Chapter 24.docx Discuss the, “Legal Issues in Cyberspace” excerpt in Section 24-5 of Ch. 24, and Section 24-6, “Copyright Infringement,” of the text. Discuss the topics you are comfortable with, the topics you struggled with, and how these issues relate to application in your field.Write a 350- to 700-word paper detailing the findings of your discussion.Must be APA format with 3 reference in alphabetical order, introduction and conclusion paragraph.  All work will be checked for plagiarism.Intellectual Property
Learning Outcomes Checklist
After studying this chapter, students who have mastered the material will be able to:
Define a trade secret and other protectable business information and articulate the various legal
implications for misappropriation of that information.
Classify trademarks marks based on their level of distinctiveness and give examples of
trademarks, trade dress, and service marks.
Express how federal laws aimed at regulating trademarks in cyberspace apply to domain names.
Identify and understand the impact of trademark infringement and dilution.
Articulate the fundamental requirements for copyright protection, the legal ramifications of
copyright infringement, and the impact of technology on copyright law.
Apply the fair use defense and give examples from case law.
Explain the process for obtaining and maintaining a patent and articulate the basic requirements
for an invention to have patent protection.
Identify and understand the remedies for acts of patent infringement.
The formal protection of intellectual property has been a foundation of U.S. law since the
ratification of the Constitution. In Article I, Section 8 of the U.S. Constitution, Congress is
specifically authorized to protect intellectual property “by securing for limited Times to Authors
and Inventors the exclusive Right to their respective Writings and Discoveries.” A study
published in the Harvard Business Review found that intellectual property represents
approximately 70 percent of an average firm’s value, and that number has nearly doubled in one
decade.1 This chapter discusses the increasingly important legal concepts of intellectual property
protection that will help business owners and managers to make informed decisions on how best
to protect their own intellectual property and prevent infringing upon the intellectual property
rights of others. In this chapter, students will learn:
K. Rivet and D. Kline, “Discovering New Value in Intellectual Property,” Harvard Business
Review, January 2000, p. 58.

Legal protections for trade secrets and other business information.
Statutory and common law requirements for protection of trademarks, service marks, and
trade dress.
Requirements for protection under federal copyright laws, consequences of infringement,
and application of the fair use test.

Overview of protections for inventors through patent law and statutory requirements for
obtaining a patent.
International treaties and risks concerning intellectual property protection.
Trade Secrets and Protection of Business Information
One of the most valuable assets of any firm is their secret processes, formulas, methods,
procedures, and lists that allow them a competitive advantage in their trade. It is important to
understand that many of these types of trade secrets, business information, and business methods
may not be protectable by patent or copyright laws. In fact, patent applicants generally rely on
trade secret law to protect their inventions while patent applications are in progress. Businesses
from across the spectrum of sectors turn to trade secret protection laws to protect some or all of
their valuable creative ideas. Examples of technical and business information material that can be
protected by trade secret law include customer lists, designs, instructional methods,
manufacturing processes and product formulas, and document-tracking processes.
Courts use several factors under the common law of the majority of states to determine whether
certain material constitutes a trade secret:

The extent to which the information is known outside the claimant’s (i.e., the firm
claiming the information to be a trade secret) business.
Measures taken by the claimant to guard the confidentiality of the information.
The value of the information to competitors.
The amount invested (in terms of time and money) in developing the information.
The efforts to maintain trade secret confidentiality among the claimant’s employees and
third-party vendors (such as auditing firms).
Trade Secret Protections
Trade secret protections are provided by state statutes and/or state common law. The Uniform
Trade Secrets Act (UTSA)2 defines trade secrets as information or articles that are to be kept
secret because of its particular value. More formally, a trade secret is described as formula,
pattern, compilation, program, device, method, technique, or process that meets the following
The UTSA is a model law drafted by the American Law Institute for use by state legislatures.
For more information on the ALI and Model Laws, see Chapter 1, “Legal Foundations.”

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.
Is the subject of efforts that are reasonable under the circumstances to maintain its
secrecy. Economic value must be identified by the owner and secrecy must be kept.
While the definition of misappropriation may cover a wide spectrum of illegal acts, most states
use the fundamental definitions contained in the UTSA: 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 any disclosure or use of a trade secret of another without express or implied consent.
Criminal Sanctions
While the UTSA does not contain any criminal sanctions, many states have added a separate set
of statutes that make certain trade secret misappropriation a criminal offense. For example, in
1997, a district attorney in California prosecuted several executives and employees of Avant!
Corporation, a firm that designed software related to semiconductor chips. The prosecutor was
alerted to the case after a competitor of Avant! sued them in an action brought under California’s
Trade Secret Act, alleging that Avant! employees stole computer code from one of Avant!’s
primary competitors.3 Ultimately, Avant! accepted a plea bargain from the prosecutor that forced
the company and seven individuals to pay $35 million in fines and resulted in incarceration for
five of the defendants. The Economic Espionage Act is a federal statute passed in 1996 providing
criminal penalties for domestic and foreign theft of trade secrets.
Cadence Design Systems, Inc. v. Avant!, 253 F.3d 1147 (9th Cir. 2002). The parties settled the
civil suit for $265 million.
Exclusive Rights for Unlimited Duration
Perhaps the most significant advantage of trade secret protection over other forms of intellectual
property (such as patents) is protection for trade secrets does not expire after a fixed period of
time. A trade secret owner has the right to keep others from misappropriating and using the trade
secret for the duration of the firm’s existence. Although sometimes the misappropriation is a
result of industrial espionage, most trade secret cases involve people who have taken their former
employer’s trade secrets for use in a new start-up business or for a new employer.
Trade secret protection endures so long as the requirements for protection continue to be met.
The protection is lost if the owner fails to take reasonable steps to keep the information secret.
For example, Sam discovers a new method for manipulating images in multimedia works. He
demonstrates his new method to a number of other developers at a multimedia conference. Sam
may have lost his trade secret protection for the image manipulation method because he failed to
take appropriate steps to keep his method secret.
Trade secret owners have recourse only against misappropriation. Discovery of protected
information through independent research or reverse engineering (taking a product apart to see
how it works) is not misappropriation.
Self-Check: Trade Secrets
Which of the following may be protectable as a trade secret?
A list of customers compiled by a firm that included buying patterns, purchaser contact
information, and preferred products of each customer.
A system used by a medical practice for scheduling patients for doctor’s office visits.
The formula for a new brand of fruit drink for a beverage supply company.

