IP Law Tracker Docket Review – IV

Monday, May 18, 2015

Each month, we review significant intellectual property decisions from the U.S. Court of Appeals for the Sixth Circuit and the U.S. District Courts for the Eastern District and Western District of Michigan. Below is the summary for May 2015.

Nedschroef Detroit Corp. v. Bemas Ents. LLC, Case No. 14-10095, 2015 WL 2453511 (E.D. Mich. May 22, 2015).

U.S. District Judge Linda V. Parker granted summary judgment in favor of plaintiff Nedschroef Detroit Corp (Nedschroef) and against two former employees who had operated a competing business while still employed by the plaintiff.

The individual defendants were agents of Nedschroef, which manufactures and services industrial fastener fabrication machines. In 2001, when they learned that they might be laid-off due to an economic downturn, the defendants formed Bemas Enterprises LLC (Bemas). Through Bemas, the defendants serviced Nedschroef machines and sold parts to Nedschroef’s customers. Bemas used a variety of confidential information provided by Nedschroef, including customer lists, pricing information, and design drawings. When Nedschroef learned of Bemas’ activities in 2014, it terminated the employees and filed this action alleging 11 causes of action, including misappropriation of trade secrets under the Michigan Uniform Trade Secrets Act, breach of duties of loyalty and fiduciary duties, false advertising, and violation of the Michigan Consumer Protection Act.

The court granted summary judgment in favor of Nedschroef on all but two counts. It rejected the defendants’ contention that Bemas’ activities were not competitive because it only sold parts and services to customers who had rejected quotations from Nedschroef as too expensive. The court ruled that the employees breached their fiduciary duties and usurped corporate opportunities despite the fact that Nedschroef was not likely to make the sales. See Rapistan Corp. v. Michaels, 203 Mich. App. 301 (Mich. Ct. App.1994) (“[W]hen a corporation’s fiduciary uses corporate assets to develop a business opportunity, the fiduciary is estopped from denying that the resulting opportunity belongs to the corporation whose assets were misappropriated, even if it was not feasible for the corporation to pursue the opportunity or it had no expectancy in the project.”); Prod. Finishing Corp. v. Shields, 158 Mich. App. 479 (Mich. Ct. App.1987) (corporate officer breached fiduciary duty by failing to disclose sales opportunity even when customer refused to do business with corporation).

In addition to claims for breach of loyalty and fiduciary duty, the court granted Nedechrop’s motion for summary judgment on counts for trade secret misappropriation, conversion, common law unfair competition, tortious interference with business relationships, unjust enrichment, and civil conspiracy. It denied summary judgment on claims for false advertising under the Lanham Act, because Nedschroef did not allege that the defendants employed a false designation or description, 15 U.S.C. § 1125(a)(1)(A). It also denied summary judgment on a claim for violation of the Michigan Consumer Protection Act, because the defendants’ activities did not involve conduct “primarily for personal, family or household purposes[.]” Mich. Comp. Laws § 445.903.

The district court awarded damages equal to the total compensation the defendants received from Nedschroef while they operated Bemas, plus an award of Bemas’ profits, treble damages, costs, and attorneys’ fees.

 

PrimePay, LLC v. Barnes, Case No. 14–11838, 2015 WL 2405702 (E.D. Mich. May 20, 2015).

U.S. District Judge Paul D. Borman denied PrimePay, LLC’s motion for a temporary restraining order preventing a former employee, Barnes, from operating a competing payroll services company. The court ruled that PrimePay failed to demonstrate a likelihood of success on its trade secret misappropriation count, noting that the injunction sought was inconsistent with PrimePay’s failure to require Barnes to enter into a noncompetition or nonsolicitation agreement during his term of employment.

Barnes worked as a PrimePay officer for over 15 years, although he did not sign a noncompetition or nonsoliciation agreement. In 2014, PrimePay informed Barnes that due to a reorganization, his salary would be reduced from $210,000 to $80,000 per year. Barnes then resigned, informed PrimePay that he planned to start a competing payroll services company, and purchased his company laptop. A number of former PrimePay customers moved their business to Barnes’ new venture. PrimePay then sued Barnes for misappropriation of trade secrets under the Michigan Uniform Trade Secrets Act (MUTSA), Mich. Comp. Laws § 445.1901 et seq., and related claims based on his retention of confidential computer files containing PrimePay accounting and customer information on his laptop and a cloud storage account. Barnes admitted that he had retained the files, but argued that he retained the accounting information because he anticipated that PrimePay would request his help in preparing its tax returns and retained the customer files unintentionally.

Judge Borman held that PrimePay failed to meet the standard necessary for the extraordinary equitable relief sought. The district court expressed doubt that PrimePay could establish that the alleged accounting information qualified as trade secrets based on general statements that the information was confidential and valuable. PrimePay did not “explain[] with any degree of clarity how this information, given this particular industry, has competitive value from not being generally known to every other payroll services company or how this type of information could be used by a competitor to steal customers.” Slip op. at *25. In addition, the court observed that, although PrimePay argued that the information was very valuable, it filed “reams of allegedly trade secret information in support of its motion for a preliminary injunction” without seeking to have the information filed under seal. Id. at *24, n.4.

