the ADA imposes an additional requirement upon employers. Employers must make reasonable accommodations in order to make it possible for disabled individuals to perform the “essential functions” of their job. Reasonable accommodations include providing facilities that are accessible to the disabled, job restructuring, offering part-time work, effecting modifications of equipment, and providing readers or interpreters for those employees who are visually or hearing impaired. However, there are limits. Employers do not have to grant a request for an accommodation if such request would place an undue hardship on the company in order to provide for the accommodation. Whether or not an employer would suffer an undue hardship from a requested accommodation is based on four factors:
  1. The nature and cost of the accommodation;
  2. The size, workforce, and resources of the specific facility involved;
  3. The size, workforce, and resources of the covered entity, and
  4. The nature of the covered entity’s entire operation.
In addition, employers do not have to accommodate individuals who pose a direct threat to themselves and others in the workplace or who cannot perform necessary job functions with an accommodation being made.

The Rehabilitation Act of 1973

Employment discrimination protections are afforded to those with disabilities under the Rehabilitation Act of 1973 which prohibits discrimination on the basis of disability in programs run by federal agencies, programs receiving federal financial assistance, in federal employment, and in the employment practices of federal contractors. The Department of Labor enforces this act.

Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA)

Employees who take positions in the U.S. military service are afforded employment protections under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). This statute provides job and wage protection (including promotions and benefits) for U.S. military personnel returning to their employment in the private sector. Employers are required to rehire military service personnel and are prohibited from treating employees differently upon rehire. The Department of Labor enforces this act.

Financial Discrimination: Background, Credit and Social Media Checks

Financial discrimination in the workplace involves employment decisions or practices based on the financial situation of the applicant or employee. Employers often use background checks, credit reports, and review social media when determining whether to hire a job applicant or promote an employee. Information contained in these sources could give rise to claim that an employer discriminated against an applicant or employee. Employers who conduct these checks must comply with all federal, state, and local anti-discrimination and privacy laws. In addition, employers must comply with the requirements of the Fair Credit Reporting Act. The Federal Trade Commission enforces the provisions of the FCRA.

Affirmative Action and Diversity Programs

Affirmative action programs set employer’s goals and policies regarding the recruitment, hiring, and retention of employees in a protected class under Title VII, including minorities, disabled individuals, and veterans. Affirmative action programs seek to remedy past employment discrimination or to assure a diverse work environment. The EEOC defines diversity programs as “a business management concept under which employers voluntarily promote an inclusive workplace. Employers that value diversity create a culture of respect for individual differences in order to “draw talent and ideas from all segments of the population” and thereby potentially gain a “competitive advantage in the increasingly global economy.” Affirmative action and diversity programs may be based on effecting social policies, ethics, principles of fairness, and surprisingly, two contradictory provisions found in Section 703 of the Civil Rights Act of 1964.
 
Title VII Section 703(a)(1) of the Civil Right Act of 1964 is called the “equal treatment” section. Under Section 703(a)(1), it is unlawful to discriminate against any individual because the individual belongs to a protected class. Section 703(a)(1) calls for employers to be “class blind” when making employment decisions.
 
However, Section 703(a)(2) is called the “equal opportunity” section. Section 703(a)(2) makes it unlawful to limit or classify employees or applicants in any way that would deprive or tend to deprive them of employment opportunities or otherwise adversely affect the person’s status because of the individual’s membership in a protected class. Section 703(a)(2) calls for employers to consider membership in a protected class in order to determine if an employment practices or policies have resulted in disparate impact on a protected class.. It may be difficult to reconcile the concepts of “equal treatment” and “equal opportunity” at the same time, especially if the latter calls for “affirmative action.” Questions regarding the imposition of employment quotas are often raised in regard to affirmative action.
 
Affirmative action programs may be adopted voluntarily by employers, imposed on an employer by a court as a part of a settlement, or as a remedy when finding that an employer acted as part of a pattern of discrimination against employees. An affirmative action program may also be implemented in cases of government contracting.
 
On the federal level, affirmative action programs began with Executive Order 11246 in 1965, which was issued by President Lyndon Johnson. Executive Order 11246 prohibits federal contractors from discriminating against employees. At the same time, it mandated the creation and implementation of affirmative action plans which would apply to private employers as a condition of being awarded a contract with the federal government. Affirmative action requirements for federal contractors are administered by the U.S. Department of Labor, Office of Federal Contract Compliance Programs (OFCCP). Affirmative action and diversity programs are subject to strict scrutiny, i.e., they must be narrowly tailored in order to further a compelling governmental interest. These programs are also subject to judicial review for compliance with the Equal Protection Clause of the Fourteenth Amendment and the Civil Rights Act of 1964 and 42 U.S.C. Sec 1982.
 
