Gedeon Richter plc v Bayer Schering Pharma AG: “Obvious to Try” and “Fair Expectation of Success”

In  Gedeon Richter plc v Bayer Schering Pharma AG [2011]  EWHC 583 (Pat), Gedeon Richter plc applied to have  two  divisional patents belonging to Bayer Schering Pharma AG  revoked for invalidity (the ‘301 and ‘069 patents).  One of the  grounds of invalidity was that the patents were obvious in  respect of four items of prior art.

The patents were for the combination of two steroidal  hormones, ethinylestradiol (EE) and drospirenone (DSP), both  of which regulate the female menstrual cycle and are used as a  contraceptive.  Both patents under examination were aimed at  finding an effective and safe formulation of the hormones in  the development of an oral contraceptive pill.  They were  directed towards a skilled formulation team working specifically in the area of the development of oral contraceptives.

Both sides in this case were agreed that there was  nothing  inventive  per se in embarking on in vitro pre-formulation  testing to determine the physico-chemical characteristics of the  ingredients concerned. Such tests would be performed in  ignorance of the results of the testing and in ignorance of  whether any particular formulation strategy would have a fair  expectation of success. But they would nevertheless be an  obvious thing to do. They were said to be obvious because the  evidence showed that the skilled person would do them  anyway, as part of his routine work. The question was,  however, how would the skilled person proceed after having  undertaken such obvious tests?  This question would, Floyd J  said, involve more in the way of a value judgment.  Further, he  said, the mere fact that such further steps could be characterised  as being performed in order to make an informed decision did  not prevent those steps necessarily from contributing to a  finding of inventiveness.

Floyd J summarised the case law on obviousness and  looked  also at the “obvious to try” test.

“Where, therefore, the evidence reveals that to arrive at the  invention, the skilled person has to embark on an experiment or  series of experiments where there was no fair expectation of  success, the conclusion will generally be that the invention was  not obvious.  Mr Thorley submitted that one had to distinguish  between experiments which were conducted in order to make  an informed decision as to what to do, and experiments which  are conducted only because it is believed that they will produce  the desired end result.  The former type could be obvious  experiments to do, notwithstanding that they were performed  without any prior knowledge of the result, or whether the result  would predict a successful outcome of the whole project.  There  was an independent motive for driving the project forward,  namely to find out whether a solution to the problem was  possible.” 

Further, in Floyd J’s view, there was no general rule:  the  guiding principle must be that one has to look at each putative  step that the skilled person is required to take and decide  whether it is obvious.  Even then, he said, one has to step back  and ask an overall question as to whether the step  by step  analysis, performed after the event, may not in fact prove to be  unrealistic or driven by hindsight.

The expert witnesses differed in their analysis of what steps the  skilled person would take after having undertaken the in vitro  tests to determine the rate of dissolution in an acidic  environment.  The expert witness for the Defendant said that he  would take the results of dissolution to mean that  an enteric  coat (a layer added to oral medications to allow the active  ingredient to pass through the stomach and be absorbed in the  intestine) needed to be adopted and that he would not take an  immediate release formulation (i.e., an uncoated ingredient)  into animal trials.  The expert witness for the Claimant said,  however, that he thought it would be prudent to proceed to an  animal model to assess the relative merits of both an uncoated  and a coated formulation.

Floyd J was not able to conclude that it would be routine to do  animal tests on an uncoated formulation.  It would, he said, be a  matter for the skilled judgment of the formulator.  Therefore, it  was not, in Floyd J’s view, obvious on the basis of the  information acquired by in vitro testing.  Further, it would not  be a step that the skilled person would be able to take with the  necessary “fair expectation of success”.  The skilled formulator 2  would have well in mind, he said, that success in this field  included near certainty of efficacy in all patients.  The  difficulties likely to be encountered if the drug were allowed to  pass unprotected into and through the stomach would not,  therefore, be productive of confidence.