The process used by an accounting firm to draft financial statements in accordance with
Generally Accepted Accounting Procedures (GAAP).
New software that helps a manufacturer speed up the design process for new products.
Answers to this Self-Check are provided at the end of the chapter.
Trademarks, Service Marks, and Trade Dress
A trademark is a word, symbol, or phrase used to identify a particular seller’s products and
distinguish them from other products. For example, the word Nike and the Nike “swoosh”
symbol identify shoes made by Nike and distinguish them from shoes made by another company.
Similarly, the Coca-Cola name and logo design distinguishes the brown-colored soda of one
particular company from competing brown-colored sodas made by other companies. When such
marks are used to identify services rather than products, they are known as service marks. Visa,
for example, is a service mark related to the credit card services offered by Visa International
Services Associated.
Trade Dress
Trademark protection also extends beyond words, symbols, and phrases to include other aspects
of the product such as shape or the color scheme of its packaging. These features are known as
trade dress. Increasingly, the U.S. Patent and Trademark Office (USPTO) and courts have
granted trademark protection for such trade dress-related characteristics as product shapes,
colors, and scents so long as a company can prove an exclusive link to the source product in the
consumer’s mind. For example, beginning in 2005, after having secured trademark registration
for the two-dimensional iPod symbol and the cobranded “Made for iPod” symbol, Apple applied
for trademark protection of the actual three-dimensional shape of their product. Apple provided
the USPTO with evidence that (1) they had spent hundreds of millions of dollars in advertising
targeted to building an association between iPod’s shape and Apple, (2) there was a widespread
consumer familiarity with the iPod’s design, and (3) many consumers automatically linked the
iPod’s shape with Apple. In 2008, the USPTO granted Apple’s application for trademark
registration. Figure 24.1 shows the sketches submitted by Apple to the USPTO.
Figure 24.1 Apple iPod Trademark Registration
Trademarks as a Business Asset
Business owners often invest significant resources into their trademark design, advertisement,
and protection because it is a valuable asset. Trademarks make it easier for consumers to quickly
identify the sources of a given good. Trademark owners design and advertise their trademarks in
hopes of helping to build brand loyalty, knowing that instead of reading the fine print on a
product, consumers have instant recognition of their mark. Rather than having to ask a store
clerk where to find a particular brand of sneaker, consumers are more likely to recognize a
unique pattern of stripes or a “swoosh” symbol. Trademark protections are designed to ensure
that competitors cannot have a free ride on a popular brand name. If a low-quality clothing
manufacturer could freely use the name Aéropostale or the widely known trade dress associated
with that mark, consumers might assume that they are buying authentic Aéropostale clothing.
Sales and reputation may suffer as consumers now began to infer that the Aéropostale company
had reduced its quality assurance standards.
Trademarks also serve as an incentive for business owners to invest in the quality of their goods
or services. If a consumer tries a brand of laundry detergent and finds the quality to be lacking, it
will be easy for a consumer to avoid that brand in the future. Trademark law provides consumer
protection by regulating the use of trademarks and prohibiting the use of a mark where consumer
confusion may result.
Source of Law
Trademark protections are a patchwork of federal and state law, but the major provisions and
protections are found in a federal statute known as the Lanham Act. The statute prohibits the use
in commerce, without the mark holder’s consent, of any protected trademark in a way likely to
cause consumer confusion. The act also prohibits the use of an unregistered common law
15 U.S.C. § 1114(1)(a).
Classifications of Trademarks
To qualify for protection as a trademark, the mark must be distinctive. That is, it must be capable
of identifying the source of a particular good. In determining whether a mark is distinctive,
marks can be grouped into three categories that are based on the mark’s relationship to the
underlying product. Because marks vary with respect to their distinctiveness, the requirements
for, and degree of, legal protection afforded a particular trademark will depend upon which
category it falls within.
Arbitrary or Fanciful
A mark categorized as arbitrary or fanciful bears no logical relationship to the underlying
product. For example, “” or “Kodak” bears no inherent relationship to their
underlying products or services. Similarly, the Google name and symbol has no obvious
connection to an Internet search engine. Arbitrary/fanciful marks are highly distinctive and are
thus afforded a relatively high level of protection.
A trademark is classified as suggestive if the mark itself evokes images of characteristics of the
underlying product. Some exercise of imagination or knowledge of a particular field may be
necessary to make this connection, but the mark itself suggests the underlying product. For
example, Under Armour Clothing suggests some type of product to be used “under” something,
but one needs a leap of imagination to understand the tied product. Suggestive marks are similar
to arbitrary marks in that they tend to be highly distinctive and are given a high level of
Google is one of the strongest and most distinctive trademarks in the world.
© AP Photo/Paul Sakuma
Case 24.1. Custom Vehicles v. Forest River, 476 F.3d 481 (7th Cir. 2007)
Fact Summary
Custom Vehicles registered the trademark “Work-N-Play” for one of their products. Work-NPlay vehicles were vans designed to be both a mobile office and, upon conversion that took the
owner approximately one hour, a camper. Later, Forest River manufactured a van with a ramp
door from the rear cargo section that had space fitted for a snowmobile, motorcycle, or ATV.
They named the van Work and Play (without registering it as a trademark). Custom filed suit for
trademark infringement, but the district court held that no infringement had taken place.
Synopsis of Decision and Opinion
The Seventh Circuit Court of Appeals affirmed the trial court’s decision in favor of Forest, ruling
that Custom’s mark was descriptive but had not acquired a secondary meaning. Sales of
Custom’s product were relatively small, and there was no evidence that the mark would have any
brand recognition. Thus, the mark was not sufficiently “famous” so as to be afforded trademark
Words of the Court: Secondary Meaning
“A trademark, like a patent, carries a presumption of validity. However, in the case of a
registered descriptive mark, the presumption is that it has acquired secondary meaning. But the
act of registration merely begins the process that leads to the presumption. Bare registration is
not enough. Trademarks cannot be ‘banked’ or ‘ware-housed’—that is, an individual or entity
cannot register thousands of names, unrelated to any product or service that it sells, in the hope
of extracting a license fee from sellers of products or services for which one of the names might
be apt. The register of a name must certify that the product is in use in commerce—defined as
the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a
right in a mark—within six months after the trademark is registered. Within those six months,
the use of the trademark in one commercial sale is not enough to place the trademark in the
ordinary course of trade, unless the sale is large enough to seize the attention of the relevant
Case Questions
Should Custom have waited until they sold more of this product before they registered
Work-N-Play as a trademark?
Why must a descriptive mark acquire a secondary meaning in order to have protection?
A descriptive trademark is one in which the mark directly describes, rather than suggests, a
characteristic of the underlying product or service in terms of color, function, and so forth. For
example, “Pizza Hut” tells us something about the product they sell. Marks that indicate
geographic ties, such as Vermont Maple Syrup, or marks that use a proper surname, such Ford
Motor Company, are considered descriptive. However, unlike arbitrary marks, descriptive marks
are not inherently distinct and may only gain trademark protection if they have acquired a
secondary meaning. Descriptive marks must clear this additional hurdle precisely because these
are frequently common terms that are connected to the product, but may also have alternate
meanings in a different context.
Standards for Secondary Meaning
A secondary meaning is created when the consuming public primarily associates a mark with a
particular product rather than any alternate meaning. For example, Microsoft attempted to
protect the term Windows as a mark for its revolutionary operating system for many years. In
order to attain that right, Microsoft was required to show that much of the consuming public
more often associated that term with their operating system rather than panes of glass.
In Case 24.1, a federal court of appeals analyzes the requirements for a secondary meaning.
Legal Implications in Cyberspace: Domain Names, Trademarks, and Cybersquatting
The explosive growth of consumer Internet use caused concern among trademark holders on a
number of fronts. Chief among them was the practice of individuals who legally registered
domain names that were also words associated with a famous trademark. Once the domain name
was secured, the individual would offer the domain name at an extraordinarily inflated rate to the
trademark owner. This practice became known as cybersquatting and was the subject of
considerable media attention in the 1990s and early 2000s. Congress responded to this practice
by passing a federal statute designed to curb some of the more unscrupulous cybersquatters. That
law, the Anticybersquatting Consumer Protection Act (ACPA), gave specific statutory remedies
to trademark owners to recover trademark-related domain names from users that acted in bad
faith. Bad faith is a dishonesty of belief or purpose. In this context, the bad faith requirement
may be met in a number of ways, but is typically satisfied when the registrant has no legitimate
reason for the use of a domain name or the registrant is using the domain name to profit or
confuse consumers. In Case 24.2, a federal court outlines nine examples of bad faith under the
Business Ethics perspective: Name for a King’s Ransom
1. Do you think that registering a domain name with the sole intent to sell the domain name
is ethical? Isn’t this just the market economy at work?
2. If one individual buys a domain name from another, with the intent to resell to another
party, is that a different ethical decision than in question one?
3. Are there any circumstances in which a party could ethically obtain the domain name of a
famous trademark?
Acquiring Rights for Trademark Protection
Assuming that a trademark qualifies for protection, rights to a trademark can be acquired in one
of two ways: (1) by being the first to use the mark in commerce, or (2) by being the first to
register the mark with the U.S. Patent and Trademark Office (USPTO or simply PTO). In the
case of registration, one typically needs to put the product into use to obtain full protection.
Remember, however, that descriptive marks qualify for protection (and can be registered) only
after they have acquired secondary meaning. Thus, for descriptive marks, there is typically a
period after the initial use of the mark in commerce before it acquires a secondary meaning,
during which it is not entitled to trademark protection. Once it has achieved a secondary
meaning, trademark protection attaches. The use of a mark in commerce generally means the
actual sale of a product to the public with the mark attached or displayed.
The other way to acquire priority is to register the mark with the PTO with a bona fide intention
to use the mark in commerce. Unlike use of a mark in commerce, registration of a mark with the
PTO gives a party the right to use the mark nationwide, even if actual sales are only to a limited
area. This right is limited, however, to the extent that others are already using the mark within a
specific geographic area. If that is the case, then the prior user of the mark retains the right to use
that mark within that geographic area; the party registering the mark gets the right to use it
everywhere else. In essence, different parties can have trademark protection simultaneously. For
example, if Robert begins to use a trademark for a specialty coffee in his coffee shop in Boston,
but does not use it in any other market, he has acquired the right to use it in Boston only because
he was the first to put it into commerce. However, if National Brand Coffee (NBC) wants to use
the very same trademark, they may register it with the PTO and be entitled to nationwide rights
(except the right to use it in the same Boston geographic market). So both Robert and NBC have
rights to the same trademark, but the rights only extend to the appropriate geographic area.
Case 24.2. People for the Ethical Treatment of Animals v. Doughney, 113 F. Supp. 2d 915
(E.D. Va. 2000)
Fact Summary
People for the Ethical Treatment of Animals (PETA) is the high-profile nonprofit organization
devoted to educating the public at large and attempting to prevent the abuse of animals for
corporate gain. Doughney registered, claiming he was head of an organization called
People Eating Tasty Animals and, thus, was entitled to use the name. Doughney’s Web site
contained links to furriers and others that would be in direct conflict with PETA’s mission.
PETA filed suit against Doughney alleging, among other things, his use of violated
the ACPA.
Synopsis of Decision and Opinion
The court ruled in favor of PETA, granted them summary judgment, and ordered Doughney to
cease use of the domain name. The court pointed out nine examples of bad faith action
taken by Doughney and held that his actions violated the ACPA. The court rejected Doughney’s
claim that the Web site was merely a parody of the PETA organization because of the likelihood
of confusion. In fact, Doughney admitted that “many people” would initially assume that they
were accessing an authentic site sponsored by PETA.
Words of the Court: Bad Faith
“[Under the ACPA], there are nine factors a court must consider in making a determination of
whether the Defendant had a bad faith intent. Applying these factors, it appears that Doughney
had the requisite bad faith intent.
First, Defendant possessed no intellectual property rights in ‘PETA.ORG’ when he registered the
domain name in 1995. Second, the ‘PETA.ORG’ domain name is not the Defendant, Michael T.
Doughney’s legal name or any name that is otherwise used to identify the Defendant. Third,
Defendant had not engaged in prior use of the ‘PETA.ORG’ domain name in connection with the
bona fide offering of any goods or services prior to registering ‘PETA.ORG.’ Fourth, Defendant
used the PETA mark in a commercial manner. Fifth, Defendant clearly intended to confuse,
mislead and divert Internet users into accessing his website, which contained information
antithetical, and therefore harmful to the goodwill represented by the PETA mark. Sixth, on
Doughney’s ‘PETA.ORG’ website, Doughney made reference to seeing what PETA would offer
him if PETA did not like his website. Seventh, Defendant, when registering the domain name
‘PETA.ORG,’ falsely stated that ‘People Eating Tasty Animals’ was a non-profit educational
organization and that this website did not infringe any trademark. Eighth, Defendant has
registered other Internet domain names which are identical or similar to either marks or names of
famous people or organizations he opposes. Ninth, the PETA mark used in the ‘PETA.ORG’
domain name is distinctive and famous and was so at the time Defendant registered this site in
September 1995.”
Case Questions
Was there any indication that Doughney was “cybersquatting”?
Could Doughney have avoided liability by making changes to his Web site or business
model? What changes may help shield him from liability?
Key Point
In order for a plaintiff to recover under the ACPA, the defendant must have acted in bad faith.
Have an idea for a trademark? Try a trademark registration search at the Web site above or link
to it through this textbook’s companion Web site at
Solutions for Managers: Advantages of Trademark Registration
PROBLEM The common law and statutory law protections in the area of trademark protection
result in too much uncertainty regarding a business’s ability to use the mark.
SOLUTION Register your trademark as soon as possible with the USPTO.
Although this may require attorneys’ fees, the return on investment may well be worth it. The
major advantages to registration are:

