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“Trademark, Labor Law, and Antitrust, Oh my!”

Sep 10, 2021 Jessica SilbeyAdd a Comment

I am allergic to antitrust law, but after reading Hiba Hafiz’s recent article, I understand that my aversion is problematic. This paper combines an analysis of trademark law, labor law, and antitrust law to explain how employers exploit trademark law protections and defenses to control labor markets and underpay and under-protect workers. For most IP lawyers and professors, this article will open our minds to some collateral effects of trademark law’s consumer protection rationale on other areas of law with important consequences for economic and social policies.

The Brand Defense says it “takes a systemic view of intellectual property, antitrust and work law,” which means reading it demands keeping several balls in the air and following their interacting paths. It is worth the effort. Here are three paths the article’s argument follows.

First, Hafiz explains how broadened trademark protections for franchisors, like McDonalds, shift obligations from the franchisor to the franchisee. This means that individual restaurants or other franchisees must tightly monitor workers and products in service to “the brand.” This monitoring means that ingredients, components, machines, and processes are strictly regulated under the franchise agreement, leaving little leeway on profit margin for the franchisee except in the cost of labor.

Second, franchisors structured their relationships with franchisees as independent business entities to take advantage of developing antitrust law to functionally immunize their franchisor-franchisee relationships from antitrust liability. Vertical integration by contract or license (as opposed to through ownership) supposedly produces economic efficiencies to consumers, which is thought to alleviate the need for close antitrust scrutiny. But, as Hafiz demonstrates in her literature and doctrinal review of antitrust law, antitrust benefits are supposed to flow both to product markets and labor markets. Hafiz shows that when franchisee-franchisor agreements significantly constrain franchisee choice in the production of goods and services, this leads franchisees to skimp on worker protections and wages, which is also an antitrust harm. Hafiz persuasively argues that antitrust court decisions mistakenly view brand protection (through trademark licensing agreements) as ultimately encouraging competition between brands to consumers’ benefit while ignoring the harm to labor markets.

The third path follows the development of lawful but distressing labor practices by which upstream employers can avoid responsibility towards downstream franchisee workers by arguing a combination of trademark protection (“the brand defense”) and vertical disintegration. Upstream franchisors impose obligations on downstream employer-franchisees through businesses contracts, which include trademark licenses. They use this to claim the absence of a joint-employer relationship despite stringent flow-through quality control requirements. Once again, product quality and labor policy are artificially disentangled. Concern over the latter is hidden or depressed in favor of the consumer welfare justification that anchors both trademark and antitrust law.

There is so much to commend this article: its succinct legal history of the three areas of law; the clarity of its doctrinal analysis in light of the complex and interacting legal regimes; and the unapologetic championing of worker power in an era of increased economic inequality and burgeoning threats to democracy that ideally ensures accountability.

Different readers will draw different insights from it. The breadth of the terrain it covers makes it broadly appealing. When reading The Brand Defense, intellectual property lawyers and professors are likely to experience something familiar suddenly becoming strange. Hafiz describes how trademark law meant to promote consumer confidence and pro-consumer competition between goods and services is harnessed to justify anticompetitive vertical restraints and unfair labor practices.

Trademarks … confer broad[] value as legal trumps in antitrust and work law, immunizing lead firms’ legal exposure for anticompetitive conduct in labor markets and work law violations. Upstream firms have thus deployed a sophisticated set of legal strategies highlighting purported consumer benefits of branding in a way that has successfully obscured agency and court view of the effects of their market power, or wage-setting power, in downstream labor markets and over downstream employees’ terms and conditions of work. (P. 51.)

This is not the typical trademark framework, to say the least. And those writing and thinking about how broader scope of trademark protection produces incumbency benefits, disadvantages small companies, and injures competition and communication, should take note. The Brand Defense is a thoroughly devastating critique of contemporary trademark practice along related lines, but it enlists the adjacent legal fields of work law and antitrust to drive the points home. The doctrinal and regulatory reforms proposed at the end are straightforward, bold, and unfortunately (to me) unlikely to transpire given the current political climate. But the proposals derive from diverse legal mechanisms and thus provide various opportunities of attack.