Ultimately, however, the court assumed that the information constituted trade secrets, and ruled that PrimePay failed to prove a likelihood of success on the issue of misappropriation. First, the court noted that Barnes was not contractually barred from competing with PrimePay or soliciting its customers. The court noted that the relief sought was at odds with the terms of the employment. “To read the MUTSA as preventing an employee who has been made privy to particular customer information in the course of his employment from ever using that knowledge when working for (or in this case becoming) a competitor would impose a de facto covenant not to compete to which the employee had never agreed.”Id. at *26. See McKesson Medical–Surgical, Inc. v. Micro Bio–Medics, Inc., 266 F. Supp.2d 590 (E.D. Mich. 2003). Second, the court found that PrimePay’s forensic evidence of misappropriation was inadequate because it did not establish that Barnes had accessed or used files containing the alleged confidential information after his resignation. Finally, the court noted that there was no evidence of “threatened” misappropriation because Michigan courts have not recognized the “inevitable disclosure doctrine” and, even if that theory was available, it would not apply to Barnes, who had acted with candor by announcing his resignation and plans to start a competing business. Threatened misappropriation under the MUTSA requires more than a generalized assertion that a departing employee possesses trade secrets and will of necessity disclose them in his new employment. Slip op. at *30.

Although the court denied PrimePay’s motion for a TRO barring Barnes’ competing activities, it did order Barnes to preserve and refrain from using the information in his possession and to permit PrimePay a reasonable opportunity to inspect and remove the computer files from his laptop and cloud storage.

 

Roe v. Nano Gas Technologies, Inc., 14-cv-13790, 2015 WL 1952283 (E.D. Mich. April 29, 2015)

In Roe, the plaintiff filed suit based on an alleged breach of an agreement between plaintiff and defendant, which sought to enjoin defendant from using, disseminating or making application for a patent in the United States Patent and Trademark Office.  Roe v. Nano Gas Techs., Inc. Case No. 14-cv-13790, 2015 WL 1952283, at *1 (E.D. Mich. April 29, 2015).  The agreement required that disputes be resolved in arbitration unless the dispute arose from one of four specific sections of the agreement.  Id.  at *3. Those sections are summarized below:

Section 2: The parties agreed to work together to pursue the interest of the company, including the defendant agreed to contribute his intellectual property and know-how to the venture;

Section 3: A non-compete covenant;

Section 8: Required that the plaintiff use initial funding investment to cover certain expenses; and

Section 9: Stated that the defendant would be primarily responsible for machine design.  Id. at *4.

The defendant moved to dismiss the case, arguing that plaintiff’s claim should have been brought in arbitration. Id. at 5. The defendant argued that plaintiff’s claim related to a section not identified in the agreement as one in which injunctive relief could be sought in court. Id. The court agreed, concluding:

an injunction prohibiting defendant from applying for a patent or for using or disseminating certain technology does not implicate the non-compete clause, the defendant’s proposed use of funding, or the design of the machine itself.  Nor does the requested injunction relate to Section 2 of the agreement because plaintiff is not seeking to have himself rejoin the team, contribute his intellectual property to defendant, or work together with defendant with respect to the possibility of sales, marketing, manufacturing, distribution services and capital funding for defendant.  Id.

The court held that plaintiff’s claim should be adjudicated in arbitration. Id.

Additionally, defendant filed a motion seeking injunctive relief of plaintiff for:

  1. hiding defendant’s property;
  2. engaging in conduct which would constitute a violation of fiduciary duties or breach the non-compete provisions of the agreement; and
  3. contacting customers, partners, vendors, clients, consultants or other business prospects of the defendant. Id.

The court noted that defendant failed to explain how it’s requested injunctive relief related to any of the sections identified in the agreement as subject to injunctive relief. Roe, 2015 WL 1952283, at *6. The defendant argued that injunctive relief was proper because plaintiff breached the “joining the team” (Section 2) and the “noncompete covenant” (Section 3) sections. Id. at *6-7.

The court rejected defendant’s argument. First, the court concluded that the defendant’s requested injunctive relief did not seek to have plaintiff join the team or contribute to his intellectual property, but rather sought to have defendant’s property returned. Id. at *6. The court held that even if Section 2 prevented plaintiff from hiding or concealing defendant’s property, another section of the agreement – not subject to injunctive relief – was more appropriate. Id.

Second, regarding the non-compete covenant of Section 3, the court determined that the term of the non-compete agreement had expired and therefore no longer applied. Id. at *7. Thus, the court denied defendant’s motion for injunctive relief.