In 1979, the U.S. Supreme Court upheld the legality of affirmative action programs in United Steel Workers of America v. Weber, 443 U.S. 193 (1973). The Court held that Title VII of the Civil Rights Act did not condemn all private, voluntary, race conscious affirmative action plans; and held that private sector employers and unions could lawfully implement voluntary affirmative action plans to remedy past discrimination. The EEOC enforces federal laws in connection with private sector affirmative action plans.
 
The EEOC compliance manual (2006), citing the Weber decision, states that:
“in examining whether such a voluntary affirmative action plan is legal under Title VII, courts consider whether the affirmative action plan involves a quota or inflexible goal, whether the plan is flexible enough so that each candidate competes against all other qualified candidates, whether the plan unnecessarily trammels the interests of third parties, and whether the action is temporary, e.g., not designed to continue after the plan’s goal has been met. “
Affirmative action programs enacted by public sector employers, public universities, and other public entities are often contested in courts throughout the United States. In Taxman v. Bd. of Educ., 91 F.3d 1547 (3d Cir. 1996), the Third Circuit Court of Appeals considered whether a school district’s affirmative action program which resulted in the school board’s termination of a teacher in order to achieve diversity in the workplace and not to remedy any past discrimination violated Title VII.
 
Although not a part of the employer-employee relationship, recently-decided cases may provide an insight into the views of the Supreme Court in future affirmative action cases. In Grutter v. Bollinger, 539 U.S. 306 (2003), the U.S. Supreme Court upheld a “holistic” admissions policy in which an applicant’s race was one of several factors to be considered, whereas in the same term, in Gratz v. Bollinger, 539 U.S. 244 (2003), the Court held an admissions policy that instituted a “point system” and assigned 20 automatic points to every member of an underrepresented minority, violated the equal protection clause of the Federal Constitution’s Fourteenth Amendment, because the point program was not narrowly tailored to achieve the interest in educational diversity that the university claimed justified the program.
 
Case Study

Taxman v. Board of Education

91 F.3d 1547 (3d Cir. 1996)
 
Procedural Posture
 
Defendant school board challenged a United States District Court for the District of New Jersey order granting partial summary judgment on liability to plaintiff teacher in a race-based employment discrimination action filed pursuant to Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e-2. The teacher challenged the dismissal of her claim for punitive damages.
 
Overview
 
Plaintiff teacher intervened in an action initiated by the government against defendant school board, asserting race-based employment discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e-2. The trial court granted plaintiff partial summary judgment on liability and, after a damages trial, awarded her full back pay. Both sides appealed; defendant claimed error in the grant of partial summary judgment and plaintiff challenged the dismissal of her punitive damages claim. The court affirmed, ruling that defendant violated Title VII when it used its affirmative action plan to grant a non-remedial work force preference, by laying off plaintiff, in order to promote “racial diversity.” Applying a two-prong test, the court ruled that the affirmative action plan, which had no remedial purpose, could not be said to mirror the purposes of the statute because there was no congressional recognition of diversity as a Title VII objective requiring accommodation. In addition, the policy’s lack of definition and structure “unnecessarily trammeled” non-minority interests. The damage award was proper. There was no evidence to support a punitive damages claim.
 
Outcome
 
The court affirmed the judgment awarding plaintiff teacher full back pay and granting her partial summary judgment on liability in an action against defendant school board for race-based employment discrimination. Defendant discriminated when it used its affirmative action plan to lay-off plaintiff in order to achieve “racial diversity.” The award of full back pay was proper. The punitive damages claim lacked evidentiary support.
Affirmative action and diversity programs have continued to be controversial and have continued to create claims by applicants, employees, and students of reverse discrimination. In June of 2016, the U.S. Supreme Court in Fisher v. Univ. of Texas, No. 14-981, 2016 U.S. LEXIS 4059 (June 23, 2016), upheld the constitutionality of the University of Texas at Austin’s affirmative action program. Stating that courts should give deference to a university to define educational goals that include the benefits of diversity in the student body, the Court held that universities must prove that the consideration of race is narrowly tailored to meet the permissible goals of achieving diversity in its student body and that “race-neutral alternatives” will not suffice to meet these goals. The Court applied three key criteria to its analysis:
  1. A university must show that it has a substantial interest in considering race as a factor in its admissions policy and that considering race is necessary to achieve this purpose;
  2. Courts should ordinarily defer to a university’s judgment that there are educational benefits that flow from diversity in the student body; and
  3. The university must prove that race-neutral alternatives will not achieve its goals of increasing diversity.
Specifically the court held:
“The compelling interest that justifies consideration of race in college admissions is not an interest in enrolling a certain number of minority students. Rather, a university may institute a race-conscious admissions program as a means of obtaining the educational benefits that flow from student body diversity. Enrolling a diverse student body promotes cross-racial understanding, helps to break down racial stereotypes, and enables students to better understand persons of different races. Equally important, student body diversity promotes learning outcomes, and better prepares students for an increasingly diverse workforce and society. Increasing minority enrollment may be instrumental to these educational benefits, but it is not a goal that can or should be reduced to pure numbers. On the other hand, asserting an interest in the educational benefits of diversity writ large is insufficient. A university’s goals cannot be illusory or amorphous — they must be sufficiently measurable to permit judicial scrutiny of the policies adopted to reach them.”
Fisher may provide an insight into the Court’s views on affirmative action in a more general sense.
 