Registration gives a party the right to use the mark nationwide, subject to any geographic
Registration constitutes nationwide constructive notice to the public of trademark
Registration enables a party to bring an infringement suit in federal court.
Registration allows a party to potentially recover treble (triple) damages, attorneys’ fees,
and other remedies.
Registered trademarks may, after five years, become “incontestable,” at which point the
exclusive right to use the mark is conclusively established.
Registering a trademark with the USPTO provides maximum nationwide protection and gives
the mark holder the right to enforce its rights in federal court.
© Paul J. Richards/AFP/Getty Images
Applications and the PTO
Applications for registration are subject to approval by the PTO. The PTO may reject a
registration on any number of grounds. For example, the PTO will refuse to register (1) any mark
that is not inherently descriptive, (2) generic marks or descriptive marks that have not attained
secondary meaning, (3) immoral or scandalous marks, (4) certain geographic marks, (5) marks
that are primarily surnames, and (6) marks that are likely to cause confusion with existing marks.
As noted above, rejection of the mark does not necessarily mean that it is not entitled to
trademark protection. It means simply that the mark is not entitled to the statutory benefits
provided by law (such as those listed in the preceding Solutions for Managers). Some famous
rejections include:

Twitter’s 2009 application to trademark the term tweet because of insufficient evidence
of secondary meaning.

Chippendales’ application to trademark their famous “cuffs-and-collar only”
configuration worn by their waiters was rejected as not inherently distinctive. The
USPTO was not sufficiently persuaded by the affidavit of an expert on American
burlesque theatre that the Chippendales costumes are associated with “iconic characters”
that makes the costume distinctive.
Preserving Trademark Protection
The rights to a trademark can be lost through abandonment, improper licensing or assignment, or
genericity. A trademark is abandoned when its use is discontinued with intent not to resume its
use. Nonuse for three consecutive years is prima facie evidence of abandonment. The basic idea
is that trademark law only protects marks that are being used, and parties are not entitled to
warehouse potentially useful marks.
Legal Speak
Prima Facie
Literally “at first sight,” prima facie cases are made when certain clear evidence exists as to a
conclusion of law, but it is subject to further evidence or defense to rebut the original evidence.
Trademark rights can also be lost through genericity (also known as genericide). Sometimes, a
trademark that is originally distinctive can become generic over time, thereby losing its
trademark protection. A word will be considered generic when, in the minds of a substantial
majority of the public, the word denotes a broad genus or type of product and not a specific
source or manufacturer. In a landmark genericity case, Bayer v. United Drug Company, decided
in 1921, aspirin was held to be generic. Other examples include zipper and elevator, which were
both formerly brand names. In deciding whether a term is generic, courts will often look to
dictionary definitions, the use of the term in newspapers and magazines, and any evidence of
attempts by the trademark owner to “police” its mark. Xerox Corporation, for example, runs fullpage advertisements in national newspapers pointing out that it is incorrect to refer to the
photocopying of a document as “Xeroxing” the document. Other companies working to police
their mark to prevent genericity include Jeep, Google, and the makers of the Band-Aid brand of
adhesive strip.
Trademark Infringement
If a party owns the rights to a particular trademark, that party can sue subsequent parties for
trademark infringement. The standard is “likelihood of confusion.” To be more specific, the use
of a trademark in connection with the sale of a good constitutes infringement if it is likely to
cause consumer confusion as to the source of that good or as to the sponsorship or approval of
that good. In deciding whether consumers are likely to be confused, the courts will typically look
to a number of factors. These factors, known as the Polaroid test, based on a landmark
infringement case in Polaroid Corp. v. Polarad Elecs. Corp.,5 include (1) the strength of the
mark, (2) the proximity of the goods, (3) the similarity of the marks, (4) evidence of actual
confusion, (5) the similarity of marketing channels used, (6) the degree of caution exercised by
the typical purchaser, (7) the defendant’s intent, and (8) the sophistication of the consumer.
287 F.2d 492 (2d Cir. 1961).
The use of an identical mark on the same product would clearly constitute infringement. For
example, suppose that Richard manufactures and sells personal computers from his home office
that overlooks a dell meadow. He likes the dell meadow so much that he uses the mark “Dell” on
all of his computers. His use of that mark will likely cause confusion among consumers, because
they may be misled into thinking that the computers are made by the more famous Dell, Inc.
Using a very similar mark on the same product may also give rise to a claim of infringement if
the marks are close enough in sound, appearance, or meaning so as to cause confusion to the
consumer. Thus, while “Dell” may be off-limits for Richard’s personal computer products (and
perhaps also “Dell’s Design”), use of Dell with an unrelated product will not give rise to an
infringement claim. The famous Dell, Inc., and the local Dell’s Deli can peacefully coexist,
because consumers are not likely to think that the computers are being made by the deli, or vice
versa. In an actual trademark case, Apple successfully blocked the importation of “Pineapple”
computers from Taiwan because the marks were too similar and could cause consumer
Key Point
Likelihood of confusion: In order for a trademark holder to prevent another from using the
holder’s mark, the holder must prove that the use of the mark by another will be likely to cause
consumer confusion as to the source of the goods. Courts use the eight-factor Polaroid test to
assess likelihood of confusion.
Trademark Dilution
In addition to bringing an action for infringement, owners of trademarks may also bring an action
for trademark dilution. In 1995, Congress passed the Federal Trademark Dilution Act that
permits mark holders to recover damages and prevent another from “dilution” of distinctive
trademarks. This is protection for the trademark owner who is unable to establish consumer
confusion. Once the prerequisites for a dilution claim are satisfied, the owner of a mark can bring
an action against any use of that mark that dilutes the distinctive quality of that mark, either
through “blurring” or “tarnishment” of that mark; unlike an infringement claim, likelihood of
confusion is not necessary. Blurring occurs when the power of the mark is weakened through its
identification with dissimilar goods, for example, IBM brand bicycles or Xerox brand paint
brushes Although neither example is likely to cause confusion among consumers, each dilutes
the distinctive quality of the mark. Tarnishment occurs when the mark is cast in an unflattering
light, typically through its association with inferior or unseemly products or services.
Concept Summary: Trademarks