 

Wedo Fundraising Inc. v. Knox County Board of Education, 14-5939, 2015 WL 2166928 (6th Cir. May 11, 2015)

In Wedo Fundraising, the Sixth Circuit reviewed the district court’s decision granting summary judgment in favor of the defendant Knox County Board of Education. The plaintiff Feredonna sued the Knox County Board of Education for trademark, trade dress and copyright infringement of Feredonna’s coupon books. Wedo Fundraising Inc. v. Knox County Board of Educ. Case No. 14-5939, 2015 WL 2166928, at *1 (6th Cir. May 11, 2015).  Feredonna had originally applied to register the trademark “SCHOOL COUPONS” on the Principal Register at the trademark office, but that registration was rejected because the mark was deemed merely descriptive.  Id.  In view of the rejection, Feredonna amended its application to register the mark on the Supplemental Register.  Id. Further, Feredonna claimed copyright protection for the design, format, layout and contents of its school coupon books in 1998, and registered its copyright in 2009-2010.  Id.

For several years, Feredonna had provided coupon books under the trademark “School Coupons” to the Knox County annual coupon book campaign.  Id.  However, at the conclusion of the 2009 coupon book campaign, Feredonna’s contract with Knox County expired and Knox County partnered with a different company for the 2010 books.  Id. at *2. When Knox County switched providers of the coupon book, it sent a letter to all merchants who had previously participated in the coupon book program to announce that the program had been re-branded from the “School Coupon campaign” to “Knox County Schools Coupon Book.”  Id. 

First, the court reviewed the district court’s granting of summary judgment that Feredonna’s trademark was descriptive. Feredonna argued that the mark was not descriptive because: (1) it had been registered on the Supplemental Register; (2) it had been continuously used; and (3) Knox County’s acknowledgment of Feredonna’s ownership entitled the mark to protection.  Wedo Fundraising, 2015 WL 2166928, at *3. The court disagreed, concluding that because the mark was not placed on the Principal Register but instead on the Supplemental Register was “a concession that the term is not inherently distinctive.”  Id.  Therefore, the court held that the mark “School Coupons” was descriptive. Id.

The court next analyzed whether the mark “School Coupons” had acquired secondary meaning. Id. at *3-4. “A descriptive mark achieves secondary meaning when in the minds of the public, the primary significance of a product feature or term is to identify the source of the product rather than the product.” Id. at *4. The court listed the following factors to determine whether a mark has acquired secondary meaning: “(1) direct consumer testimony; (2) consumer surveys; (3) exclusivity, length, and manner of use; (4) amount and manner of advertising; (5) amount of sales and number of customers; (6) established place in the market; and (7) proof of intentional copying.” Wedo Fundraising, 2015 WL 2166928, at *4. Viewing the evidence in a light most favorable to Feredonna, the court concluded that the only factor supporting a finding of secondary meaning was the exclusivity, length and manner of use of the “School Coupons” mark. Id. For the other factors, the court emphasized that Feredonna had provided no direct consumer testimony or surveys to support its position that the mark had acquired secondary meaning. Id. “Although the lack of survey evidence is not fatal to Feredonna’s claim, consumer surveys are ‘the most direct and persuasive evidence’ of secondary meaning.”  Id. The court held that the mark had not acquired secondary meaning and was not protectable.

For similar reasons, the court also rejected Feredonna’s trade dress infringement claims.  “Trade dress refers to the image and overall appearance of a product.  It embodies that arrangement of identifying characteristics or decorations connected with a product, whether by packaging or otherwise, that makes the source of the product distinguishable from another and promotes its sale.”  Id. at *6. “To prevail on a trade-dress infringement claim, a party must prove that the trade dress in question is entitled to protection—in other words, that it is (1) distinctive, and (2) primarily nonfunctional—and then that (3) the trade dress of the competing product is confusingly similar.”  Id.

Feredonna argued that its trade dress was inherently distinctive based largely on the style and design of the coupon books. Id. at *7. However, “product design or configuration, as opposed to product packaging, is never inherently distinctive and is protectable only if it has acquired a secondary meaning.”  Id. at 6. Erring on the side of caution, the court held that the books were not inherently distinctive because the size, shape and feel of the coupon books related more to their design rather than their packaging, and therefore required secondary meaning. Id. at *7. Applying the seven factors for secondary meaning, the court held that secondary meaning was not present for the same reasons secondary meaning was not found for the trademark. Weddo Fundraising, 2015 WL 2166928, at *7.

Finally, the court reviewed the district court’s grant of summary judgment that Feredonna’s copyright was not infringed. Feredonna’s copyright claim was focused on the “new advertising copy that it created from raw offer verbiage from merchants, pointing to both the language and format of the copy.” Id. at *8 (internal quotations omitted). The court emphasized that “Feredonna did nothing but change the style and format of the language submitted by merchants,” which the Sixth Circuit has held is not enough to “reflect the requisite originality” for copyright protection. Id.Further, the court concluded that there was not sufficient evidence that Knox County had copied Feredonna’s booklets. Id. The court concluded that the district court appropriately granted summary judgment on Feredonna’s copyright claim. Id.