Review the Grutter case carefully.
 
Case Study

Grutter v. Bollinger

539 U.S. 306 (2003)
 
Procedural Posture
 
Petitioner law school applicant sued respondents, a law school, university regents, and university officials, claiming race discrimination in the law school’s admission policy. The trial court concluded that the policy was unlawful and granted an injunction. Sitting en banc, the United States Court of Appeals for the Sixth Circuit reversed the judgment and vacated the injunction. The Supreme Court granted certiorari.
 
Overview
 
The law school had long been committed to racial and ethnic diversity, especially to the inclusion of students from groups that, historically, had been discriminated against. Rather than imposing quotas, the law school admissions program focused on academic ability and a flexible assessment of applicants’ talents, experiences, and potential to contribute to the learning of those around them. It did not define diversity solely in terms of race and ethnicity but considered these as “plus” factors affecting diversity. The Court found that the Equal Protection Clause did not prohibit this narrowly tailored use of race in admissions decisions to further the school’s compelling interest in obtaining the educational benefits that flow from diversity. The goal of attaining a “critical mass” of underrepresented minority students did not transform the program into a quota. Because the law school engaged in a highly individualized, holistic review of each applicant, giving serious consideration to all the ways the applicant might contribute to a diverse educational environment, it ensured that all factors that could contribute to diversity were meaningfully considered alongside race.
 
Outcome
 
The Court affirmed the decision of the circuit court.
 

Ethical Considerations

Affirmative Action
It is often argued that “it is time to end affirmative action” for minorities and women. Has this time now come? On the other hand, some have argued that it is is important to “mend it, not end it.” In light of the reasons for the creation of affirmative action plans in the first place, have “affirmative action” plans become obsolete or unnecessary?
 
Discrimination
Why should the government have the power to override the hiring and firing decisions of an owner of a business even if those decisions might amount to discrimination? After all, it is the business owner and not the government who has risked his or her capital in creating the business.
 
Mandatory Retirement
Should university faculty be subject to mandatory retirement at a certain age?
 
Protected Disability
Is it fair to place the burden of accommodating workers’ identifiable and protected handicaps on employers rather than force employees to seek employment in jobs where their handicaps will not be a factor in their employment? Before you respond, take a look at the website of the EEOC to identify the various types of “impairments” recognized by this administrative agency.
 

Questions

  1. What classes of workers are protected by Title VII?
  2. What are the three theories of discrimination under Title VII?
  3. Who enforces and what damages and remedies are available under Title VII?
  4. What are the prima facie case elements of a sexual harassment suit?
  5. How is wage discrimination addressed in the U.S.?
  6. What does it mean at law that an employer must accommodate an applicant or employee’s religion?
  7. What defenses can an employer raise to avoid or limit liability under Title VII and other discrimination statutes?
  8. How have recent technology innovations complimented the goals of the Americans With Disabilities Act?
  9. What is meant by financial discrimination?
  10. Has the Civil Rights Act of 1964 (as amended) worked a reverse discrimination on certain groups considered to be in the “majority” of the work force? Explain how you reached your conclusion.

Chapter Twenty | Intellectual Property: Patents

Introduction To Intellectual Property

The Constitution of the United States provides the authority of the U.S. Congress to regulate that area of law known as intellectual property.

 “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries …” (Article I, Section 8)

Intellectual property flows from inventions of tangible things and creative work, including written and artistic expression or symbols or names (marks) that identify goods or services. According to the World Intellectual Property Organization (WIPO), “…intellectual property refers to creations of the mind: inventions; literary and artistic works; and symbols, names and images used in commerce [and]  … is divided into two categories:

  • Industrial Property includes patents for inventions, trademarks, industrial designs and geographical indications.
  • Copyright covers literary works (such as novels, poems and plays), films, music, artistic works (e.g., drawings, paintings, photographs and sculptures) and architectural design.”

This type of property, often called “knowledge assets,” represents significant value to its owners. This area of law provides owners with a legal framework to protect tangible and intangible knowledge assets from unauthorized use or other forms of infringement. Owners are required to file with the U.S. Patent and Trademark Office (USPTO) for protection in the U.S. and with the World Intellectual Property Organization (WIPO) for purposes of global protection.

Intellectual property law is intended to encourage individuals, whether they are inventors, writers or artists, to be creators and innovators by providing for a limited period of time during which the monopoly of ownership allows them to profit from their creativity.

We will begin our examination of intellectual property with patent law.

