On Monday, May 20, 2019 the Supreme Court settled a decades-long circuit split regarding a licensee’s ongoing trademark usage rights following the rejection of a trademark license agreement under the U.S. bankruptcy code. In an eight to one decision, the Court found that “rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.”

As discussed in our earlier alert, upon filing for bankruptcy, the debtor – or, for these purposes, the licensor – is given the right to either “assume” or “reject” the debtor’s executory contracts such as a trademark license. Under bankruptcy law, the rejection of a contract “constitutes a breach,” rendering the contract unenforceable against the debtor-licensor. Whether said rejection also had the effect of stripping the licensee of any and all continued rights to use the licensed trademark, is the crux of this case. (See our earlier discussion of the oral arguments for this case here.)

For decades, a licensee’s fate upon rejection of a trademark license rested in the hands of individual bankruptcy courts. On the one hand, the First and Fourth Circuits found that a licensee cannot continue using the mark following rejection citing, in part, the burden this would impose on the licensor to continue monitoring the quality control of the mark. On the other hand, the Seventh Circuit found that rejection had no bearing on the licensee’s continued right to use the licensed mark.

Justice Kagan authored the opinion, adopting the Seventh Circuit’s approach. “The question is whether the debtor-licensor’s rejection of that contract deprives the licensee of its rights to use the trademark. We hold it does not.” The Court based its decision, in part, on the longstanding bankruptcy rule: “The estate cannot possess anything more than the debtor itself did outside bankruptcy.” Namely, to permit the debtor to rescind the license and all accompanying rights it had conveyed to the licensee upon rejection would give the debtor more rights than it would have outside bankruptcy, in direct violation of this rule. In adopting the rejection-as-breach rule, but not the rejection-as-rescission rule, the Court “prevents a debtor in bankruptcy from recapturing interests it had given up.”

The Court also rejected the lower court’s argument that because Section 365(n) of the Bankruptcy Code provides significant protection for licensees of all intellectual property except trademarks, that an opposite rule must apply to trademark licensees. On the contrary, the Court made it clear that no such negative inference arises. Justice Kagan explained that this argument “pays too little heed to the main provisions governing rejection and too much to subsidiary ones.” That is, “Congress did nothing in adding Section 365(n) to alter the natural reading of Section 365(g)—that rejection and breach have the same results.”

The key takeaway from this decision is that “[r]ejection of a contract – any contract – in bankruptcy operates not as a rescission but as a breach.”

These boots were made for walkin’– no not your ugg boots, my UGG® boots.

On May 10, 2019, an eight-person jury in Illinois federal court found Sydney-based company Australian Leather Ltd. and owner Adnan Oygur liable for willful infringement of the “UGG” trademark (U.S. Reg. No. 3,050,925), registered to Deckers Outdoor Corporation since 2005.

In Deckers Outdoor Corporation v. Australian Leather Pty Ltd, 1:16-cv-03676 (N.D. Ill.), Oygur, accused of selling 12 pairs of boots called “ugg boots” online to U.S. customers, was ordered to pay Deckers $450,000 in statutory damages and possibly millions more in attorney’s fees. During the four-day trial, Oygur tried—but ultimately failed—to convince the Illinois jury that in Australia, “ugg” is a generic term for the sheepskin boot style of footwear, claiming it should never have been granted trademark protection in the first place. He based this argument, in part, on his 35 years of experience in the sheepskin industry and 20 years of manufacturing the “ugg boots.”

Deckers’ victory perhaps showcases the importance for brand owners to actively and aggressively police and protect their trademarks, lest a rogue infringer, however sympathetic, chip away at their brand—and its attendant intellectual property rights.

“The hallmark of the continuing offense is that it perdures beyond the initial illegal act, and that ‘each day brings a renewed threat of the evil Congress sought to prevent’…” Toussie v. United States, 90 S. Ct. 858, 864 (1970). In a ruling issued May 9, the Seventh Circuit determined that a failure to report under the Consumer Product Safety Act is a continuing violation by affirming the lower court decision fining Spectrum Brands, Inc. for failing to report an alleged coffee pot defect.[1] This rare instance of a court ruling on CPSC activity highlights the need for companies to report when a product may contain a potential safety defect.