However, while claim 1 of the ‘301 patent and claim 6 of the  ‘069 patents were not found to be obvious, Floyd J  found that  the two claims that set out the steps taken to improve the rate of  dissolution by surface coating inert particles with DSP or by  spraying were obvious.  Floyd J found that it would be obvious  to a skilled person to surface coat inert particles in order to  achieve a better dissolution rate.  As for spraying, this was  found to be part of the common general knowledge for  achieving rapid dissolution of a poorly soluble ingredient.   Therefore, these claims were both found to lack inventive step.

Federal Judge Upholds DOJ’s Expansive Application Of FCPA

On April 20, 2011, in a prosecution brought against Lindsey Manufacturing Company (“Lindsey”) and several of its officers and employees, a U.S. Federal District Court Judge ruled that the term “instrumentalities” applies to foreign state-owned enterprises under the Foreign Corrupt Practices Act (“FCPA”). Under this broad ruling, any employee or officer of a foreign state-owned enterprise would be considered a “foreign official” under the FCPA.

By way of background, the FCPA prohibits paying, promising, or authorizing the giving of anything of value to any foreign official in order to obtain or retain business or an improper benefit. Under the FCPA, the term “foreign official” is defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality. . .” 15 U.S.C. § 78dd-2(h)(2)(A). 

The U.S. Department of Justice (“DOJ”) has traditionally maintained an expansive interpretation of the term “instrumentality,” arguing that any state-owned, state-controlled, or state-operated company could be an “instrumentality” of a foreign government. On this basis, the DOJ has pursued FCPA prosecutions in cases where bribes were allegedly promised or paid to employees of state-owned hospitals, utilities, natural resource exploration companies, and other enterprises. Until the Lindsey case, however, the DOJ’s broad interpretation had not been the subject of a court decision.

In the Lindsey matter, DOJ alleged that Lindsey and several of its officers and employees paid bribes to two high-ranking employees of the Comisión Federal de Electricidad (“CFE”), an electric utility company wholly-owned by the Government of Mexico.  See DOJ Press Release on Lindsey Indictment. The Lindsey Defendants moved to dismiss the case, arguing that CFE did not qualify as an instrumentality of the Mexican Government because the term “instrumentality” did not cover any entity beyond government agencies or departments.  See Lindsey Motion to Dismiss. Accordingly, the Lindsey Defendants argued, employees of CFE could not be considered foreign officials under the FCPA.

The Lindsey Court disagreed. The Court held that “if an instrumentality must share all of its characteristics with both a department and an agency . . . the term ‘instrumentality’ would be robbed of independent meaning. Canons of statutory construction counsel against this outcome, which would turn ‘instrumentality’ into surplusage.”  See Ruling on Motion to Dismiss. The Lindsey Court ruled that “a state-owned corporation having the attributes of CFE may be an ‘instrumentality’ of a foreign government within the meaning of the FCPA, and officers of such a state-owned corporation . . . may therefore be “foreign officials” within the meaning of the FCPA.”

The ruling is ultimately relatively narrow, as it applies to only one element of an FCPA violation – the “foreign official.” Nor is the ruling a surprise to any practitioner that has appeared in front of the DOJ or heard DOJ officials speak about the FCPA at conferences or in other venues. What makes the ruling notable is that, in an environment where virtually all FCPA matters settle before proceeding to trial, the DOJ now has case law on the side of its expansive interpretation of “foreign official.” U.S. companies and individuals should take note and ensure their compliance policies and procedures reflect this expansive interpretation.

Post Scripts: On May 10, 2011, the jury in the Lindsey case returned a guilty verdict on all counts on which they deliberated against all defendants: Lindsey Manufacturing, its CEO Dr. Keith Lindsey, CFO Steven K. Lee, and Angela Aguilar, the wife of Lindsey’s Mexican sales representative. The jury deliberated for one day.