Purpose Of Patents

A patent creates the exclusive right to exclude others from making, using, importing, and selling the patented innovation to an inventor, or patent holder, for a limited period of time. Congress first enacted a Patent Act in 1790 (1 Stat. 109). At present, the U.S. Patent Act (35 U.S.C. §§1 et seq.) is the controlling statute governing patent law. The grant of a patent gives the patent holder monopoly rights for a limited period of time to benefit from the invention. The grant of exclusive rights to an inventor encourages the investment necessary for the development of new and useful discoveries.

Patent Requirements

The Act grants the right to obtain a patent to anyone who “… invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof …” (35 U.S.C. §101). In order for the subject matter to be patentable, it must fit within one of those categories and also be novel, non-obvious and useful.

Therefore, in order for an invention to be patentable it must meet the following essential requirements: (1) patentable subject matter, (2) utility, (3) novelty, (4) non-obviousness, and (5) disclosure.

Patentable Subject Matter

The subject matter of a patentable invention must fall into one of the categories described in §101. Any “… process, machine, manufacture, or composition of matter, or … improvement thereof …” is eligible. (35 U.S.C. §101). However, laws of nature, physical phenomena, and abstract ideas are not considered eligible for patent protection.

The court in Mayo clarifies what is patentability and affirms that laws of nature are not patentable.

 

Case Study

Mayo Collaborative Services v. Prometheus Laboratories, Inc.

Supreme Court of the United States, 566 U.S. 66 (2012)

Procedural Posture

Respondent licensee of patents relating to the use of drugs to treat autoimmune diseases brought an action against petitioner competitors alleging that the competitors infringed the patents, but the competitors asserted that the subject matter of the patents was unpatentable laws of nature. The U.S. Court of Appeals for the Federal Circuit upheld the patents. Certiorari was granted.

Overview

The patents concerned a method of determining the proper dosage of thiopurine drugs which were metabolized differently by different patients with autoimmune diseases to avoid harmful side effects or ineffectiveness. The U.S. Supreme Court unanimously held that the patents were not patent-eligible since the relationships between concentrations of metabolites in the blood and the likelihood that a thiopurine drug dosage would prove ineffective or cause harm were known laws of nature, and the patents did not describe genuine applications of those laws. The steps of administration of the drugs by physicians who already used the drugs, advising the physicians to apply the natural laws in making treatment decisions, and directing the measurement of metabolite levels were well known and simply told the physicians to engage in well-understood, routine, conventional activity previously engaged in by scientists in the field. Further, considering the steps as an ordered combination added nothing to the laws of nature that was not already present when the steps were considered separately, and there was no inventive concept in the claimed application of the natural laws.

Laws of nature, natural phenomena, and abstract ideas are not patentable. A new mineral discovered in the earth or a new plant found in the wild is not patentable subject matter. Likewise, Einstein could not patent his celebrated law that E equals mc squared, nor could Newton have patented the law of gravity. Such discoveries are manifestations of nature, free to all men and reserved exclusively to none.

Phenomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work. Monopolization of those tools through the grant of a patent might tend to impede innovation more than it would tend to promote it. However, too broad an interpretation of this exclusionary principle could eviscerate patent law. All inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas. Thus, a process is not unpatentable simply because it contains a law of nature or a mathematical algorithm. An application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection.

If a law of nature is not patentable, then neither is a process reciting a law of nature, unless that process has additional features that provide practical assurance that the process is more than a drafting effort designed to monopolize the law of nature itself. A patent, for example, could not simply recite a law of nature and then add the instruction “apply the law.”

Outcome

The judgment upholding the patents was reversed.

The Diamond case examined a different question presented by the patentable subject matter requirement, namely, whether a live, human-made organism is patentable.

 

Case Study

Diamond v. Chakrabarty

Supreme Court Of The United States, 447 U.S. 303 (1980)

Procedural Posture

Petitioner, Commissioner of Patents and Trademarks, appealed the judgment from the United State Court of Customs and Patent Appeals, which allowed respondent microbiologist’s patent claims for a genetically engineered micro-organism that was capable of breaking down crude oil.

Overview

Respondent microbiologist filed patent claims for human-made, genetically engineered bacterium that was capable of breaking down multiple components of crude oil. The court affirmed the judgment that allowed respondent’s claims. The court rejected the argument of the patent office board of appeals that 35 U.S.C.S. § 101 was not intended to cover living things such as laboratory created micro-organisms. The court held that respondent’s micro-organism constituted a “manufacture” or a “composition of matter” within the meaning of 35 U.S.C.S. § 101 and thus qualified as patentable subject matter. The court found that respondent had produced a new bacterium with markedly different characteristics from any found in nature and which had the potential for significant utility. The court held that the language of 35 U.S.C.S. § 101 embraced respondent’s invention.