A Failure to Report Is a Continuing Violation

The Seventh Circuit found a failure to report to be a continuing violation until the day a company’s Section 15(b) report is made because the peril of the unreported coffee pot – physical harm – continues to be a risk for the public. The debate in this case turned on when the five-year default statute of limitations for federal statutes containing no time bar begins to run on CPSC enforcement actions. The lower court found the CPSC enforcement action against the company for late reporting not time-barred, and the Seventh Circuit agreed.

The Seventh Circuit looked at the issue in two ways: First, that every report the company received that should have been reported was a separate violation. And, second, that the stream of complaints the company received could be viewed as evidence of the continuing risks posed by the allegedly defective coffee pot.

The company had argued that the CPSC’s enforcement was barred by the Gabelli doctrine – the principle that a claim accrues when fraudulent conduct occurs, not when discovered, and that generally refuses to apply a discovery rule to a statute of limitations for government enforcement. The Court found the Gabelli doctrine did not apply because it was not the discovery rule that made the government’s case timely. The Gabelli doctrine, originating from an SEC case, is an equitable doctrine seeking to protect plaintiffs from a malefactor’s fraudulent actions. An individual plaintiff is not expected to be in a constant state of investigation to suss out fraud. This equitable doctrine does not apply similarly to the government, whose resources and non-individual nature are not consistent with the purpose of the Gabelli doctrine. On the other hand, a separate equitable doctrine, the continuing violation doctrine, exists to prevent wrongdoers from using their earliest wrongdoing as a way to avoid liability for wrongdoing that continued over time. It is this doctrine that the Seventh Circuit found to apply to make CPSC enforcement timely. The majority and concurring opinions differed only on how to characterize the continuing violation: as one continuous wrong of non-reporting (the majority) or as a series of isolated wrongful acts of non-reporting, each one restarting the clock (the concurrence).

The Court’s decision reinforces that the CPSA intends that consumer reports and other evidence of potential defects that present a risk of injury be promptly reported in order to protect public safety. See also U.S. v. Michaels Stores, Inc. et al., 2016 WL 1090666 (N.D. Tex. Mar. 21, 2016) at 2. A failure to report presents a continuing risk to public safety, therefore a failure to report is a continuing violation.

Turning on the Statute of Limitations Clock

It is rare to find courts interpreting sections of the CPSA. In doing so, the Seventh Circuit’s decision continues to reinforce, as in the district court decision, that the five-year statute does not start to run until a company has filed a Section 15(b) report. At that time, the five year statute of limitations on penalty claims by the CPSC will begin to run. 28 U.S.C. § 2462.

[1] The Seventh Circuit also found that the district court had authority to enter and did not abuse its authority by entering an injunction requiring the company to implement a compliance program and retain an expert. The district court ruling imposed a failure to report fine, a fine for the sale of recalled products, and an injunction requiring the company to adhere to its new compliance practices and to retain an independent consultant to recommend modifications to those practices.

On March 25, the European Commission (EC) fined Nike €12.5 million for restricting cross-border and online sales of branded merchandise by its European licensees. In December last year, the EC fined Guess €40 million for imposing restrictions on the use of its brand by distributors online. In total in 2018, the EC imposed fines of over €150 million on suppliers of consumer goods in relation to online distribution practices. And there is more to come. Further cases against companies including Universal Studios and Sanrio (owner of the Hello Kitty brand) are ongoing.

This represents a huge change in the antitrust risk faced by suppliers distributing goods online in Europe. After 20 years of little or no formal enforcement in relation to vertical distribution issues, the EC has suddenly imposed a series of very large fines, focusing on online distribution. Indeed, it seems the EC launched its investigation of Nike on its own initiative rather than in response to a complaint.