Two other FCPA prosecutions, U.S. v. Carson, et. al. and U.S. v. O’Shea, in two different federal district courts, also involve defendants asserting that a state-owned company should not be covered by the term “instrumentality” under the FCPA. We are closely watching those cases and will provide updates as they develop.

Federal Circuit Invalidates Claims to Fully Human Antibodies for Lack of Written Description When Specification Is Limited To Murine and Chimeric Antibodies

On February 23, 2011, the Federal Circuit held invalid for lack of written description a patent owned by Johnson & Johnson’s subsidiary Centocor Ortho Biotech in an appeal from a judgment that Abbott’s product Humira (adalimumab), a fully human monoclonal antibody specific to tumor necrosis factor used to treat rheumatoid arthritis and some other autoimmune diseases, infringed the patent.

Centocor’s U.S. Patent 7,070,775 was originally based on the discovery of murine and chimeric antibodies to TNF-α. The chimeric antibody was comprised of a murine variable region and human constant region, which made it less immunogenic than the murine antibody. However, because it still contained a murine variable region, it was more likely to elicit an immune response than a fully human antibody. Some eight years after the priority date, Centocor submitted claims to a fully human antibody. An illustrative claim, rewritten in independent form and shortened for clarity, was:

An isolated recombinant anti-TNF-α antibody comprising a human constant region and human variable region, wherein said antibody (i) competitively inhibits binding of A2 to human TNF-α, and (ii) binds to a neutralizing epitope of human TNF-α in vivo with an affinity of at least 1x 108 liter/mole.

After a 5-day trial in the Eastern District of Texas, the jury found Abbott willfully infringed, rejected its argument that the asserted claims were invalid, and awarded Centocor over $1.67 billion in damages. The district court denied Abbott’s motion for judgment as a matter of law, and Abbott appealed.

The Federal Circuit reversed, holding the claims invalid for lack of written description under 35 U.S.C. § 112.

The specification of the ’775 patent detailed the characteristics of the chimeric antibody, including its ability to bind TNF-α with high affinity, neutralizing activity, and A2 specificity. It also identified the sequence of TNF-α and contained examples of making and using chimeric antibodies to TNF-α. The specification provided the amino acid sequence of a murine variable region of an antibody that had the desired characteristics of high affinity, neutralizing activity, and specificity, but did not illustrate making fully human antibodies with these characteristics.

The Federal Circuit found the specification’s failure to illustrate a fully human antibody with the desired characteristics rendered the asserted claims a mere wish-list of properties that a fully human anti-TNF-α antibody should have, i.e., high affinity, neutralizing activity, and A2 specificity.

The opinion recognized that the written-description requirement does not in all cases demand working examples or an actual reduction to practice for a patent’s description to be found sufficient under 35 U.S.C. § 112. Responding to Centocor’s argument, the court acknowledged that Noelle v. Lederman, 355 F.3d 1343 (Fed. Cir. 2004), taught that disclosure of a well-characterized antigen would sometimes be sufficient to describe claims to antibodies to that antigen. However, it clarified that the adequacy of the description in such cases was premised on discovery of a new antigen to which antibodies were raised using routine methods. In the case at bar, by contrast, the antigen (TNF-α) was in the prior art and the claimed “invention” was a class of antibodies with desirable therapeutic properties that the applicants had never made.

The opinion also discussed the PTO’s Written Description Guidelines example in which the full characterization of an antigen was said to support claims to isolated antibodies capable of binding to that antigen, even without working examples of such antibodies. As with its discussion of the Noelle case, the court explained that this example assumed that the specification described a new antigen and that the production of antibodies to that antigen was routine. By contrast, the production of fully human antibodies was assuredly not routine as of the priority date of the ’775 patent, rendering the example in Guidelines of no help to Centocor.