Syllabus

Title 35 U. S. C. § 101 provides for the issuance of a patent to a person who invents or discovers “any” new and useful “manufacture” or “composition of matter.” Respondent filed a patent application relating to his invention of a human-made, genetically engineered bacterium capable of breaking down crude oil, a property which is possessed by no naturally occurring bacteria. A patent examiner’s rejection of the patent application’s claims for the new bacteria was affirmed by the Patent Office Board of Appeals on the ground that living things are not patentable subject matter under § 101. The Court of Customs and Patent Appeals reversed, concluding that the fact that micro-organisms are alive is without legal significance for purposes of the patent law.

Decision

A live, human-made micro-organism is patentable subject matter under § 101. Respondent’s micro-organism constitutes a “manufacture” or “composition of matter” within that statute. Pp. 308-318.

(a) In choosing such expansive terms as “manufacture” and “composition of matter,” modified by the comprehensive “any,” Congress contemplated that the patent laws should be given wide scope, and the relevant legislative history also supports a broad construction. While laws of nature, physical phenomena, and abstract ideas are not patentable, respondent’s claim is not to a hitherto unknown natural phenomenon, but to a nonnaturally occurring manufacture or composition of matter — a product of human ingenuity “having a distinctive name, character [and] use.” ***

(b) The passage of the 1930 Plant Patent Act, which afforded patent protection to certain asexually reproduced plants, and the 1970 Plant Variety Protection Act, which authorized protection for certain sexually reproduced plants but excluded bacteria from its protection, does not evidence congressional understanding that the terms “manufacture” or “composition of matter” in § 101 do not include living things.***

(c) Nor does the fact that genetic technology was unforeseen when Congress enacted § 101 require the conclusion that micro-organisms cannot qualify as patentable subject matter until Congress expressly authorizes such protection. The unambiguous language of § 101 fairly embraces respondent’s invention. Arguments against patentability under § 101, based on potential hazards that may be generated by genetic research, should be addressed to the Congress and the Executive, not to the Judiciary.***

Outcome
The court affirmed the judgment that allowed respondent microbiologist’s patent claims. The language of the patent statute covered respondent’s invention of a living, genetically engineered micro-organism.

The Diamond court concluded that the fact that the micro-organisms in question were alive was not legally significant to its decision since §101 allows for “… any new and useful … manufacture, or composition of matter …“ to be patentable.

Utility

Utility requires that the invention be useful but not hypothetical or abstract. The patent applicant must demonstrate that the invention is operational and it has both a beneficial and practical use.

In State Street Bank v. Signature Financial Group, Inc. (149 F.3D 1368 (1998)) the Court of Appeals evaluated whether an algorithm (software) that managed a mutual fund investment structure was patentable. Since “abstract ideas” are not patentable and an algorithm is an abstract idea it is, therefore, not patentable subject matter. The court, in State Street, though, using the “machine or transformation test” concluded that “… to be patentable an algorithm must be applied in a “useful” way.” The court in Bilski v. Kappos (561 U.S. 593 (2010)) decided that the State Street standard was not the exclusive test of patentability but a “useful clue” when determining patentability.

Novelty

The requirement that the invention is novel means that patent will not be granted to a new invention that is already available to the public. If the invention has been disclosed to the public prior to the filing of an application for a patent the new invention is not considered to be novel. If the “… claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention …” it is not patentable. (35 U.S.C. §102). Prior public disclosure is determined by a search for what is called I” Prior art consists of all of the information available to the public prior to the date of filing that is pertinent to the invention.

Non-Obviousness

The Patent Act of 1952 added the requirement of non-obviousness to the standard for patentability. (35 U.S.C. §103). The Supreme Court established the three conditions that must be met to determine whether the non-obviousness requirement has been met. (Graham v. John Deere Co., 383 U.S. 1 (1966)). The Court, in determining whether the standard of non-obviousness has been met, required that:

  1. the scope and content of the prior art must be determined;
  2. differences between the prior art and invention under consideration must be ascertained; and
  3. the skill that a person of ordinary skill in the art under review.

For example, if the new invention is not sufficiently different from others like it or if the new invention would be obvious to a person of ordinary familiarity with that type of invention then the non-obviousness standard has not been met by the new invention.

Sufficiency of Disclosure

The monopoly granted to the patent holder requires that the inventor fully describe the details of the invention in a way that a person skilled in the art would be able to make or use it. The description must also present the “best mode contemplated by the inventor or joint inventor of carrying out the invention” meaning that the disclosure must describe the inventor’s preferred way of making the invention. (35 U.S.C. §112).

Types of Patents

All patents must meet the standards of patentability described above, i.e., the invention must be of a new and useful process, machine, manufacture, or composition of matter, or a new and useful improvement thereof. There are, however, different types of patents to consider.

Utility Patents

Utility patents protect the functionality of the invention and are the most common. A utility patent protects the functional aspects of the invention, but a design patent protects the visual look. The term of protection for a utility patent is twenty years from the earliest filing date of the application.

