When Trademark Infringement Isn't
In what has caused some concern in certain sections of the legal community1, on November 5, 2008 the 9th Circuit Court of Appeals set forth another ruling on how to assess whether 1st Amendment protection is afforded to what is otherwise trademark infringement.2 Beginning in 1997 the 9th Circuit adopted a likelihood of confusion test in making the determination in a case that involved use of Dr. Seuss trademarks in a parody of O.J. Simpson.3 Five years later in Mattel v. MCA Records4 the Court was faced with a uniquely different set of facts, and ruled that use of the "Barbie" trademark for the catchy song "Barbie Girl" was constitutionally protected because the expressive interest in commenting on Barbie outweighed any likelihood of confusion posed by the use of the trademark.5
Finally, in E.S.S. Entertainment 2000 Inc. v. Rockstar Videos Inc.6 the Court held that use of trademarks in an expressive work is permissible unless it has no artistic relevance to the underlying work or the use explicitly misleads as to the source or content of a work. Dr. Seuss and its progeny have led to the obvious question: What test applies? In an abundance of caution, all three approaches must be considered. Although E.S.S. proceeded Mattel and Dr. Seuss, it would not be unlogical to apply the various tests in a staggered approach similar to the following.
First, parties would like to address the extent to which use of the trademark bears artistic relevance to the source. As highlighted by Mr. Lee of the L.A. Daily Journal, considering that in E.S.S. the issue revolved around the use of a strip club’s trademarked name in the video game Grand Theft Auto for no apparent purpose other than to make a reference to it, this prong should be easily satisfied.7
The second issue to be argued would be the extent to which use of trademark by the proponent causes a likelihood of confusion, followed by a balancing of the two competing issues in a manner consistent with Mattel. This approach, though simple and redundant, would ensure that the parties duly consider all major aspects of each of the 9th Circuit’s rulings, leaving them prepared for the certain scrutiny they will face from the Court.
1. Mark S. Lee, The 9th Circuit’s Doublespeak, L.A. Daily Journal 5 (Dec. 2, 2008).
2. See E.S.S. Entertainment 2000 Inc. v. Rock Star Videos Inc., 2008 WL4791705 (9th Cir. Nov. 5, 2008).
3. Dr. Seuss Enterprises, LP v. Penguin Books USA Inc., 109 F.3d 1394 (9th Cir. 1997).
4. 296 F.3d 894 (9th Cir. 2002).
5. Id.
6. E.S.S., Supra, n. 2.
7. Lee, Supra, n. 1 at ¶10.
Small Businesses At Risk of Being Liable for Their LLC's Debts & Obligations
I just scored a big victory on behalf of a client in Los Angeles Superior Court, and it reminded me to remind you of the importance of observing business formalities with your corporations and LLCs.
In the late 90s, my client had loaned about $200,000 to an acquaintance (we’ll call her Lauren), for use in a business Lauren was forming with a business partner. Lauren and her partner took the money and formed an LLC, but never paid back a dime of the loan. Of course, to keep the matter challenging for me, the loan agreement was entirely verbal. Thus, I not only had to prove an oral agreement, I had to deal with the statute of limitation problem from this decade old debt.
The LLC was defunct, so a judgment against that entity would have been worthless. In any event, it had always been my client’s understanding that these were personal loans to the individuals, not to the company.
I tried the case to a jury, and I called the defendants as my first witnesses, even before my own client, because I anticipated that they would acknowledge the debt (and thereby avoid all those problems of proving the oral agreement), but would try to push it off to the LLC. They testified as expected, and I was then able to show through the testimony of my client why the debts that they had just admitted to were in reality personal debts. The total judgment awarded by the jury and court exceeded a million dollars.