The court’s distinction of Noelle and the Written Description Guidelines illustrates an often unstated interplay between written description and obviousness. Here, for example, the known role of TNF-α in certain autoimmune diseases and the known desirability of blocking TNF-α with a therapeutically acceptable monoclonal antibody would render obvious the idea of a fully human monoclonal antibody with high and specific affinity for TNF-α that binds in a neutralizing manner. But claiming that desired result in a patent is not the same as doing the work. Stated differently, claiming the solution to a recognized problem without having made a real contribution toward actually realizing that solution—which in this case was the hard work of actually making the fully human antibodies—is not the type of activity the patent laws are intended to promote and protect.

The court also noted that Centocor had not itself made fully human antibodies to TNF-α and instead waited until after they had been made by Abbott before adding the asserted claims to a pending application. It did not rely on this fact for its holding that the claims were invalid for lack of written description, but the relative timing of the amendment and the creation of the accused infringing product—coupled with the applicants’ failure to themselves make the desired antibodies—did not make out a factually appealing case for Centocor.

Reinstatement of Debt: A Bankruptcy Court’s Strict Interpretation and Application of Change-in-Control Provisions to Protect Senior Secured Lenders

In In re Young Broadcasting, Inc., et al., 430 B.R. 99 (Bankr. S.D.N.Y. 2010), a bankruptcy court strictly construed the change-in-control provisions of a pre-petition credit agreement and refused to confirm an unsecured creditors’ committee’s plan of reorganization, which had been premised on the reinstatement of the debtors’ accelerated secured debt under Section 1124(2) of the Bankruptcy Code.

“Reinstatement” refers to a chapter 11 plan proponent’s ability to reinstate the pre-default terms of an accelerated debt by curing all defaults. This cure is typically accomplished by paying off all late payments and other arrearages and bringing the loan current. The bankruptcy court in Young Broadcasting rejected the committee’s attempt to reinstate the debtors’ senior secured debt because the committee’s plan resulted in a default under the change-in-control provisions of the pre-petition credit agreement. In so holding, the bankruptcy court rejected the committee’s arguments that certain provisions of the plan which “formalistically” complied with the change-in-control provisions were sufficient to avoid a default, finding the plan provisions to violate the plain terms and clearly expressed purpose of the change-in-control provisions.

Factual Background

Young Broadcasting, Inc. (“YBI“) and certain affiliates (collectively, the “Debtors“) owned and operated various television stations across the country and a national television sales representation firm. Prior to the bankruptcy filing, YBI had obtained senior secured financing of $350 million (the “Senior Secured Debt“). In addition, YBI had issued senior subordinated notes in the amount of $640 million.

After filing for chapter 11, competing plans of reorganization were filed in the Debtors’ jointly-administered cases by the Debtors and the Official Committee of Unsecured Creditors (the “Committee“). Under the Debtors’ proposed plan, holders of the Senior Secured Debt would receive equity in a new company formed to hold all of the common stock of the reorganized Debtors and the senior subordinated noteholders would receive equity warrants in the new company. As a result, the Debtors would be completely deleveraged.

By contrast, the Committee’s proposed plan would reinstate $338 million of the Senior Secured Debt. The Committee’s plan would also provide the senior subordinated noteholders with a pro rata share of 10% of the reorganized Debtors’ common stock and options to purchase preferred stock and additional common stock. In connection with the proposed reinstatement, and in an attempt to remain in compliance with the change-in-control provisions of the credit agreement (described below), the Committee’s plan provided that Vincent Young, one of the Debtors’ founders (“Mr. Young“), would receive all of the Class B shares of common stock of the reorganized Debtors and certain accompanying voting rights described further below. Upon full repayment of the Senior Secured Debt in November 2012 (the original maturity date), such stock would convert to 10% of the Class A common stock.

Holders of the Senior Secured Debt objected to confirmation of the Committee’s plan on the grounds that the proposed reinstatement was impermissible as it would violate certain change-in-control provisions in the credit agreement and that the plan was not feasible and violated the absolute priority rule.