A trademark is a word, symbol, or phrase used to identify a seller’s product and
distinguish it from other products.
Businesses invest significant resources in trademark design; these marks are among a
company’s most valuable assets.
Trademark protection is a combination of state law and a federal statute known as the
Lanham Act.
Trademark protection is obtained either through initial use in commerce or registration
with the USPTO.
Managers should focus special attention to policing their firm’s mark, that is, having a
policy in place and taking steps to prevent others from using the mark. Otherwise, the
mark may be lost through abandonment or genericity
In order to prove infringement, the mark owner must prove that use of the mark by
another could cause consumer confusion or that the use of the mark dilutes or tarnishes
the mark.
Copyright Law: Protections of Original Expressions
Black’s Law Dictionary defines a copyright as “the right of literary property as recognized and
sanctioned by positive law.” More precisely, copyright protection is an intangible right granted
by the Copyright Act of 19766 (a federal statute) to the author or originator of an original literary
or artistic production, where the artist is invested, for a specified period (see Table 24.1), with
the sole and exclusive privilege of multiplying copies of the work along with the right to profit
by publication and sale.
17 U.S.C. § 101, et seq.
Table 24.1 Copyright Protection Periods
Copyright Owner
Sole author or originator
Publisher or other party
(works for hire)
More than one author or
Copyright Duration
70 years from death of the author or originator.
First of (1) 120 years from the date of creation, or (2) 95 years
from the date of publication.
70 years from the death of the last surviving author or originator.
The Copyright Act allows creators to obtain a copyright by having an “original work of
authorship fixed in any tangible medium of expression, not 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.”7
17 U.S.C. § 102(a).
Protected works include literary works, musical works, dramatic works, choreographic works,
motion pictures, sound recordings, and pictorial or graphical works. Works that cannot be
protected include ideas, procedures, processes, systems, methods of operation, concepts,
principles, or discoveries, no matter how it is explained, illustrated, or described.8
Note that ideas, procedures, systems, and the like may be covered by intellectual property
protections other than copyright law.
Fundamentally, in order to gain copyright protection, a work must meet a three-part test: (1)
originality, (2) some degree of creativity, and (3) fixed in a durable medium.
Originality and Creativity Requirements
The meaning of the word original has brought about the most controversy in interpreting the
requirements of the Copyright Act. What is to be considered original, and what guidelines should
be used to determine originality? The courts have ruled that an original work of authorship is a
work that is original to the author; meaning, the author must use her own creative capabilities to
create the work or medium. Does this mean that a compilation of noncopyrightable facts (such as
names and telephone numbers) can be copyrighted as long as one author put the collaboration
together first or in a creative way? In Feist Publications, Inc. v. Rural Telephone Service,9 the
landmark case on copyright originality and creativity, the U.S. Supreme Court gave some
guidance as to what level of creativity was necessary to meet the originality requirements. The
Court ruled that, although compilations of facts could be copyrightable, there had to be some
creative element used that made the compilation an original work. For example, the White Pages
of a telephone directory do not meet the creativity requirement because they are simply arranged
alphabetically. One federal appellate court has even held that the Yellow Pages listings of a
telephone directory do not meet the originality requirement.10
499 U.S. 340 (1991). This case was the beginning of the phone book battles. Once Feist was
decided, several different publication companies began to compete with telephone companies for
Yellow Pages advertising. This one decision spurred a new niche in the publishing industry.
BellSouth Advertising v. Donnelley Information Publishing, 999 F.2d 1436 (11th Cir. 1993).
Durable Medium
To be protected, a work must be fixed in a durable medium. This underscores the copyright law’s
requirement that the work must be more than just an idea or thought process. In fact, the work
must be in a tangible form such as in writing, digital, video, and so forth. Copyright protections
extend automatically to a work once created. Although there is no need to register the work with
the United States Copyright Office to obtain protection, registration is a prerequisite to actually
enforcing the holder’s rights in court.
Copyright Infringement
When a copyright holder pursues a party that it believes has infringed on its copyright, the
aggrieved party will generally pursue one of three theories of infringement. These theories have
been developed by the federal courts to sort out the various ways by which one could infringe
upon a copyright. These theories are direct, indirect (also known as contributory), or vicarious
Direct Infringement
Direct infringement occurs when the copyright owner can prove legal ownership of the work in
question and that the infringer copied the work without permission. While the first element is
straightforward, the second element is more complex than appears at first glance. In the context
of the copyright protections afforded by law, it is clear that the word copied must have an
expansive definition rather than a narrow one (i.e., copy means more than an exact replica). At
the same time, of course, the definition cannot be so expansive as to foreclose any works of the
same category.
Courts have developed the substantial similarity standard to guide the definition of copy under
copyright laws. Thus, a copyright holder need only prove that the infringer copied plots,
structures, and/or organizations that made the infringing work substantially similar to the
copyrighted work.
Indirect Infringement
Indirect infringement (also known as contributory infringement) involves three parties: the
copyright owner, the direct infringer, and the facilitator of the infringement. The theory of
indirect infringement is one that holds the facilitator liable for damages. Therefore, before
pursuing a theory of indirect infringement, the copyright owner must identify the direct infringer.
Normally, in order for the facilitator to be liable, the party must have knowledge (direct or
imputed) of the infringement and/or contribute to the infringement in some material way. In the
famous case of A&M Records, Inc. v. Napster, Inc.,11 a federal appeals court held that Napster’s
business model of facilitating a peer-to-peer community for sharing of digital music files
constituted contributory infringement because Napster had the ability to locate infringing
material listed on its search engines and the right to terminate users’ access to the system. Digital
file sharing is discussed more extensively later in this section (see Legal Implications in
Cyberspace: Copyrights in the Digital Age).
239 F.3d 1004 (2001).
Legal Speak
Direct and Imputed Knowledge
Direct knowledge implies a party has firsthand, actual knowledge of a fact. Imputed knowledge
is gained from circumstances or a relationship with a third party where a diligent party “should
have known” about the fact at issue.
Vicarious Infringement
The final copyright infringement theory, vicarious infringement, is similar to the indirect
infringement theory in that they both involve third parties not involved in actual direct
infringement. Vicarious liability is based on agency law (see Chapter 10, “Agency and
Employment Relationships”) and can be used as a theory of liability when the infringing party
(the agent) is acting on behalf of or to the benefit of another party (the principal). In that case, the
principal party is said to be vicariously liable. The copyright owner will be entitled to remedies
against the principal to the same extent as the direct infringer. Vicarious liability most often
occurs in an employer–employee circumstance where the employee is acting with authority from
the employer and commits an act of infringement that benefits the employer.
The No Electronic Theft Act12 (NET Act) of 1997 gave sharper teeth to the Copyright Act’s
previous criminal sanctions. The NET Act provides for criminal liability for anyone infringing
on a copyright by making a reproduction or distribution, including by electronic means, of one or
more copies of a copyrighted work with a total retail value of more $1,000. Penalties include
maximum fines of $250,000 and potential incarceration.13
17 U.S.C. § 506.
A catalyst for this law was a criminal case brought against an MIT student that posted
copyrighted software on the Web free of charge for anyone to download. The government could
not obtain a conviction in the case because the existing law (prior to the NET Act) only imposed
criminal liability when the infringement was undertaken for private financial gain. The NET Act
eliminated the financial gain requirement for a criminal conviction. See U.S. v. LaMacchia, 871
F. Supp. 535 (D. Mass. 1994).
Defense to Infringement Claims: Fair Use
Copyright owners do not enjoy unlimited rights to their work. Rather, the law balances public
interests with the property rights of copyright owners. The most common and powerful defense
is fair use. A landmark case on the fair use defense is the U.S. Supreme Court’s decision in
Universal Studios v. Sony,14 where the Court ruled that Sony’s manufacturing and selling of
Betamax (the first videocassette tape recording format used in a home videocassette recorder, or
VCR, which was the precursor to digital video recording technology) was not per se
infringement. The Court made clear that Congress did not give absolute control over all uses of
copyrighted materials. Some uses were permitted and because the device could still be used for
“substantial non-infringing uses” the Court held that Sony was not liable for contributory
infringement. This fair use exception, known as the Sony defense or the Betamax doctrine, was
used, unsuccessfully, as the basis for the defense in the A&M Records v. Napster case (discussed
previously in this chapter) and was reexamined by the U.S. Supreme Court in the MGM v.
Grokster case (discussed later in the chapter).15 Fair use has also been extended to the use of a
work for parody or satirical purposes.16
464 U.S. 417. After Sony had started producing videotape recorders (sold under the brand
name Betamax) in a price range that many consumers could afford, Universal saw the mass
distribution of this product as a threat to its business and market share. They sued Sony on an
infringement theory, claiming that consumers were using the Sony product to copy their
copyrighted movies.
See Legal Implications in Cyberspace: Copyrights in the Digital Age.
Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994).
The term fair use has now been codified in the Copyright Act with four specific (though
nonexclusive) guideposts: the purpose and nature of the use, the nature of the work itself, the
amount and substantiality of the material used, and the effect of the use on the market.
Purpose and Nature of the Use
If the use of the work is to further education or scholarship, courts are more likely to be
sympathetic to an assertion of fair use. This does not mean, however, that whole sections of
textbooks or copied videotapes may be used with impunity. Also, if the use is for some
commercially profitable purpose, this will weigh heavily against the infringer. This is not to say
that commercial use is a complete bar to assertion of fair use.
Nature of the Work
If the copyrighted material has not yet been put into the public domain, fair use is a difficult
defense. This is not to say that a complete bar to nonpublic works exists; newsworthy and factual
information are still subject to fair use.
Amount and Substantiality Used
Courts essentially analyze the totality of the circumstances regarding the amount of copyrighted
material used compared to the entire work at issue. Short phrases and limited use of the
copyrighted work are often protected by the fair use defense.
Market Effect
Courts are reluctant to allow fair use as a defense (even if the use fits the other three categories)
if a copyright holder demonstrates that the value of a copyrighted work will be diminished by
allowing its use. Fair use cannot impair the marketability or economic success of the copyrighted
Self-Check: Fair Use
Which of these situations would constitute fair use?
A manager photocopies an article of interest from The Wall Street Journal and distributes it
to three co-workers who also may be interested.
A company buys one copy of a training manual from a publisher, and then distributes
photocopies of entire chapters to its workforce.
An executive rents out a DVD on motivation from her local video/DVD store. The next
day, she shows the DVD during work hours to her management team in order to inspire
them to adopt certain leadership practices.
A firm that arranges corporate training sessions buys a DVD that features former General
Electric CEO Jack Welch on problem-solving skills for executives. The firm shows 30
minutes of this DVD at the beginning of each of its eight-hour training sessions called
“Solutions for Solving,” for which they charge $500 per person for the entire session.
Answers to this Self-Check are provided at the end of the chapter.
RIAA Lawsuits
In addition to aggressively pursuing file-sharing services such as Napster and Grokster, the
motion picture and music recording industry has filed thousands of infringement lawsuits against
individuals engaged in file sharing. The Recording Industry Association of American (RIAA)
has invested substantial resources in tracking down and recovering damages from individual
infringers. In a 2009 case that garnered substantial media attention, a jury imposed damages of
$1.92 million against Jammie Thomas-Rasset in a federal court in Minnesota. The award was the
result of a lawsuit filed by RIAA against Thomas-Rasset that alleged she downloaded more than
1,700 copyrighted songs.
Legal Speak
The unlawful use of another’s intellectual property.
Legal Implications in Cyberspace: Copyrights in the Digital Age
Technology has created new challenges for legislatures and courts struggling with applying
copyright law in the digital age.
Computer Software
In order to settle uncertainty in the computer science field about the ability to copyright
computer software, Congress amended the Copyright Act with the Computer Software Copyright
Act.* This law, passed in 1980, specifically defined computer software programs as a literary
work and, thus, entitled to protection. However, the nature of computer software brings with it a
good deal of uncertainty in terms of copyright protection. In 1986, the landmark case of Whelan
v. Jaslow† gave the first guidance by an appellate court on the issue of copyright protection for
software and indicated that courts were willing to extend broad protection to computer programs,
including both the “look and feel” of a program’s displays and also the program’s structure,
sequence, and organization. More recently, courts have been carving back this broad protection
and adopting a more sophisticated test. One appellate court also made clear that patents, not
copyrights, would be the most suitable form of intellectual property protection to protect the
dynamic aspects of writing computer software programs.‡
17 U.S.C.A. § 117.