I cannot guess how readers from the antitrust or labor law fields will find The Brand Defense. If you are less allergic to trademark law than I am to antitrust law, Hafiz’s article is well worth your time. Even if you are allergic, Hafiz’s sophisticated ideas, delivered in systematic arguments, will bring you far enough along to learn a lot about the twenty-first century workplace and the doctrinal and regulatory framework inhibiting the fight against destabilizing economic inequality.

Profiting Off Infringement

Jul 29, 2021 Christopher J. BuccafuscoAdd a Comment

It’s hard to imagine people tolerating intentional violations of their physical autonomy, never mind seeking to monetize such behaviors. But as Kristelia García argues in her new essay, Monetizing Infringement, many copyright owners find this strategy appealing.

According to copyright’s standard narrative, infringement reduces the returns to creative effort and, thus, undermines authors’ incentives to produce new works. Here, however, García “destabilizes long-held but problematic assumptions about the interplay between copyright law’s purported goals and its treatment of infringement by challenging the received wisdom that rightsholders are necessarily anti-infringement.” (P. 270.)

Building on work by Tim Wu, Dave Fagundes, and Rebecca Tushnet, among others, García catalogues three distinct forms of monetizing copyright infringement across a variety of creative domains: (1) profitable infringement, in which infringement results in income for the rightsholder; (2) remedial infringement, in which infringement mitigates a worse outcome for the rightsholder; and (3) promotional infringement, in which infringement amounts to valuable and cost-efficient promotion for the rightsholder’s content.

It is well known that owners of sound recording copyrights have found user-generated content on YouTube to be a profitable form of infringement, thanks to YouTube’s Content ID system. When musicians’ fans create and post videos to YouTube, record labels can reap the advertising revenue without having to generate their own content. But García also describes how video game developers rely on sales of extra downloadable content, like additional levels and characters, to benefit from pirated versions of their games. While users may be able to pirate a game for free, they are often willing to pay for added content that increases its appeal.

Game developers also encourage what García calls remedial infringement, encouraging piracy when it is a less significant problem than others that they face. For example, gray market resellers offer game “keys” that allow purchasers to access games and promotional content for lower prices than the developer is charging. Often, however, the keys don’t work, and the developers spend considerable time and money responding to complaints about fake and broken keys. In response, García notes that several developers have opted to encourage users to simply pirate their games, instead of using gray market sites. Either way, the developers argue, they aren’t being paid. But at least they don’t have to deal with the additional headache.

Most interesting to me is García’s category of promotional infringement and her example of musicians encouraging fans to create videos that incorporate the musicians’ songs and post them online. In some cases, the original video will generate millions of views and promote fan interest in the song. In other cases, the video will inspire others to create their own versions. But in either case, the potentially infringing videos can generate new streams and new revenue for musicians. García and I elaborate on this phenomenon in our forthcoming article, “Pay-to-Playlist: The Commerce of Music Streaming.”

Having cataloged various forms of monetizing infringement, García then elaborates on potential reasons why copyright owners might engage in this behavior rather than simply suing (or threatening to sue) for infringement. She notes how copyright law covers a wide variety of content and actors with a fairly similar set of legal rights. This opens up the possibility that owners simply have very different preferences and norms with respect to uses of their works. García also suggests that monetization may be an effective strategy in situations where technology changes more rapidly than law. Although authors might not prefer this strategy in a perfect world, they may come to rely on it where industrial changes outpace legal ones.

Finally, although this article is largely descriptive rather than normative, García considers the potential costs and benefits of monetizing infringement. On the benefits side, she includes the efficiencies of private ordering, tailoring the law’s one-size-fits-most approach, and an effective shrinking of copyright’s scope and duration, at least for those who aren’t targeted with infringement actions. But monetizing infringement has costs as well. It is easier and safer for larger established players than it is for upstarts or independents. Selective copyright enforcement can also lead to confused norms and user uncertainty. If one gaming company allows or encourages infringement, that doesn’t mean that others will—or that this one will continue to do so in the future and for everyone.