Analysis

Section 1124 of the Bankruptcy Code defines when a creditor’s claim is deemed “impaired”, thereby entitling the creditor to vote on a plan of reorganization. A creditor whose claim is “unimpaired” is not entitled to vote. Pursuant to Section 1124(2), a plan of reorganization may render a claim unimpaired by providing for the reinstatement of the original terms of the prepetition obligation as it existed before default. This Section requires (i) that the plan provides for the cure of any payment or performance defaults (other than an ipso facto default), (ii) that the plan provides for compensation for any damages caused by the creditor’s reasonable reliance on the right of acceleration, (iii) that the plan provides for compensation for any actual pecuniary losses incurred as a result of a failure to perform a nonmonetary obligation, (iv) that the plan provides for the affirmation of the original terms, including maturity, and (v) that the plan not otherwise alter the legal, equitable or contractual rights of the creditor. Because an obligation that is so reinstated is deemed to be unimpaired, the reinstated creditor is deemed to have accepted the plan of reorganization and will have no right to vote. In effect, by meeting the requirements set forth under Section 1124(2), the plan proponent will have the ability to reverse a lender’s exercise of its contractual or legal right of acceleration and reinstate the original terms of the obligation. This can be a powerful tool for debtors and creditors when formulating plans under chapter 11 of the Bankruptcy Code. It is typically used with respect to obligations that had been accelerated pre-petition. Fully matured obligations must be paid in full in order to be reinstated.

In Young Broadcasting, the holders of the Senior Secured Debt argued that reinstatement was improper because the terms of the plan violated the change-in-control provisions in the credit agreement, resulting in uncured defaults. Both sides cited to In re Charter Communications, 419 B.R. 221 (Bankr. S.D.N.Y. 2009), where the bankruptcy court found no default under a change-in-control provision when a plan of reorganization provided the relevant principal with the necessary voting rights and voting power, but divorced those rights from the underlying economic interest in the company (i.e., the principal’s voting power was out of proportion to his underlying equity interest in the reorganized debtor).

The pertinent provisions of the Senior Secured Debt holder’s credit agreement provided that a change-in-control default would occur if Mr. Young, his immediate family members, certain persons controlled by Mr. Young and members of management ceased to hold over 40% of the Voting Stock (which stock granted the holder general voting power to elect the board of directors). The credit agreement also required that if any person or group were to own more than 30% of the total outstanding Voting Stock, then the Young group must own more than 30% or, alternatively, have the right or ability to elect a majority of the Debtors’ board of directors.

The Committee’s plan provided for two classes of directors and two classes of stock with different voting rights. There would be six Class A directors and one Class B director. The stock was likewise split between Classes A and B, with Mr. Young receiving all of the Class B shares of common stock of the reorganized Debtor. Each Class A share of common stock (5,000,000 of which were to be issued) would have 20 votes for Class A directors and 1 vote for the Class B director. Each Class B share of common stock (500,000 of which were to be issued) would have 1 vote for Class A directors and 1,000 votes for the Class B director. Under this structure, the Committee argued that the terms of its plan complied with the change-in-control provisions of the credit agreement because Mr. Young, who would be given all of the Class B stock, would have over 82% of the vote – far in excess of the 40% requirement. The Committee arrived at this figure by comparing the total number of votes Mr. Young would be entitled to vote (i.e. 500,500,000) to the total number of votes all Class A shareholders would be entitled to vote (i.e. 105,000,000). Thus, the Committee relied on the idea that Mr. Young’s retention of 82% of the absolute number of votes would suffice to avoid a default under the change-in-control provisions, even though, as a result of the two tiers of directors and stock, Mr. Young retained much less than the required 40% of the actual voting power.