797 F.2d 1222 (3rd Cir. 1986).

Computer Associates International v. Latai, Inc., 982 F.2d 693 (2nd Cir. 1992).
Evolution of Copyright Law and Technology
The revolutionary technological gains and the increasing popularity of the information
superhighway has led to significant threats to copyright holders such as record labels and movie
studios. In the past, copyright infringement of movies and music was limited because the
technology that existed to copy these media was not capable of producing mass copies, except
through a sophisticated criminal network. In short, the average consumer was limited in what he
could copy and distribute and, thus, copyright holders had little fear that day-to-day consumer
infringement would impact their revenue stream from sales of the original. However, when the
digital age truly arrived, copyright holders responded by lobbying Congress for additional
protections in the area of copyright laws.
Audio Home Recording Act
The Audio Home Recording Act (AHRM), a 1992 amendment to the Copyright Act, was a
response to the rapidly advancing technology of digital audio that emerged in the early 1990s.
This new digital technology industry threatened the major record labels because it caused
enforceability problems for the copyright protection of musical recordings. In the early 1990s,
these digitally copied recordings became increasingly common because the recording device, a
CD-Writer, became standard equipment with many computer packages. The AHRA forced
manufacturers of CD-Writers to pay royalties (2 percent of their sales) to a fund administered by
the Copyright Office, and eventually paid to copyright owners. It also required the producers of a
digital audio recording device to include a Serial Copy Management System (SCMS) that,
through computer software, prevents copies from copies to be made, but does not prevent copies
from originals to be created.
Digital Millennium Copyright Act
Congress passed the Digital Millennium Copyright Act (DMCA) in 1998 in an attempt to
modernize copyright law to deal with the new challenges that had emerged in the digital age. The
DMCA was controversial because it added substantial protections to copyright holders of digital
products and gave immunity to internet service providers (ISPs) for certain copyright liability.
Some of the major provisions of the DMCA are:

Civil and criminal penalties established for anyone who produces, sells, or distributes any
product or service that circumvents antipiracy software or other antipiracy technology.

Restriction of import or distribution of analog video recorders and camcorders that lack
antipiracy features.
ISPs have no liability for copyright infringement by their users (such as posting
copyrighted software on an ISP’s electronic bulletin board) so long as the ISP does not
have actual knowledge of the infringing material.
File Sharing
Technology changed the status quo rapidly. The late 1990s saw the introduction of two very
important technological advances: (1) the popular music file format known as MP3 (essentially
compressed digital files), and (2) the increasing speed advancements of the Internet. These two
additions changed the once hours-long process of transferring music and movies over the
Internet to a process that took just a few minutes or less. The MP3 file popularity grew very
quickly. This, in turn, brought about the ability to upload and download music and video files
from one private personal computer to another. The ability to upload and download hundreds of
files a day led to the establishment of peer-to-peer (P2P) networking and, of course,
entrepreneurs who have leveraged this technology into profit. The pioneer of P2P file-sharing
communities was Napster. As discussed, the Ninth Circuit Court of Appeals effectively shut
down Napster after they ruled that Napster’s business model was inherently illegal because
Napster had imputed knowledge of copyright infringement. However, other Napster-like services
were thriving under a business model whereby the P2P provider could not have any actual
knowledge of copyright infringement. The motion picture and recording industries doggedly
pursued each of these companies by suing them under a contributory infringement theory. Of
course, Napster eventually reemerged as a pay for subscription service. Ultimately, the issue of
what level of intent was necessary to constitute infringement was decided by the U.S. Supreme
Court in Landmark Case 24.1.
Concept Summary: Copyrights