The realities of how copyright law is wielded in the hands of owners often differ from the standard narratives that lobbyists and scholars articulate about incentives and access. García’s work joins a growing movement of scholars who are exploring the ways in which the law interacts with the particularities of actual creative industries. This is an important contribution for scholars who want to move beyond just-so stories and abstract theories.

Dirty Hands, Dead Patent?

Jul 2, 2021 Margo BagleyAdd a Comment

The 2018 Federal Circuit Gilead Sciences v. Merck & Co.¹ decision is one of the rare patent cases in which a court has applied the unclean hands doctrine to withhold a remedy for infringement. Sean Seymore used this case as a launching point for a deeper and more expansive reconception of the role of the unclean hands doctrine in patent law. He suggests that a range of pre-issuance malfeasance by the patentee, not just inequitable conduct before the USPTO, should preclude relief for the offending plaintiff against all defendants.

The doctrine of unclean hands is best known in patent law as the origin of the inequitable conduct defense, which renders patents obtained from the USPTO through materially deceptive behavior permanently unenforceable against anyone. Unclean hands, however, is both broader and narrower than inequitable conduct. It is not limited to misconduct in patent prosecution, but it only prevents the patentee from enforcing the patent against the particular defendant in the action involving the misconduct; other defendants are fair game.

So, while inequitable conduct results in permanent unenforceability, unclean hands only creates relative unenforceability. The rationale for this dichotomy is that if the patentee’s misconduct did not occur during the process of obtaining the patent, the underlying property right remains taint-free. Thus, only enforcement of the right in the proceeding to which the misconduct relates should be disallowed.

Many pundits remarked the surprising revival of the standalone doctrine of unclean hands –untethered from inequitable conduct– in the Gilead Sciences decision. However, Seymore goes deeper, using the case as an opportunity to propose a more robust, expansive, yet theoretically sound role for unclean hands in patent cases; a role which complements, without subsuming, its inequitable conduct progeny.

In his thought-provoking article, Seymore identifies a type of pre-issuance misconduct that raises the same misconduct-in-patent-acquisition concerns as inequitable conduct, but because it does not involve USPTO proceedings, gets treated as unclean hands with only relative unenforceability (as between the parties) and not permanent unenforceability with erga omnes effect.

This result, according to Seymore, makes no sense. He persuasively argues that a more equitable and symmetrical approach would be to treat all misconduct that taints the patent right ab initio the same: by imposing a remedy of permanent unenforceability.

The facts of the Gilead case exemplify Seymore’s scenario of concern. There, Gilead shared its Hepatitis C lead compound, sofosbuvir, with Merck as part of a technology collaboration subject to a confidential firewall agreement. Merck violated the agreement by allowing one of its in-house lawyers — prosecuting Merck’s own applications — to participate in a teleconference where he learned sofosbuvir’s structure. He later amended Merck’s pending applications to cover sofosbuvir. Moreover, when Merck later sued Gilead for patent infringement, the same attorney gave false testimony at trial.

Gilead’s successful assertion of an unclean hands defense was based on both the litigation and pre-litigation misconduct. In affirming the holding, the Federal Circuit noted that the pre-litigation business misconduct met the requirement for the unclean hands defense by potentially enhancing Merck’s legal position, possibly expediting patent issuance, and likely lowering invalidity risks in litigation. These were all directly connected to the patent enforcement relief sought.

Seymore employs a series of examples to distinguish actions triggering inequitable conduct, such as submitting fabricated data to the USPTO, from those with which his proposal is concerned. An example of the latter is falsifying information in a grant proposal that results in an award of funds later used to develop a patented invention. While there is no fraud on the USPTO, there is fraud on a federal agency and the patent is the fruit of that poisonous tree. As such, per Seymore, the patent should be rendered permanently unenforceable.

An intriguing example of “misconduct” in the article is poaching for the public good. In this scenario, a hypothetical COVID-19 vaccine manufacturer seeking to speed up product development, poaches an employee from a competitor (who has already developed a vaccine) and uses the knowledge of what does not work obtained from the employee to accelerate its product development and FDA approval.