Design Patents

Design patents protect “… any new, original and ornamental design for an article of manufacture …” (35 U.S.C. §171). These patents focus on the non-functional, visual aspects of the object. The drawings included in the application are very important since they clearly establish the visual characteristics of the subject of the application. The term of protection for design patents is fifteen years from the date of the grant of the patent.

Plant Patents

The Plant Patent Act of 1930 (35 U.S.C. Ch. 15) amended the Patent Act to make new varieties of plants eligible for patent protection. A patent is available to anyone who “… invents or discovers and asexually reproduces any distinct and new variety of plant …”. (35 U.S.C. §161). A grant of a plant patent will allow the owner to prevent others “… from asexually reproducing the plant, and from using, offering for sale, or selling the plant so reproduced.” (35 U.S.C. §163). The term of protection for a plant patent is twenty years from the earliest filing date of the application.

Business Methods Patents

Business methods are activities related to running a business. Patents for business methods have been available since Congress enacted the Patent Act of 1790. The issue to be addressed is whether the business method represents a “… new and useful process, … or any new and useful improvement thereof …” (35 U.S.C. §101). The term of protection for business method patents is twenty years from the earliest filing date of the application. This type of patent has become increasingly popular since the 1980s due to the rise of internet companies that use software to develop new “methods” of doing business. As a result, business method and software patents intersect. It is important to remember that while the inclusion of software is not a prerequisite for a business method patent, it frequently incorporates software. Tax strategies would be an example of such a patent.

While the USPTO, for many years, did not recognize the patentability of business methods the Patent Act does not prohibit them. The State Street decision (see above) in 1999 established the rule that patent laws were intended to protect any method, whether or not it required the aid of a computer, so long as it produced a “… useful, concrete and tangible result.” Bilski v. Kappos (561 U.S. 593 (2010)) overruled the “useful” result finding but did not invalidate business method patents. The “useful” result test remains the most appropriate method for determining the viability of a business method patent.

These patents are frequently used by owners to protect innovative business methods that are enabled as a result of software and the internet. They are particularly important in e-commerce applications. Amazon’s patent of its “1-click” shopping system is an example of a business method patent.

Software Patent

A software patent is commonly defined as a patent on any performance of a computer realized by means of a computer program. As with business method patents, patent protection of software is not specifically included in the Patent Act. In fact, the eligibility for patent protection for software remains unsettled. The issue has been addressed several times by the courts but a definitive answer has not been provided (see Bilski v. Kappos (561 U.S. 593, 2010), Mayo Collaborative Services v. Prometheus Laboratories, Inc. (566 U.S. 66, 2012) and Alice Corp. v. CLS Bank International (134 S. Ct. 2347, 2014)).

In Alice, the court addressed whether an abstract idea could not be patented just because it was implemented on a computer. The court found that a software implementation of an escrow arrangement was not patent eligible because it is an implementation of an abstract idea.

 

Case Study

Alice Corporation Ltd. v. CLS Bank International

134 S. Ct. 2347 (U.S. Sup. Ct. 2014)

Procedural Posture

A currency transaction facilitator sued a patent assignee, alleging that the claims disclosing schemes to manage certain forms of financial risk were invalid, unenforceable, or not infringed. A district court held that all of the claims were patent ineligible. The United States Court of Appeals for the Federal Circuit affirmed the judgment. Certiorari was granted.

Summary

Judicial precedent has long held that 35 U.S.C.S. § 101 contains an important implicit exception: Laws of nature, natural phenomena, and abstract ideas are not patentable.

Judicial precedent treads carefully in construing the exclusionary principle that the laws of nature, natural phenomena, and abstract ideas are not patentable lest it swallow all of patent law. At some level, all inventions embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas. Thus, an invention is not rendered ineligible for patent simply because it involves an abstract concept. Applications of such concepts to a new and useful end remain eligible for patent protection.

In applying the 35 U.S.C.S. § 101 exception, the court must distinguish between patents that claim the building blocks of human ingenuity and those that integrate the building blocks into something more, thereby transforming them into a patent-eligible invention. The former would risk disproportionately tying up the use of the underlying ideas, and are therefore ineligible for patent protection. The latter pose no comparable risk of pre-emption, and therefore remain eligible for the monopoly granted under federal patent laws.

Judicial precedent sets forth a framework for distinguishing patents that claim laws of nature, natural phenomena, and abstract ideas from those that claim patent-eligible applications of those concepts. First, the court determines whether the claims at issue are directed to one of those patent-ineligible concepts. If so, the court then asks what else is there in the claims before it? To answer that question, the court considers the elements of each claim both individually and as an ordered combination to determine whether the additional elements transform the nature of the claim into a patent-eligible application. Case law describes step two of this analysis as a search for an inventive concept, i.e., an element or combination of elements that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself.