Copyright protection is an intangible right granted by the Copyright Act to the author or
originator of an original literary or artistic production.
In order to obtain copyright protection, the work must be a result of some creative
capability by the author/originator and it must be fixed in a durable medium (such as in
There are three theories of infringement: direct, indirect (also known as contributory),
and vicarious.
A powerful defense is “fair use” of copyrighted material where a court will examine the
purpose and nature of the use, the nature of the work, the amount used, and the market
effect of the use.
Patents: Legal Protection of Inventions and Processes
A patent is a government-sanctioned monopoly right that allows an inventor the exclusive
entitlement to make, use, license, and sell her invention for a limited period of time. Patent rights
are important in the entire businesses community, but are particularly vital to the manufacturing,
technology, and pharmaceutical sectors. Patents are often an important part of the planning for
these firms because their business model depends on the benefits of obtaining a patent; that is,
the full legal protection of their ideas, methods, and inventions. Once a patent is obtained, a
competitor is barred from profiting off the patented device or process during the life of the
patent. Thus, a patent can be a firm’s most important and valuable asset.
Understanding the fundamentals and discarding the myths of patent laws are important for
managers. The most common myth is an assumption that nearly any new idea or invention is
“patentable” (able to obtain patent law protection). This assumption is not true and may be an
expensive lesson to learn. In fact, in order to obtain a patent, the idea or invention must meet
stringent criteria set down in federal statutes. The patent application procedure is often very
expensive because one must almost always obtain counsel that specializes in patent law. These
law firms, known colloquially as intellectual property (or simply “IP”) firms, are often more
expensive than expert counsel in other areas of the law given the specialized nature of their
Landmark Case 24.1: Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 545 U.S. 913
Fact Summary
After the Napster decision, a number of other P2P file-sharing communities emerged with a
slightly different business model. One famous firm, Grokster, used a business model whereby it
would be impossible for Grokster to know if the files being shared were an infringing use. Thus,
Grokster argued, no Napster-like imputed liability could attach and no contributor infringement
existed. According to Grokster (and many other such firms that were emerging), this is precisely
the same business that Sony was in when selling the Betamax and they were entitled to the same
type of fair use exception of “capable of substantial non-infringing uses” as the Supreme Court
articulated in the Sony case. When MGM studios sued Grokster (and others including
StreamCast, the distributor of Morpheus software) both the federal trial court and the federal
court of appeals agreed with Grokster and allowed Grokster to use the Sony exception in their
ruling against MGM.*
Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 380 F.3d 1154 (9th Cir. 2004).
Synopsis of Decision and Opinion
The Supreme Court unanimously held that Grokster could be liable for inducing copyright
infringement and reversed the court of appeals ruling. The Court specifically ruled that anyone
who distributes a device with the intent to promote its use to infringe copyright is liable for the
resulting acts of infringement (contributory) by third parties. Although there was some
disagreement among the Justices about the Sony defense, ultimately the Court held that the lower
courts had misapplied the Sony exception because there was ample evidence that Grokster had
acted with intent to cause copyright infringement via the use of their software.
Words of the Court: Evidence of Intent
“Three features of this evidence of intent are particularly notable. First, each company showed
itself to be aiming to satisfy a known source of demand for copyright infringement, the market
comprising former Napster users. StreamCast’s internal documents made constant reference to
Napster, it initially distributed its Morpheus software through an OpenNap program compatible
with Napster, it advertised its OpenNap program to Napster users, and its Morpheus software
functions as Napster did except that it could be used to distribute more kinds of files, including
copyrighted movies and software programs. Grokster’s name is apparently derived from Napster,
it too initially offered an OpenNap program, its software’s function is likewise comparable to
Napster’s, and it attempted to divert queries for Napster onto its own Web site. Grokster and
StreamCast’s efforts to supply services to former Napster users, deprived of a mechanism to
copy and distribute what were overwhelmingly infringing files, indicate a principal, if not
exclusive, intent on the part of each to bring about infringement.”
Case Questions
Why was the Court so concerned about the Open Nap program offered by StreamCast and
Why do your think the Court refused to apply the Sony exception in this case?
Even if one is successful in obtaining a patent, enforcing the patent via an infringement suit is an
even more expensive undertaking. According to a study in The New York Times, the median cost
for enforcing a patent (assuming an infringement suit is necessary) is around $1.2 million. This
significant cost factor must be considered in a company’s patent management strategy.
Solutions for Managers: Avoiding Intellectual Property Liability: Landmines on the Web
PROBLEM Managers that oversee an Internet-based marketing model are often barraged with
conflicting information and advice about trademark and copyright law.
By taking simple and inexpensive precautions, managers can help protect their company from
infringement liability.
SOLUTION #1 Limit your linking.
Courts have allowed the use of a typical hypertext link so long as the use is reasonable under the
circumstances. Inline imaging, framing, and even deep linking have all been given legal
protection so long as the essence of the copyright and trademark laws are protected. However, an
attempt to use a link to create confusion by the consumer that ultimately could result in the
consumer being directed to a competing business would constitute infringement.
For example, let’s suppose that MuseumTicketsRUs is a registered trademark of a company that
sells tickets to museum exhibits in major cities and that it hosts a Web site, A second firm,, hosts a Web site that provides links to all
museum Web sites, all museum online stores, art supply stores, and the like. If
simply provides a link to MuseumTicketsRUs, then no copyright or trademark infringement has
taken place. However, if uses MusuemTicketsRUs’s logo, similar name, or other
similar identifying characteristic, and uses the link to direct a consumer-user to a competing site
with which has a commissioned-based agreement, this would clearly constitute
infringement and expose to significant legal liability. Thus, it is a good idea to take
steps to avoid any consumer confusion such as displaying a disclaimer that the originating site
with the link is not related to or a part of the linked site.
Deep linking (i.e., linking to an embedded site) may be cause for additional concerns if the
embedded site skips through advertising that the Web page host has placed in the original site. It
is a good practice to use links only to originating Web pages (home pages) or at the very least to
offer links to both the originating home page and the deep-linked page in close proximity with
labels for the user that describe the content of the page. Moreover, if the linked site has taken
technical steps to prevent linking or given notice that they do not sanction deep linking, this
should give a manager pause because they may be crossing the line of reasonableness into
The ultimate protection against infringement, of course, is obtaining express permission to deep
link or image. The owner of the site will often give you permission so long as your site is not a
competitor or a site that may tend to tarnish their image (such as adult-content sites). A simple
form for this permission is shown.
Agreement and Permission to Use
This Agreement, made this ____ day of October, 2010, between Museum TicketsRUs (Owner)
and (User), acknowledging sufficient consideration, the parties agree as follows:
1. Owner permits User to link, deep link, inline image, or frame Owner’s Web site
( from User’s Web site (
2. User shall be entitled to use this permission until such time as Owner gives User 48
hours’ notice via e-mail to cease the use of the link. Owner has the absolute and
unconditional power to revoke this permission at anytime and for any reason.
3. Upon such notice, User agrees to cease the use of any and all links to Owner’s Web site
as soon as possible.
4. Owner shall not be entitled to any compensation under this Agreement.
Signed: ____________(Owner)
Solution #2 Make copyrighted images thumbnail size.
A significant amount of litigation has ensued over the use of copyrighted photos in thumbnail
size as a means to preview the content for a consumer using an Internet search engine or
consumers who link to another page via the thumbnail image. The idea, of course, is to allow the
consumer-user attempting to find a particular photograph or image to scan multiple images and
choose, rather than having to actually link to the actual page to view, the photos, thus saving the
consumer user time.
Copying the image of another is clearly infringement. For example, if Best Furniture, a large
retailer of patio furniture, takes photographs of its products and displays them on their Web site,
the use of those photos by a competing retailer on their own Web site (or in a catalog for that
matter) is clearly illegal. However, let’s suppose that a Web site that is hosted by Patio and Deck
Contractors Inc. provides thumbnail images of Best Furniture’s patio furniture photos on its Web
site with a link to Best Furniture’s site as a service to Patio and Deck Contractors’ customers. In
this instance, the uses of the images are legal under the fair use exception to the Copyright Act.
An overwhelming majority of courts have ruled that use of thumbnail photograph images by
Internet Web sites has “transformed” the original photograph in such a way as to make the use of
the images legal.
Fundamentals of Patent Law
Patent law in the United States dates back to 1790 and is governed by the Patent Act established
by the very same Congress that ratified the U.S. Constitution. Of course, the law has been
amended since then, but the basic standards have not changed much. A patent for inventions or
processes (also known as “utility” and “business method patents,” respectively) lasts for a period
of 20 years from the date of filing the application with the USPTO. A “design” patent (discussed
later) lasts for 14 years.
In order to obtain a patent, an invention must be novel, non-obvious, and a proper subject matter
for protection under the patent law.
The patent issued to the Wright brothers in 1906 for their flying machine began a new era in
global commerce.
© AP Photo/U.S. National Archives Records Administration
Novelty Standard
An invention or process must be unique and original, and a patent applicant must show that no
other identical invention or process exists. The statute delineates the guidelines for this novelty
standard based on a three-prong test. The first prong is the “public use” test, and requires that the
invention or process not already be in public use. The second prong governs priority for