While the public benefits from a second vaccine on the market, should the manufacturer be able to enforce its vaccine patent(s) against a different competitor? Is there a sufficient nexus between the possible trade secret misappropriation (poisonous tree) and acquisition and enforcement of the patent (fruit)? Should engaging in bad conduct for a good cause affect the taint? Or should we be less concerned about not enforcing patents (which could exclude other manufacturers from the market) in a public health situation? Such tensions are beyond the article’s direct focus but perhaps could fruitfully be explored in future work.

Considering the open-ended nature of the unclean hands determination, and the risk that it could devolve into a patent litigation “plague”² like inequitable conduct pre-Therasense,³ Seymore wisely cabins application of his proposal with several constraints. These include a tort-based proximity requirement: misconduct that lacks a sufficient nexus to acquisition of the patent right (what he calls collateral misconduct) should be subject to the ordinary unclean hands remedy of relative unenforceability. He also articulates five discretion-limiting principles and aligns the proposal with normative justifications for the doctrine such as court integrity, public interest, and deterrence of wrongful conduct.

Seymore candidly notes that his proposal could result in overdeterrence: patentees taking inefficient precautions to avoid misconduct, or bypassing patents for trade secret protection. He further opines that bona fide purchasers for value without notice of the misconduct could be harmed (and patent rights made more uncertain) if his proposal is adopted. Nevertheless, he concludes, quite correctly, that this risk already exists for inequitable conduct, and that the high hurdle of clear and convincing evidence required for proving unclean hands provides a further critical limit. He also suggests ways for patentees to purge the “taint” before filing for patent protection and provocatively queries whether some types of “uncleanness” in patent law should be tolerated, citing to the largely defunct moral utility doctrine.

I probably appreciated Seymore’s paper more than most because he elegantly develops a wonderfully cogent theory that I wish I had been aware of in writing an article over a decade ago. At the time, I alluded to a kind of pre-litigation invention-creation misconduct possibly recognizable in equity, but my effort was under-theorized. Sean Seymore’s insightful recognition of the latent implications of the Gilead decision’s resurrection of the unclean hands defense in patent cases was a pleasure to read and an important evolution in thinking about equitable doctrines in patent law.

Update of Jotwell Mailing Lists

Jun 27, 2021 JotwellAdd a Comment

Many Jotwell readers choose to subscribe to Jotwell either by RSS or by email.

For a long time Jotwell has run two parallel sets of email mailing lists, one of which serves only long-time subscribers. The provider of that legacy service is closing its email portal next week, so we are going to merge the lists. We hope and intend that this will be a seamless process, but if you find you are not receiving the Jotwell email updates you expect from the Intellectual Property section, then you may need to resubscribe via the subscribe to Jotwell portal. This change to email delivery should not affect subscribers to the RSS feed.

The links at the subscription portal already point to the new email delivery system. It is open to all readers whether or not they previously subscribed for email delivery. From there you can choose to subscribe to all Jotwell content, or only the sections that most interest you.

Tracking Change and Continuity in Twenty-First Century Copyright Fair Use

Jun 2, 2021 Michael GoodyearAdd a Comment

In the past sixteen years, copyright law has undergone important changes. Court have issued major decisions, such as Skidmore v. Led Zeppelin, which clarified the Ninth Circuit’s substantial similarity test and rejected the inverse ratio rule, and Capitol Records, LLC v. Vimeo, LLC, in which the Second Circuit elucidated a more concrete red flag knowledge standard for purposes of the Digital Millennium Copyright Act. Significant new copyright legislation, in the form of the Music Modernization Act, has also been promulgated. And during this period, fair use jurisprudence has also continued to grow apace. Many of the cases that are now considered copyright law canon for students, academics, and practitioners alike were decided during this period, including Bill Graham Archives v. Dorling Kindersley, Ltd., Perfect 10, Inc. v. Amazon.com, Inc., Cariou v. Prince, and Authors Guild, Inc. v. Google, Inc. Barton Beebe’s recent article analyzing fair use opinions from 1978 to 2019 thus provides a welcome update to his earlier work that covered fair use cases from 1978 through 2005.