All of this activity can be traced back to the EC’s e-commerce sector inquiry, and the inquiry report published in May 2017. In a series of blog posts, we will look at the nature of and background to this change. This post examines the Nike case. Others will examine the Guess case and the lessons to be learned from the e-commerce sector inquiry more broadly.

What Did Nike Do?

Nike’s fine relates to various measures it took to prevent its EEA licensees – and the customers of its licensees – from selling products bearing trademarks owned by Nike cross-border and online within the EU Single Market. Its licensing agreements included conditions designed to prevent out-of-territory sales by licensees and, in some cases, by the customers of its licensees. Nike also threatened to terminate licensees making out-of-territory sales and engaged in other practices to prevent such sales occurring.

Both the relevant license conditions and the related practices were clear and well-established, per se infringements of EU antitrust law. The EC and EU courts have always taken the view that, in addition to traditional antitrust goals, the purpose of EU antitrust rules is to actively promote a single, unified market across the EU/EEA (the so-called “single market objective”). As a result, contractual restrictions and behaviors that restrict imports and/or exports between EU/EEA countries have always been treated as per se infringements of EU antitrust law. Nike’s actions fall squarely within that category.

The relevant practices included:

  • License conditions that directly frustrated sales outside the licensed territory – such as obligations to refer out-of-territory orders to Nike or to pay double royalties for out-of-territory sales;
  • License conditions prohibiting licensees from supplying products to customers that might make out out-of-territory sales;
  • Other, non-contractual measures – such as threatening to terminate or refusing to supply “official product” holograms to licensees making out-of-territory sales (and carrying out licensee audits to ensure compliance);
  • Requiring master licensees to impose restrictions on their sub-licensees prohibiting their sub-licensees from making out-of-territory sales within the EEA;
  • Requiring licensees to impose restrictions on out-of-territory sales in their contracts with retailer customers; and
  • Putting pressure on retailers to prevent them from purchasing products from Nike licensees based in other EEA territories (i.e. from outside the retailer’s own country).Indeed, Nike was arguably fortunate – its fine would likely have been substantially higher but for the fact that:
  • It is unclear whether Nike was badly advised, or simply chose to take the risk due to the lack of enforcement, but its practices had been in place for over 12 years.
  • It cooperated extensively with the EC’s investigation – earning a 40% fine reduction as a result;
  • Its behavior did not relate to its main “Nike” brand, but the brands of certain soccer clubs and national soccer federations (such as Manchester United, Barcelona, and the French national federation) that Nike controlled under license agreements; and
  • The products involved – such as scarves, mugs and plastic bowls – were low value items generating limited revenues.
  • Finally, it is worth noting that Nike would likely have been able to impose some restrictions on out-of-territory sales – although not such extensive ones – if either (i) its licenses had been exclusive rather than non-exclusive or (ii) it had been licensing patents or know how as well as trademarks.

Retailers have been paying close attention to recent developments in the MasterCard/Visa Interchange Fee litigation, and for good reason. Every year, consumers increasingly expect and demand that retailers accept credit cards for payment, and for many, interchange fees—or the “swipe fees” retailers must pay to the banks and networks for every transaction—have now become the second highest cost of doing business, trailing only employee wages. In fact, industry reports calculate that retailers pay billions of dollars annually in interchange fees.

However, an opportunity for some cash relief may be forthcoming. On January 24, 2019, the tumultuous fourteen-year Interchange Fee litigation inched one step closer to final resolution when Judge Margo Brodie granted preliminary approval of the $6.2 billion settlement between Visa and MasterCard and a class of U.S. merchants. The court also set a July 23, 2019 deadline for retailers to either opt out of the settlement or remain in the class. Retailers that remain in the class would be entitled to their pro rata share of the settlement fund, while those that opt out would have to file a lawsuit or negotiate a settlement directly with the defendants.