inventors of the same invention or process. The American standard is known as the “first-toinvent” rule, which provides that the inventor who has been determined to invent first (not the
inventor who has filed first) has priority over other inventors of the same product. The final
prong requires a determination by the USPTO that the applicant filed the patent within a
reasonable time of the invention. Landmark Case 24.2 sets out the public use test of the novelty
Landmark Case 24.2: Dunlop Holdings Ltd. v. RAM Golf Corporation, 524 F.2d 33 (7th
Cir. 1975)
Fact Summary
DuPont chemical company produced a chemical known as Surlyn in 1964. Before DuPont found
a commercial use for it, Butch Wagner, who was in the business of selling re-covered golf balls,
began to experiment with Surlyn as a golf ball cover. In November 1964 he had developed the
formula so that it was suitable to give unprecedented durability to a golf ball and began to sell
the Surlyn covered balls that same year. Wagner never applied for a patent. Subsequently,
Dunlop obtained a patent for Surlyn covered golf balls and when RAM began to produce the
same type of golf balls, Dunlop sued RAM for infringement. RAM defended their use by
challenging Dunlop’s patent as invalid because Wagner made the invention public 10 years
earlier via his sale of many Surlyn covered balls to a group of regular customers. Dunlop
countered that Wagner had concealed an important ingredient and, thus, had concealed the actual
invention from the public. The trial court agreed with RAM holding that Wagner’s public use
barred Dunlop from obtaining a patent.
Synopsis of Decision and Opinion
The appellate court affirmed the ruling of the trial court against Dunlop. The court held
Wagner’s golf balls that were coated with the Surlyn-based invention were in public use because
Wagner had marketed and sold the items as best he could as a sole proprietor. The court also
ruled that the fact that Wagner did not reveal a key ingredient of the invention to the public was
not relevant. Thus, Dunlop could not pass the first prong of the novelty standard (public use test)
and is not entitled to a patent.
Words of the Court: Public Use Test
“The patent claims are broad enough to encompass any golf ball cover made principally of
Surlyn, and there is no doubt that Wagner had made a large number of such golf balls and
successfully placed them in public use. The only novel feature of this case arises from the fact
that Wagner was careful not to disclose to the public the ingredient that made his golf ball so
tough. [ . . . ] But in this case, although Wagner may have failed to act diligently to establish his
own right to a patent, there was no lack of diligence in his attempt to make the benefits of his
discovery available to the public. [ . . . ] [T]he evidence clearly demonstrates that Wagner
endeavored to market his golf balls as promptly and effectively as possible. The balls themselves
were in wide public use.”
Case Questions
What factors did the court consider in ruling that Wagner’s use was public?
What is Dunlop’s theory as to why Wagner’s conduct did not make the prior use public?
Nonobviousness Standard
The nonobviousness standard requires that an invention must be something more than that which
would be obvious, in light of publicly available knowledge, to one who is skilled in the relevant
field. In other words, a patent cannot be granted for minimal improvements that were relatively
obvious to those in the field. For example, Joanna adds a small extender switch to her
lawnmower (an existing patented invention) that will make it easier for taller people to kill the
engine. Joanna is not entitled to a new patent because the invention is essentially a minimal (also
called de minimus) improvement and relatively obvious.
Patentable Subject Matter Standard
Note that not all processes and inventions that are nonobvious and novel are patentable. The
patentable subject matter standard bars laws of nature, natural phenomena, and abstract ideas
from being patentable. Albert Einstein’s theory of relativity was groundbreaking. It was new and
nonobvious beyond question. But should this natural phenomenon be patentable? The patent
system was not intended to cover every novel and nonobvious idea. The courts have held that
some mathematical algorithms, materials common to nature (penicillin, for example), or
unapplied ideas are not patentable. Ultimately, patent laws cover processes and ideas based on
human ingenuity.
Business Method Patents
Because of the exclusion of certain subject matter from patent protection, courts have historically
struggled with the notion of giving patent protection to a process developed by a business in the
name of efficiency or some competitive advantage. Some courts rejected novel, useful, and
commercially successful business methods as nonpatentable subject matter. However, in 1998, a
federal appeals court helped settled many issues related to business method patents and provided
guidance for other courts in the landmark case of State Street Bank & Trust Co. v. Signature
Financial Group.17 The State Street court articulated a cogent legal theory whereby business
methods may be patentable so long as they accomplish something practically useful in a novel
and nonobvious way. The case also provided a road map for the emerging Internet business
community to plan Internet business models in such a way as to be eligible for patent protection.
More recently, the U.S. Supreme Court upheld the notion that business methods, such as a
system that institutions could use to hedge the seasonal risks of buying energy, were patentable.18
149 F.3d 1368 (Fed. Cir. 1998). The case involved a challenge to a patent issued to Signature
for a process that facilitated a method whereby several mutual funds pooled their investments
into a single fund that achieved management cost savings over many other funds.
Bilsk: v. Kappos, 561 U.S.____(2010)
Design Patents
Patent laws also protect inventors of any new, original, and ornamental design for an article of
manufacture. Design patents are subject to the same requirements as utility or business method
patents (novelty and nonobvious) and the design must be primarily ornamental (not primarily
functional). Design patents are mainly concerned with protecting the appearance of an article.
The shape of the classic Coca-Cola bottle is a famous example of a design based primarily on
appearance, not function.
Infringement, Notice, and Remedies
Infringement is defined in the Patent Act as “[W]hoever without authority makes, uses or sells
any patented invention, within the United States during the term of the patent therefore, infringes
the patent.” Anyone who “actively induces infringement” of a patent is considered an infringer
as well. Infringement occurs in one of two ways: literal infringement or through equivalence.
Literal Infringement
The courts have developed three rules for determining whether literal patent infringement has
occurred. The rule of exactness applies when the infringer makes, uses, or sells an invention that
is exactly the same as the claims made in the patent application, thus infringing on the patent. An
infringement also occurs if the infringing device does more than is described in the patent
application of the protected invention. This literal infringement is known as the rule of addition.
Under the rule of omission, however, when the alleged infringing invention lacks an essential
element of the patent holder’s claims in the patent application, infringement has not occurred.
The rule of omission is subject to abuse because individuals may avoid infringement liability by
omitting an element of the patented device and substituting another element that is substantially
similar, but not exact. To prevent this abuse, the Supreme Court developed a doctrine that
allowed courts to find infringement if the invention performs substantially the same function in
substantially the same way to achieve the same result. The doctrine, known as the doctrine of
equivalence, however, is limited to an evaluation of whether any of the key elements of the claim
have been interchanged with known equivalents.
Legal Implications in Cyberspace: Computer Software and Internet Business Methods
Computer Programs
Of course, technology continues to give us new challenges as to what is and what is not
patentable material. In the early 1970s, the Supreme Court took the view that computer programs
and the machines that process them are nothing more than glorified algorithms and, therefore,
not patentable. But in 1981, the Court decided Diamond v. Diehr* and “clarified” (some would
say reversed) its position, ruling that some computer programs could be patented. Eventually, the
courts developed a test to determine whether algorithm-based computer programming was
patentable. The test was designed to investigate whether the computer-related process was
applied in some fashion to physical elements or processes. In other words, did the algorithm
allow a certain physical transformation to take place? If the computer programs were
accompanied by some physical transformation, then they were patentable.
450 U.S. 175 (1981). The case involved a patent application for a computer program that
facilitated molding uncured synthetic rubber into cured rubber. According to the patent
application, the process differed from the previously employed method because of the use of
specific mathematical formulas, which would allow for a more accurate measuring of material
heating and feeding times. The patent was rejected by the USPTO because the patent examiner
did not consider the process met the subject matter requirements of the Patent Act.
Internet Business Method Patents
After the court opened the door to business method patents in the 1998 State Street case
(discussed earlier), many Internet-based businesses applied for patents. According to the
USPTO, the number of patent applications for Internet business methods have increased nearly
800 percent. One of the most famous Internet business method patents was granted to Amazon
for its “One-Click” ordering system that stores a customer’s billing and shipping information so
it does not have to be reentered on subsequent visits to the site. In a highly publicized case
during the technology boom of the late 1990s, Amazon (still a relative newcomer in the
bookselling business at the time) sued mega-bookseller Barnes and Noble over Barnes and
Noble’s use of an “Express Lane” option on its Web site that was similar to Amazon’s patent in
that the feature allowed consumers to “buy it now with just 1 click.” Barnes and Noble defended
on the basis that the patent should not have been issued because the invention was too obvious.
After a preliminary defeat in the federal courts for Amazon,† the parties settled the dispute in
March 2002. Although Amazon lost on what was essentially thought of as a procedural issue,
one important victory was that they did not lose the patent on the basis of nonobviousness.
Therefore, the court signaled that Internet business methods, so long as they fit the requirements
for other utility and method patents, were protectible., Inc. v., Inc., 239 F.3d 1343 (Fed. Cir. 2001).
In some cases though, courts have been reluctant to enforce business method patents in the
technology sector when the process described in the patent is too narrow due to the lack of
technology at the time of the patent. In 2002, a California college professor sued Netscape,
Microsoft, and AOL for infringing on a patent he obtained relating to efficiency in Web site
interactivity. The federal appeals court affirmed the ruling of the trial court, which found that the
professor’s patents were invalid altogether and that the patent description was too generic to be