Both Beebe’s original article and this update use statistical analyses of all the fair use opinions issued during the period to draw conclusions about how judges have applied the four fair use factors and their subparts. Beebe’s earlier work provided an important statistical analysis baseline for anyone wanting to understand, modify, or improve fair use. This long-awaited update will no doubt prove useful in providing the most recent data on fair use determinations to those in the copyright space.

The updated article, in addition to those opinions issued during 1978-2005, analyzes a further 273 fair use opinions from 220 cases. Perhaps surprisingly given the number of fair use opinions issued over the past decade and a half, fair use analyses largely remained the same during the 2006-2019 period. For example, the vast majority of courts have continued to primarily apply only the four factors listed in Section 107, even though the factors are explicitly meant to be nonexclusive. Courts also tend to apply them mechanically, moving through each factor to see which party it favors. The Second and Ninth Circuits, as well as the Southern District of New York, also continue to exert the most influence on fair use cases, although the Ninth Circuit is growing in importance.

However, Beebe discovered several important trends during this period. On average, the number of opinions addressing fair use is on the rise. Many more have arisen in opinions addressing motions to dismiss, which Beebe—no doubt correctly—chalks up, at least in part, to the Supreme Court’s stricter motion to dismiss standard from Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal, both of which were decided after the initial study. The fair use defense has also been increasingly adjudicated at the summary judgment stage.

In addition, Beebe found that, like in his earlier study, lower courts continue to cite to overturned precedent and dicta. For example, in Sony Corp. of America v. Universal City Studios, Inc., the Supreme Court established the presumptions that commercial uses are unfair, noncommercial uses are fair, and commercial uses harm the plaintiff’s market. But in Campbell v. Acuff-Rose Music, Inc., the Supreme Court limited these standards by reducing the importance of commercial use to a considered factor rather than a per se fair use rule. Yet district courts have continued to cite to Sony unabashedly for these rules. This has even increased since 2005. Similarly, courts continue to cite the Supreme Court’s dicta in Harper & Row v. Nation Enterprises that factor four is “undoubtedly the single most important element of fair use,” even though the Supreme Court overrode this statement in Campbell by stating that all factors should be considered and that the transformativeness inquiry was at the heart of fair use.

The core of Beebe’s article, however, is how he uses data on the fair use factors to determine both the impact of a factor on the overall outcome and its correlation with the other factors. The first and fourth factors—the purpose and character of the work (including transformativeness) and market effect—continue to predominate, with the fourth factor correlating the most strongly with the overall fair use determination. The first and fourth factors also strongly correlate with each other.

The determinativeness of the fourth factor may, at first blush, surprise many commentators who have argued that the transformativeness inquiry drives the fair use analysis. Beebe found that as compared to 2005, when it appeared that the importance of transformativeness was waning, courts now consider whether a use is transformative in the vast majority of cases. Indeed, transformativeness, taken alone, was the single most determinative subfactor for the overall fair use outcome, even more so than market effect. Despite this influence on the overall outcome, Beebe found that transformativeness has not yet eaten the entire fair use inquiry.

Beebe notes that statistics cannot be a replacement for traditional doctrinal analysis, but the data he has gathered does provide a valuable high-level understanding of the trends in fair use jurisprudence and opens the way for further research on fair use. Hopefully, Beebe continues this long-running project. The Supreme Court’s decision in Google LLC v. Oracle America, Inc., is the first Supreme Court decision to address fair use since Campbell in 1994. How courts decide to interpret Google v. Oracle could prove significant for fair use decisions in the coming years, especially those involving computer programs and other technological innovations.

How Do Innovation Races Affect Research Quality?

Apr 30, 2021 Lisa Larrimore OuelletteAdd a Comment

Significant new technologies have often been invented nearly simultaneously, and some scholars have worried that patent law’s rewards for the first to file create incentives to race to the patent office and do less to refine the invention. Similar concerns have been voiced about competition for academic priority leading to rushed, low-quality publications. But measuring whether competition for IP or academic credit actually decreases quality has proven difficult, and this difficulty limits the usefulness of models of innovation races.