Decision

Asserted computer-implemented inventions–consisting of (1) method for exchanging obligations, (2) computer system configured to carry out method, and (3) computer-readable medium programmed to perform method–held not patent-eligible under 35 U.S.C.S. § 101.

Outcome

The judgment was affirmed.

Patent Application

A patent application requires four parts. They are the specification and claims, the drawings and the inventor’s oath or declaration (35 U.S.C. §115).

The specification is a summary of the technical aspects of the invention. It “… shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor or joint inventor of carrying out the invention.” (35 U.S.C. §112). The claims include a description of the novel features of the invention and of the scope of protection that will be created by the patent.

The drawings will show all of the different features of the invention “… where necessary for the understanding of the subject matter sought to be patented” (35 U.S.C. §113). The USPTO may also require a “… a model of convenient size to exhibit advantageously the several parts …” of the invention (35 U.S.C. §114).

Finally, the inventor’s oath or declaration will include a statement that “… the application was made or was authorized to be made by the declarant and but the declarant believes himself or herself to be the original inventor or an original joint inventor …“ of the claimed invention (35 U.S.C. §115).

A patent examiner will review the application thoroughly and examine the prior art. If the review is satisfactory a patent will be issued (35 U.S.C. §131). In the event that the reviewer either rejects, or objects to, the application, the USPTO will notify the applicant and provide reasons for the rejection or objection.

The applicant may request further review of the application (35 U.S.C. §132). If the applicant does not move forward with the application with six months following the rejection or objection the application will be considered to be abandoned (35 U.S.C. §133). The applicant may pursue an appeal to the Board of Patent Appeals and Interferences (BPAI) (35 U.S.C. §134). There are two additional opportunities for appeal if the decision of the BPAI is not acceptable to the applicant. §141 allows the applicant to file an appeal with the United States Court of Appeals for the Federal Circuit. If that option is not taken, the applicant may ”… have remedy by civil action against the Director …” (35 U.S.C. §145).

An inventor can file a provisional patent application (PPA). A PPA is a strategy that will allow the applicant to establish an early filing date for the patent application. The PPA must sufficiently disclose the invention and a full application must be filed within one year. Patent protection continues for a full 20-year patent term from the filing date of the regular application if approved.

Types of Infringement

Direct infringement arises when anyone “… without authority makes, uses, offers to sell, or sells any patented invention within the United States or imports into the United States any patented invention during the term of the patent therefor …” (35 U.S.C. §271).

Anyone who induces another party to infringe on a patent will be liable for indirect infringement (35 U.S.C. §271(b)). Indirect infringement requires that the person allegedly inducing infringement must be shown to have known the existence of the patent. Contributory infringement arises where a party knowingly “… offers to sell or sells within … or imports into the United States a component …” of a patented invention that will be used in a manner that will infringe on the patent (35 U.S.C. §271(c)). In both instances, the existence of direct infringement is required.

Defenses to Infringement

Invalidity and non-infringement are the two most common defenses to patent infringement (35 U.S.C. §282(b)). Invalidity challenges the validity of the patent itself. Since the statute establishes a presumption that the patent is valid the burden of establishing the “… invalidity of a patent …” is on the party asserting such invalidity (35 U.S.C. §282(a)). Raising invalidity as a defense requires a defendant to show that the patented invention did not meet the novelty or non-obviousness standards.

Non-infringement requires the defendant to describe or demonstrate the differences between its invention and the plaintiff’s patent. Essentially, this defense shows that the challenged invention is different from the patent that is the subject of the infringement claim.

If a plaintiff (patent holder) engages in illegal or unethical behavior in order to benefit its patents the patent holder has engaged in patent misuse and will be barred from instituting a patent infringement claim.

First Sale Doctrine

The first sale doctrine allows purchasers of a patented product to resell it without fear of an infringement claim. The Impression Products case supports the “right to tinker” by purchasers of products.

 

Case Study

Impression Products, Inc. v. Lexmark International, Inc.

Supreme Court Of The United States, 137 S. Ct. 1523 (2017)

Syllabus

A United States patent entitles the patent holder to “exclude others from making, using, offering for sale, or selling [its] invention throughout the United States or importing the invention into the United States.” 35 U. S. C. §154(a). Whoever engages in one of these acts “without authority” from the patentee may face liability for patent infringement. §271(a). When a patentee sells one of its products, however, the patentee can no longer control that item through the patent laws—its patent rights are said to “exhaust.”

Respondent Lexmark International, Inc. designs, manufactures, and sells toner cartridges to consumers in the United States and abroad. It owns a number of patents that cover components of those cartridges and the manner in which they are used. When Lexmark sells toner cartridges, it gives consumers two options: One option is to buy a toner cartridge at full price, with no restrictions. The other option is to buy a cartridge at a discount through Lexmark’s “Return Program.” In exchange for the lower price, customers who buy through the Return Program must sign a contract agreeing to use the cartridge only once and to refrain from transferring the cartridge to anyone but Lexmark.