Netscape Corp. v. Konrad, 295 F.3d 1315 (Fed. Cir. 2002).
The Patent Act sets forth appropriate measures that must be taken to properly inform users that
an article is patented. This is often done by placing the word patent, the symbol “pat.,” or the
patent number on the specific article. If no marking is identifiable, then the patentee is unable to
collect damages from the infringers unless they were properly warned and still continued to
Patent infringers are subject to the following damages:

Actual damages. Includes profit from lost sales and royalties for any sale made by the
infringer, for example.
Prejudgment interest. It is not uncommon for years to pass before an infringer is spotted;
thus, revenue from possible sales may have been withheld from the patentee for a long
period of time.
Attorney’s fees. The prevailing party may receive reasonable attorney’s fees where the
infringer has acted in bad faith (i.e., had received notice that the invention was patented
and yet continued his infringing conduct).
Concept Summary: Patents

A patent is a government-sanctioned monopoly right that allows an inventor the exclusive
rights over an invention or method for a limited period of time.
In order to obtain a patent, the invention or method must be novel, nonobvious, and of
proper subject matter (natural phenomena are not protected under patent laws).
Some business methods are patentable so long as they accomplish something practically
useful in a novel and nonobvious way.
Infringement may occur through either literal means or through equivalence.
Table 24.2 Intellectual Property Protections
Source of
State statutes
based on
Trade Secret
Act and/or
Trademarks/Service Words, symbols, or
marks/Trade dress phrases that identify a statute
particular seller’s
product/service and
Act) and
distinguish them from some state
other products/services. and federal
Trade dress extends
trademark protection to law.
shape or color scheme
of a product.
Authors and originators Federal
of literary or artistic
secrets Secret processes,
formulas, methods,
procedures, and lists
that provide the owner
with economic
Customer lists
with contact
buying patterns,
and credit
Life of the
VISA (Service
mark) iPod’s
shape (Trade
Unlimited; so
long as owner
actively protects
(“polices”) the
use of the mark.
Rights of a
recording artist
and writer of a
Author: 70 years
from death of
the author. Work
for hire: 120
Source of
Act of 1976,
as amended).
Inventors for exclusive Federal
rights to make, use,
license, or sell an
Patent Act
years from date
of creation or 95
years from
Rights to a newly 20 years from
date of filing
pharmaceutical. except for
design patents
(14 years).
Key Terms
Misappropriation p. 602
The 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 disclosure of a trade secret to
another without express or implied consent.
Economic Espionage Act p. 603
A federal statute passed in 1996 providing criminal penalties for domestic and foreign
theft of trade secrets.
Trademark p. 603
A word, symbol, or phrase used to identify a particular seller’s products and distinguish
them from other products.
Service mark p. 604
A word, symbol, or phrase used to identify a particular seller’s services and distinguish
them from other services.
Trade dress p. 604
A product’s distinctive design, packaging, color, or other appearance that makes it unique
from other products or goods.
Secondary meaning p. 606
A requirement for a descriptive trademark to gain protection, acquired when the
consuming public primarily associates the mark with a particular product rather than any
alternate meaning.
Bad faith p. 607
A legal concept in which a malicious motive on the part of the defendant in a lawsuit is
necessary in order for a plaintiff to recover. Under the Anticybersquatting Consumer
Protection Act, the court looks to nine factors in making a determination of bad faith
Genericity p. 610
Also known as genericide, the act or process of losing trademark protection occurring
when, in the mind of a substantial majority of the public, the word denotes a broad genus
or type of product and not a specific source or manufacturer.
Federal Trademark Dilution Act p. 611
A federal law enacted by Congress in 1995, which permits mark holders to recover
damages and prevent another from diluting distinctive trademarks.
Originality p. 612
A requirement in order to gain copyright protection in which the author must use his or
her own creative capabilities to create the work or medium.
Creativity p. 612
A requirement in order to gain copyright protection in which there must be some creative
element used that made the compilation an original work.
Durable medium p. 612
A requirement in order to gain copyright protection in which the work must be in a
tangible form such as in writing, digital, video, and so forth.
Direct infringement p. 613
A theory of copyright infringement occurring when the copyright owner can prove legal
ownership of the work in question and that the infringer copied the work in a
substantially similar manner without permission.
Indirect infringement p. 613
Also known as contributory infringement, a theory of copyright infringement holding a
third-party facilitator liable for damages when it has knowledge of the infringement
and/or contributes to the infringement in some material way.
Vicarious infringement p. 614
A theory of copyright infringement resulting when there has been a direct infringement
and a third-party facilitator is in a position to control the direct infringement and benefits
financially from the infringement.
No Electronic Theft Act p. 614
A federal law enacted in 1997 (also referred to as the NET Act), which provides for
criminal liability for anyone who infringes on a copyright willfully for financial gain.
Fair use p. 614
A defense against copyright infringement where the court will examine the purpose and
nature of the use, the nature of the work, the amount used, and the market effect of the
use to determine whether the use is permitted.
Per se p. 614
A Latin term literally meaning “of, in, or by itself” without any additional facts needed to
prove a point.
Novelty standard p. 620
A standard to obtain a patent requiring that an invention or process be unique and original
and that a patent applicant show that no other identical invention or process exists.
Nonobviousness standard p. 621
A standard to obtain a patent requiring that an invention must be something more than
that which would be obvious, in light of publicly available knowledge, to one who is
skilled in the relevant field.
Patentable subject matter standard p. 621
A standard that bars laws of nature, natural phenomena, and abstract ideas from being
patentable subject matter.
Literal patent infringement p. 622
One way in which patent infringement occurs, applying when the invention or process
violates either the rule of exactness or the rule of addition.
Rule of exactness p. 622
A rule for determining whether literal patent infringement has occurred that applies when
the infringer makes, uses, or sells an invention that is exactly the same as the claims made
in the patent application.
Rule of addition p. 622
A rule for determining whether literal patent infringement has occurred that applies when
the infringing device does more than is described in the patent application of the
protected invention.
Rule of omission p. 622
A rule stating that when the alleged patent infringing invention lacks an essential element
of the patent holder’s claims in the patent application, infringement has not occurred.
Doctrine of equivalence p. 623
A doctrine that allows courts to find patent infringement if the invention performs
substantially the same function in substantially the same way to achieve the same result.
Theory to Practice
WidgetCo. is a manufacturer and wholesaler of a line of widget products with annual revenue of
$50 million. Maurice, a mid-level manager at WidgetCo., supervises a work team responsible for
assessing quality assurance for the widgets before they are shipped to various retailers around the
United States. Maurice and his group have been highly successful in developing a quality
assurance process, including the development of training manuals, a video series for new
employees, and specific checklists and procedures to ensure that any defective or substandard
widgets are detected and repaired prior to shipping.
1. Which forms of intellectual property protections are available to WidgetCo. to protect the
quality assurance process and materials that Maurice’s team have developed?
2. What are the major advantages and disadvantages to each protection?
3. Compare the facts of the hypothetical in this Theory to Practice with the standards for
qualification of a trade secret. Could the process be considered a trade secret under these
4. What steps could the company take to achieve its objective of having the process
protected under trade secret laws and avoid misappropriation?
5. If WidgetCo. wanted copyright protection for its manuals and training video series, how
would they obtain protection under the Copyright Act? If the manuals are simply a
compilation of facts known in the industry, is that protectable?
Manager’s Challenge
One major consideration in protecting a trade secret is the efforts by the company to keep the
secret confidential. Develop a written policy for WidgetCo. (in Theory to Practice above) to help
assure that these trade secrets and materials would be protected and kept confidential under the
Uniform Trade Secrets Act. What considerations should management take into account when
developing a policy on trade secrets? Be sure to think about primary stakeholders (such as
employees who may depart with the trade secrets) and secondary stakeholders (such as thirdparty visitors or outside auditors that may be privy to the processes and materials). Note that this
is not intended to be a legal document. Rather, the policy should be thought of as a draft
statement of internal control on trade secrets, processes, and materials. A sample answer may be
found on this textbook’s Web site at
Case Summary 24.1 :: Bennett v. Shidler, 338 F.3d 1125
(10th Cir. 2003)
Trade Secret
Harvey Bennett, Inc., is a company that developed a method designed to be taught to infants on
how to survive in the water. The company developed a course in this technique called “swimfloat-swim” and generated revenue by training and certifying instructors who then teach the
technique to the public at large for a fee. The instructors are trained extensively on the nearly
2,000 procedures necessary to accomplish the technique. All instructors signed a nondisclosure
form and an Agreement Not to Compete. When several of the instructors resigned and formed a
venture called “Aquatic Survival,” Bennett filed suit claiming, among other allegations,
misappropriation of the swim-float-swim system.
Case Questions
Does the swim-float-swim qualify as a trade secret?
What factors would the court use to assess whether the technique is a trade secret? Discuss.
Case Summary 24.2 :: In re Reed Elsevier, Inc.__ F.3d__
2007 WL 1086403 (Fed. Cir. 2007)
Trademarks/Service Marks
Reed Elsevier operated a Web site that allowed users to identify an attorney using a variety of
criteria, including geographic location, practice expertise, and so forth. The Web site,, was first used in commerce by Reed in 1998. Later, Reed applied to have registered as a service mark.
Case Questions
Is the mark too generic for protection?
If the court determines the mark is primarily descriptive, what further obstacle must Reed
overcome in order to obtain protection for the mark?
Case Summary 24.3 :: KSR International v. Teleflex, 550
U.S.___ (2007)
KSR designs, manufactures, and sells parts to auto manufacturers (not consumers) and developed
a pedal device for Ford vehicles. KSR received a patent on the pedal device. KSR also sold
products to General Motors (GM) and, in order to make the pedal device compatible for GM
cars, KSR added an electronic throttle control to the pedal device. Teleflex claimed to have a
patent for the pedal device that could be connected to such a throttle and, therefore, sued KSR
for patent infringement. KSR defended on the basis that the device produced for GM was simply
a combination of two existing products and could not be patentable.
Case Questions
What do you think Teleflex’s specific theory of infringement was?
Which element of patentability does KSR claim Teleflex is missing in the combined
Case Summary 24.4 :: Darden v. Peters, 488 F.3d 277 (4th
Cir. 2007)
Darden filed an application with the Copyright Office seeking to register his Web site, which he
titled “APPRAISERSdotCOM.” He described APPRAISERSdotCOM as a derivative work
based on “US Census black and white outline maps” and “clip art.” Darden’s application
identified “graphics, text, colors, and arrangement” as the material that he added to the
preexisting work and in which he claimed copyright protection. Additionally, Darden filed a
separate application for registration of the work “Maps for APPRAISERSdotCOM.” Darden
described his “maps” work as a derivative work that, similar to the “APPRAISERSdotCOM”
work, was based on preexisting U.S. Census black and white outline maps.
Case Questions
Determine whether Darden’s compilation is protectable using the Feist doctrine.
Does Darden’s idea contain the necessary elements for copyright protection? Discuss.
Self-Check ANSWERS
Trade Secrets
This type of customer data is protectable as a trade secret because of its potential value to a
Probably not protectable unless the system is something highly unique. But the basis of
scheduling medical appointments is not typically protectable.
Formulas are protectable.
Unless the process is highly unique, it is not protectable because it is based on a public
Software source coding is protectable.
Fair Use
Covered by fair use. Limited amount used, noncommercial, and minimal market effect.
Not covered by fair use. Market effect and commercial nature of the use would exclude it
from the fair use defense.
Probably not fair use. The market effect would determine this question, but the commercial
nature and the fact that it is the entire DVD would weigh against fair use as a defense.
Not fair use. Commercial nature, profit motive, amount and substantiality used, and market
effect would bar any use of fair use in this case.
The Legal Environment of Business. A Managerial Approach: Theory to Practice
Chapter 24: Intellectual Property
ISBN: 9780073377698 Author: Sean P. Melvin
Copyright © McGraw-Hill Company (2011)

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