In a creative and important new working paper, Race to the Bottom: Competition and Quality in Science, economists Ryan Hill and Carolyn Stein tackle this empirical challenge. They focus on structural biologists, whose research deciphering protein structures has advanced drug and vaccine development (including for COVID-19) and led to over a dozen Nobel Prizes. Journals and funding agencies generally require structural biologists to deposit their structures for proteins and other biological macromolecules in a worldwide repository, the Protein Data Bank (PDB). Using this rich dataset, Hill and Stein have documented that structures with higher expected reputational rewards induce more competition and are completed faster—but at lower scientific quality. Recognizing and navigating this tradeoff is important for scholars and policymakers concerned with allocating awards among competing innovators through a range of policy instruments, ranging from academic credit to intellectual property.

Three key features of the PDB make it a viable setting for this research. First, it has objective measures of project quality. The quality of a PDB structure is based on how well it fits to experimental data, resulting in quantitative, unbiased quality metrics. Second, it provides measures of project timelines. The authors could observe both the time between collecting experimental data and depositing a structure (as a measure of project speed) and the time between a first deposit and the deposit of similar structures (as a measure of competition). Third, it enables estimates of the expected reputational reward from winning the priority race to deposit a given protein structure. The detailed descriptive data in the PDB allows a structure’s potential to be estimated based on information that would have been known to researchers before they began working, including the protein type, organism, and prior related papers.

If scientists can choose whether to invest in a research project and how long to refine their work before publishing, then the projects with the highest potential reputation rewards should induce the most entry—but entrants concerned about being scooped may also rush to publish their work prematurely. And this is exactly what Hill and Stein find. Structures in the 90^th versus the 10^th percentile of the potential distribution induce more competition (30% more deposits), are completed faster (by 2 months), and have lower scientific quality (by 0.7 standard deviations). The fact that high-potential projects are completed more quickly suggests these results aren’t driven by high-potential projects being more complex. Additionally, the authors show that these correlations are smaller for scientists who receive lower reputational rewards from publication and priority: researchers at government-funded structural genomics consortia, who are focused achieving a comprehensive protein catalog rather than publishing individual results.

The welfare implications of rushed, low-quality protein structures appear significant. Improving a structure generally requires inefficient reinvestment of the same costs expended by the original research team. But optimizing existing incentives is challenging. Hill and Stein consider increasing the share of credit allocated to the second-place team—such as through recent journal policies that treat scooped papers on equal footing with novel papers—and conclude that if the total rewards are fixed (as seems plausible with scientific credit), the quality improvement might be outweighed by decreased investment. As another option, they argue that both investment and quality could be improved by barring entry by competitors once one team has started working on a protein structure—a sort of academic prospect theory, as was the norm in the early days of structural biology, before the size of the field made the norm too difficult to enforce. Importantly, this result depends on the specific nature of their model, with quality differences driven more by rushed work to avoid being scooped than by the skill of the research team. Reintroducing this kind of entry barrier for academic research would be challenging (and problematic under antitrust laws), but this result may inform debates over the optimal timing of awarding patent rights.

Hill and Stein’s rigorous empirical evidence that innovation races can lead to decreased quality scientific work is a welcome addition to the innovation racing literature, including because many racing models omit this consideration altogether. And their paper is also well worth reading for their thoughtful discussion of key factors for allocating rewards among competing innovators. First, how easy is it to build on incomplete work, both scientifically and legally? Unlike in structural biology, follow-on work is not always particularly costly; for example, if an ornithologist releases an incomplete dataset of bird species, a subsequent team can pick up the project relatively seamlessly, increasing the value of early disclosure. Second, how important are differences in research skill relative to the decline in quality caused by rushing? Ending innovation races early may be effective in structural biology, but in many cases, giving the first team time to complete work well may not be worth the cost of preventing a better team from stepping in. Third, are rewards fixed? Creating additional academic credit may be difficult, but financial rewards—including through government prizes and subsidies—can be used to increase the second team’s payoff without reducing the first’s.

Before reading this paper, I had thought about the problem of rewards for incomplete research primarily in terms of quality thresholds such as patentability criteria, but choosing a threshold that applies across projects of varying difficulty is challenging in practice. Hill and Stein have given me a richer understanding of the relevant variables and policy instruments for tackling this challenge, and I look forward to seeing the impact this work has on the innovation law community.