The Defendants, in their minds, may well have intended that the debts be company debts, but they did not observe the necessary formalities. They may have thought they hit the jackpot when they found someone willing to loan them $200,000 with no documentation, but that contributed to their own downfall. If these had been real company debts, then we would expect to see the usual formalities such as promissory notes issued by the company, and company minutes reflecting the terms of the loans. Most LLCs operate in a small business fashion and as a result run a high risk of inadvertently losing their liability shield under what is known as the Alter Ego Doctrine. The Alter Ego Doctrine is generally based on the idea that the member(s) of the LLC have acted as one and the same in a manner that works a fraud or injustice on another, and therefore should share the same liabilities. In determining whether the individual members are personally liable for the debts and obligations of the LLC under this doctrine the courts consider several factors, the most significant of which is failure to follow organizational formalities.
A failure to follow formalities has been seen to include improperly organizing an LLC, not timely filing required forms or paying required fees and taxes, not having a continuous presence in the home state, and not having a designated agent to receive legal documents. There are a few specific activities that commonly cause problems under the "failure to follow organizational formalities" factor: (1) Commingling of Assets; and (2) Failing to Keep Company Records.
A simple and common example of commingling and failing to keep records is where a member uses LLC funds or assets for personal use without documenting the transaction, and with no proof of authorization under the LLC’s articles. The lack of any formal procedure in the expenditure will make plain to any deciding judge that the LLC was no more than a name, and at all times the member and the business were one and the same entity.
These issues are of particular concern for the small business oriented LLC because they tend to operate on more limited budgets, have less management personnel, and, as a result of the primary focus being profits, generally have less time to ensure the LLC is complying with nuanced and complicated business laws. While the best answer to avoid the above mentioned pitfalls is of course what the small business person would most love to avoid, the high risk of inadvertently putting all personal assets at stake requires that they bite the bullet and consult with a business planning attorney. While doing so may serve a frustrating cost, it must be remembered that the above mentioned concerns are only a few of the many an LLC member must be wary of. In the end, the business person’s choice on whether to forgo professional consultation will most likely make the difference between walking away from any future financial disaster, or bringing it home.
Dude, Who's My Plaintiff? -- Courts Allow Anonymous Plaintiffs
On August 12, 2008, the Second District U.S. Court of Appeals reaffirmed the national and local trend toward recognizing a litigant’s right to proceed anonymously through the courts. In order to sue under a pseudonym, plaintiff’s generally must show that the need for confidentiality outweighs the public’s right to know and any prejudice suffered by defendant due to the secretive pleading. While not necessarily a light burden for plaintiffs, the real strain of the increasingly minted right is on defendants.
Depending on the context of the suit, major public out-lashes could be directed at defendants helpless to stop the tide. For instance, defendants sued civilly (publicly) for sexual abuse stand to lose much in the way of reputation, and eventually income, no doubt due in large part to the public’s natural inclination to distance themselves from what might be a perpetrator. While public scrutiny of the would be victim once would serve as a blow-off valve to some extent, now defendants are not only left to deal with an unrelenting public reaction, but will dually reap heightened scrutiny for the same allegations as plaintiffs who have convinced the court of the need for confidentiality will have generally shown that they would face unwarranted injury should their identities be disclosed. In other words, defendants will have no way to call public attention to a plaintiff’s credibility, and the public will be informed, or may very well assume, that defendants or their associates had posed a threat to the plaintiff prior to or during the litigation.
Defendants’ aggressive depiction of all factors assessed by courts of their jurisdiction in deciding whether or not to permit plaintiffs to act incognito is the only recourse afforded to diminish the risk of anonymous lawsuits. Particularly, considering the public has a well established right to know who is using the court system, focusing on the lack of need to preserve a plaintiff’s identity and the severe damage that could be inflicted on a defendant’s personal and/or professional reputations as a result of the anonymous lawsuit would be key. Also, seeking an anonymous designation as a defendant may also assist in preventing unfair prejudice. Ultimately, regardless of a defendant’s choice of tactics the courts have once again increased the need to vigorously litigate cases at the earliest of stages, which requires a heightened state of readiness, and can make litigation all the more daunting.
1. Sealed Plaintiff v. Sealed Defendants, Docket No. 06-1590-cv, (Dist. 2d, 2008)
2. Id. at 7-8.