Companies known as remanufacturers acquire empty Lexmark toner cartridges—including Return Program cartridges—from purchasers in the United States, refill them with toner, and then resell them. They do the same with Lexmark cartridges that they acquire from purchasers overseas and import into the United States. Lexmark sued a number of these remanufacturers, including petitioner Impression Products, Inc., for patent infringement with respect to two groups of cartridges. The first group consists of Return Program cartridges that Lexmark had sold within the United States. Lexmark argued that, because it expressly prohibited reuse and resale of these cartridges, Impression Products infringed the Lexmark patents when it refurbished and resold them. The second group consists of all toner cartridges that Lexmark had sold abroad and that Impression Products imported into the country. Lexmark claimed that it never gave anyone authority to import these cartridges, so Impression Products infringed its patent rights by doing just that.

Impression Products moved to dismiss on the grounds that Lexmark’s sales, both in the United States and abroad, exhausted its patent rights in the cartridges, so Impression Products was free to refurbish and resell them, and to import them if acquired overseas. The District Court granted the motion to dismiss as to the domestic Return Program cartridges, but denied the motion as to the cartridges sold abroad. The Federal Circuit then ruled for Lexmark with respect to both groups of cartridges. Beginning with the Return Program cartridges that Lexmark sold domestically, the Federal Circuit held that a patentee may sell an item and retain the right to enforce, through patent infringement lawsuits, clearly communicated, lawful restrictions on post-sale use or resale. Because Impression Products knew about Lexmark’s restrictions and those restrictions did not violate any laws, Lexmark’s sales did not exhaust its patent rights, and it could sue Impression Products for infringement. As for the cartridges that Lexmark sold abroad, the Federal Circuit held that, when a patentee sells a product overseas, it does not exhaust its patent rights over that item. Lexmark was therefore free to sue for infringement when Impression Products imported cartridges that Lexmark had sold abroad. ***

Holding

[1] A patent holder could not bring a patent infringement suit against a toner cartridge remanufacturer to enforce the single-use/no-resale provision accompanying its domestic return program cartridges because once sold, the return program cartridges passed outside of the patent monopoly, and whatever rights the patent holder retained were a matter of the contracts with its purchasers, not patent law;

[2] A patentee’s authority to limit licensees did not mean that patentees could use licenses to impose post-sale restrictions on purchasers that were enforceable through the patent laws;

[3] An authorized sale outside the United States, just as one within the United States, exhausted all rights under the Patent Act.

Outcome

Judgment reversed; case remanded ***

Estoppel

Estoppel in its various forms is a concept that we have discussed earlier in chapters relating to contracts, agency, and business associations. Estoppel may, for a variety of reasons, prevent someone from asserting a claim or defense. Defendants can raise two types of estoppel defenses to an infringement claim. They are file wrapper and equitable estoppel. The file wrapper includes all of the patent documents filed with the USPTO. This type of estoppel prevents an inventor from denying any deficiencies in its invention that were disclosed during the patent application process. Equitable estoppel will arise when the patent holder represented to the defendant that the patent would not be enforced. If the defendant relied on the holder’s misrepresentation then the holder’s claim may be dismissed.

Remedies for Infringement

The Patent Act provides for civil remedies for infringement of a patent. These include injunctive relief, damages and, in exceptional cases, attorneys fees. The statute of limitations for an infringement suit is six years (35 U.S.C. §281 et seq.).

Injunctive Relief

The court may issue an injunction either at a preliminary stage in the dispute or as part of the final resolution of the claim. A preliminary injunction may be issued where the patent holder can demonstrate that there is a significant likelihood that (a) it will suffer permanent harm in its absence, and (b) the patent holder will prevail in its infringement claim.

Damages for Infringement

Damages available to patent holders as a remedy for infringement include compensatory and increased damages. Lost profits and costs are recoverable as compensatory damages where the patent holder can establish the value of the patent. Increased damages are available at the discretion of the court if deliberate or willful infringement has been established. Attorney’s fees may be awarded by the court where willful infringement has been shown.

 

Ethical Considerations

Brewing Infringement

Jim teaches 4th grade history. He developed and patented a tea brewing device. He sold one of the tea brewers to Walter. Walter sees real potential in the tea brewer. He decides to launch a company that will sell the device on the internet. Walter reverse engineers Jim’s design, copies it and begins to sell his version of the tea brewer on his website. Are Walter’s actions ethical?

 

Questions

  1. What is the constitutional basis for intellectual property law?
  2. What rights are granted when a patent is issue?
  3. What is patentable subject matter?
  4. Does a patent application meet the novelty requirement if it is already published?
  5. Do design patents focus on utility of the invention?
  6. How are business method and software patents similar?
  7. What are the two most common types of patent infringement? Explain their differences.
  8. What is the First Sale Doctrine?