Disagreeing with the Committee’s contentions, the bankruptcy court, applying New York law to interpret the credit agreement, found that the plain meaning of the change-in-control provisions required that the Young group retain the power to elect over 40% of the entire board of directors and not just over 40% of the votes. Under the Committee’s proposed terms, Mr. Young would have the ability to control less than 15% of the entire board. The bankruptcy court found that the clear intent of the change-in-control provisions was to preclude third parties from obtaining more control than the Young group and management. Accordingly, the bankruptcy court held that reinstatement of the Senior Secured Debt pursuant to the Committee’s plan was impermissible since the plan resulted in defaults under the change-in-control provisions of the pre-petition credit agreement that were not cured.

The bankruptcy court also denied confirmation of the Committee’s Plan for failure to meet the requirement under Bankruptcy Code Section 1129(a)(11) that the plan be feasible. Applying the “reasonable likelihood of success” standard for feasibility and looking at expert valuations and projections, the bankruptcy court found that the Committee’s plan was not feasible because the Committee failed to establish that the reorganized Debtors could satisfy the Senior Secured Debt upon maturity in November 2012 through either a sale or a refinancing.

Lastly, the bankruptcy court found that the Committee’s Plan violated the absolute priority rule because the Committee failed to produce sufficient evidence showing that the distribution of equity to Mr. Young, while general unsecured creditors were not paid in full, was outweighed by the value of the benefits conferred by reinstatement of the Senior Secured Debt. Thus, ultimately, the Committee in Young Broadcasting was unable to establish that reinstatement was a beneficial bargain for the estate.

Lessons Learned

Young Broadcasting has lessons for both lenders and debtors. For lenders, it highlights the importance of clearly drafted change-in-control provisions which can be used as a weapon to guard against an unfavorable reinstatement in a chapter 11 bankruptcy case. For debtors and other plan proponents, Young Broadcasting establishes some clear limits on the gamesmanship that can be played with change-in-control provisions in a reinstatement under Bankruptcy Code Section 1124(2). Though the Charter Communications case indicates that it may be possible to separate the economic interest from the voting interest, Young Broadcasting shows that it may not be possible to separate the actual number of votes from the underlying voting power and avoid a change-in-control default. The equitable considerations at play in Young Broadcasting also highlight the importance of clearly establishing the economic benefits to be obtained by the estate from the reinstatement.

Department of Labor Releases Timesheet Smartphone “App” for Employees

On May 9, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) launched its first application (or “app”) for smartphone platforms. The app (dubbed “DOL-Timesheet App”) is an electronic timesheet that allows employees to independently track the hours they work and determine the wages they believe they are owed.

The development and launch of the DOL-Timesheet App signals a continued and aggressive commitment by the WHD to enforce wage and hour laws across the country—but it also reflects a not-so-subtle shift in the WHD’s tactics. Aware that it has limited capacity for investigation and enforcement (especially in these times of budget cuts), the WHD is pushing measures, such as the DOL-Timesheet App, that essentially “deputize” employees, giving them the power and the know-how to determine whether their employers are complying with applicable wage and hour laws. In light of these measures, it is critical that employers take steps to ensure compliance with federal and state wage and hour laws and ensure the accuracy of their timekeeping systems.

The DOL-Timesheet app appears to be in line with the so-called “Right to Know” regulatory initiative the DOL unveiled in December 2010. Moreover, according to the DOL’s regulatory agenda, the DOL is considering a proposed rule that would require covered employers to notify workers of their rights under the Fair Labor Standards Act (FLSA), and to provide information regarding hours worked and wage computation.

The DOL-Timesheet App undoubtedly will add fuel to the wage and hour litigation fire sweeping across the country. Employers should not expect that this fire will die down in the near future.

About the Application

The application is a fairly simple time-tracking tool—with potentially dangerous consequences for employers that do not have reliable and accurate time-recording systems in place.

A user first enters his or her employment information, including the employer’s name, the employee’s hourly rate, and the day of the week on which the employee’s workweek begins. That information is saved, and moving forward the employee need only tap on that employer’s name to get to two prompts: “Start Work” or “Manual Time Entry.”

The “Start Work” function works like a stopwatch, and records the exact time that the icon is selected. Users will see the name of the employer and time information (e.g., “XYZ Corp., Started work on 5/12/11 9:36 am”). Tapping the employer’s name again allows the user to either “Stop Work,” presumably to signal the end of the workday, or “Start Break,” to record any break periods during the workday.

If “Start Break” is chosen, the user can select either “Meal” or “Other” as the type of break, and can add comments regarding that break. The timesheet will then show that information (e.g., “Break started at 9:44 am”). Users who are unfamiliar with rules relating to the compensability of break time under federal law can view a summary of the federal regulations on this topic.

Once “Stop Work” is selected, the DOL-Timesheet App gives the user a summary of his or her workday, which the user can email to anyone he or she chooses. The summary calculates gross pay for the week, based on the employee’s regular rate, and the app can calculate the number of overtime hours and wages due as a result.

The “Manual Time Entry” feature is similar in content, but simply allows the user to input historical data on start and stop times and breaks for any given date.

The DOL-Timesheet App also contains a very limited “Glossary” that defines common wage and hour terms. Only a few basic terms are included, such as “breaks,” “gross pay,” and “workweek.” The app also features a “Contact Us” section that gives telephone numbers and email and office addresses for the WHD.

Following is a screenshot of the DOL-Timesheet App:

The DOL-Timesheet App is not currently enabled to track more advanced pay mechanisms—such as tips, commissions, bonuses, deductions, holiday pay, pay for weekends, shift differentials, and pay for regular days of rest. According to the DOL, future releases or updates of the application may contain these features.

The free application is currently available only on the iPhone and iPod Touch, although the WHD is considering releasing it on other smartphone platforms, such as Android and BlackBerry. According to the DOL, workers without a smartphone can use the DOL’s printable work hours calendar in English or Spanish to track rate of pay, work start and stop times, and arrival and departure times.

Both the app and the calendar can be downloaded from the Wage and Hour Division’s homepage at http://www.dol.gov/whd/, or through traditional application servers, like iTunes.

Conclusion

The DOL’s new app makes it especially important for employers to ensure the consistency and the accuracy of their time-reporting mechanisms. In particular, employers should make sure that their employees understand that the company’s timekeeping mechanisms are the basis for their pay and the company’s compliance with applicable laws, and those records must be filled out completely and accurately regardless of whether the employees are using any other means for tracking their time. In addition, employers should not in any way discourage their employees from using the application lest they be charged with retaliation against their employees’ exercise of rights under the FLSA.

Employers defending wage and hour litigation also should consider this application as a potential source of relevant information. If the employee actually has maintained accurate, contemporaneous time records on the application, the information could be helpful to the employer’s defense as compared with an employee’s after-the-fact estimation of hours worked developed during litigation.

District Court Decision Reversed as Genuine Issue of Material Fact Remained: Zobmondo Entertainment LLC v Falls Media LLC

In an appeal from a decision of the Central District of California, Zobmondo Entertainment LLC v Falls Media LLC (Case 08-56831, April 26 2010), the US Court of Appeals for the Ninth Circuit has reversed a grant of summary judgment in favour of an accused trademark infringer, holding that questions of fact existed as to whether the trademark WOULD YOU RATHER…? as applied to board games was suggestive or merely descriptive.

Falls Media LLC and Zobmondo Entertainment LLC both incorporate the mark WOULD YOU RATHER…? on books and board games based around the idea of posing humorous, bizarre or undesirable choices. For example, one question from Zobmondo asks: “would you rather have your grandmother’s first name or her haircut?”.

Falls Media filed an ‘intent to use’ application for the WOULD YOU RATHER…? mark in July 1997 for books and board games. It released books incorporating the mark in 1997 and 1999, and a board game in 2004. The ‘intent to use’ application was allowed in 2002 and, following the submission of a statement of use in commerce, the US Patent and Trademark Office (USPTO) issued a registration for WOULD YOU RATHER…? in July 2005.

Zobmondo’s founder filed an ‘intent to use’ application for the mark WOULD YOU RATHER in September 1997. Falls Media’s mark was cited against Zobmondo and the application was subsequently abandoned. Regardless, beginning in 1998, Zobmondo went on to produce multiple games based around humorous ‘would you rather’-style questions, and in 2002 released its first game featuring the WOULD YOU RATHER…? mark.

In 2006, following the registration of Falls Media’s mark, Zobmondo filed suit against Falls Media in the Central District of California alleging among other things, trade dress infringement, copyright infringement and unfair competition. Falls Media responded by filing its own suit in the Southern District of New York claiming, among other things, trademark infringement and unfair competition. Zobmondo counterclaimed for cancellation of the WOULD YOU RATHER…? mark. The New York action was transferred to California and the two cases were consolidated.

Both parties filed motions for summary judgment. The court granted Zobmondo’s motion on several claims, including Zobmondo’s counterclaim for cancellation of Falls Media’s mark. In short, the court found, as a matter of law, that:

  • l the WOULD YOU RATHER…? mark was merely descriptive; and
  • l no rational juror could find that the mark had acquired secondary meaning by 2002, when Zobmondo first released a game prominently featuring the mark.

Falls Media appealed to the Ninth Circuit.

The district court had turned to several tests to determine that the WOULD YOU RATHER…? mark was merely descriptive. First, it applied the ‘imagination’ test, asking whether imagination or a mental leap was required in order to reach a conclusion as to the nature of the product referenced. Second, it applied the ‘competitors’ needs’ test to determine the extent to which the mark is needed by competitors for their goods and services. Finally, it utilized the ‘extent of use’ test, which evaluates the extent to which others have used the mark on similar merchandise. The court determined that both the ‘imagination’ and ‘extent of use’ tests indicated that the mark was descriptive, while the ‘competitors’ need’ test was difficult to apply. It buttressed its opinion with evidence in the form of statements by persons related to Falls Media suggesting that they believed that the mark was merely descriptive.

The Ninth Circuit found several flaws with the district court’s ruling. First, a proper application of the ‘imagination’ test would have found that, without comprehensive consumer surveys, there was no way to conclude that consumers necessarily viewed the mark as merely descriptive of a game involving bizarre or humorous choices. Second, the court found that the ‘competitors’ needs’ test indicated that the mark was suggestive, given that Zobmondo debated 135 possible names for its games during development, and successfully sold its games for several years without use of the WOULD YOU RATHER…? mark. The circuit court declined to apply the ‘extent of use’ test, which is not a controlling measure of trademark validity in the Ninth Circuit.

As to the additional evidence cited by the district court, the Ninth Circuit ruled that, while probative, the statements suggested only that Falls Media believed that the mark was descriptive, and did not indicate that consumers would reach the same conclusion. The Ninth Circuit also believed that the district court had improperly discounted expert testimony that the mark had never been used as the title of a board game before Zobmondo entered the market, as that suggested that competitors did not find the mark useful in describing their products. Finally, the Ninth Circuit noted that Zobmondo’s attempt to register a similar mark supports the inference that, at one time, it believed that the mark was inherently distinctive.

The core of the Ninth Circuit’s determinations was that the district court had misapplied the summary judgment standard as it relates to trademarks. A registered trademark enjoys a strong presumption of validity and where, as here, the USPTO does not require evidence of secondary meaning, the mark is entitled to a presumption that it is inherently distinctive as well. Trademark validity is also an intensely factual issue, and summary judgment is disfavoured in trademark claims generally. Given this, and the normal summary judgment standard requirement that all reasonable inference be drawn in favour of the nonmoving party, the Ninth Circuit simply could not conclude, based on incomplete and conflicting evidence, that there was no issue of fact as to whether WOULD YOU RATHER…? was suggestive or merely descriptive.