Unlike the prior 2012 settlement vacated by the Second Circuit, many within the industry anticipate that the current settlement will be approved this time around. If affirmed, the $6.2 billion settlement would constitute the largest antitrust settlement in U.S. history, making the upcoming July 23 opt-out deadline all the more important for retailers to mark on their calendars. This post provides: (1) a summary background of the Interchange Fee litigation; and (2) an overview of the pathways to recovery that retailers should evaluate in advance of the July 23 deadline.

The Interchange Fee Litigation

In 2005, merchants brought suit against Visa, MasterCard, and their member banks, alleging that the defendants violated antitrust law by conspiring to fix interchange fees and uniformly adopting anticompetitive rules, including anti-steering and “honor all cards” rules that prevent merchants from steering customers towards lower-cost payment methods and from negotiating lower interchange rates with the issuing banks.

The U.S. Department of Justice launched its own investigation into Visa and MasterCard’s anticompetitive conduct. This investigation resulted in a settlement with the government in 2010 which required the card networks to modify or eliminate various rules.

In 2012, the class reached a $7.25 billion deal with the card networks in exchange for a perpetual release of all future claims relating to the merchant rules at issue. Following numerous objections by retailers and other merchants across the nation that balked at the release, the Second Circuit in 2016 vacated the settlement on appeal.

On remand, the parties continued to litigate until late 2018, when the defendants reached the current $6.2 billion settlement. Meanwhile, retail industry groups such as the National Retail Federation continue to closely monitor the ongoing litigation with a separate class of merchants seeking injunctive relief to verify whether Visa and MasterCard will reform their rules. While the cash settlement will likely be appealed again, most observers believe that the likelihood of approval is higher now because the perpetual release from the prior settlement has been replaced with a more limited 5-year release of claims.

The Pathways to Recovery

As the July 23 opt-out deadline approaches, there are many considerations that retailers should weigh when deciding how to proceed. The right decision will, of course, be individualized to each retailer. Outside legal counsel can help retailers engage in a cost-benefit analysis and assessment of each option, including expected recoveries and potential timeframes for relief. The various pathways to recovery include, but are not limited to:

  • Remaining in the Class. Retailers may elect to remain in the class and file a claim as a member of the class settlement. This option requires the least amount of work and can be more appealing than pursuing direct action against the networks for retailers with small claims or few resources. However, a recovery through the class settlement may be smaller compared to the other options available, and retailers would likely be forced to wait a minimum of 2–3 years before a payout is realized due to the size and complexity of the claims administration process. Furthermore, there is a risk that the settlement is either rejected by the courts or voluntarily terminated by the defendants if the number of opt outs crosses a certain threshold.
  • Opt-Out Litigation. On the other hand, retailers that choose to opt out of the class and pursue litigation could potentially realize a recovery that is as great as five to ten times what the class has achieved on its claims. Litigation provides retailers the best opportunity to maximize the full value of their claims and to negotiate for non-cash benefits and favorable business terms, such as a reduction in fee rates locked in for a number of years or a modification of merchant rules to allow for steering or surcharging for certain transactions. Hundreds of merchants have already litigated their claims and reached settlements, and many other retailers continue to litigate their claims. While litigation would entail higher costs and engaging in some discovery, retailers may be able to share legal costs on a pro rata basis by jointly litigating the case as part of a larger merchant group, which would also provide additional benefits including increased leverage and cover.
  • Settlement Negotiations. Retailers with large claims may also consider engaging in settlement negotiations directly with the card companies before the close of the July 23 opt-out deadline. An independently negotiated settlement could be larger than—and pay out earlier than—a recovery obtained through the class. Retailers with smaller claims may find it helpful to engage the card companies as part of a merchant group in order to leverage aggregate transaction volume.
  • Sale of Claim. If increasing cash flow in the short term is a priority, retailers may want to consider monetization through a sale and assignment of their claims. A market for these claims has been increasingly developing since the parties have reached their current class settlement, and a number of third-party funders are now making offers in the range of 60–80 cents on the dollar. Retailers interested in selling their claims should be sure to solicit multiple bids from different funders before accepting a final offer.
  • Related Cases in Other Jurisdictions. Retailers with business operations outside of the U.S. should also track recovery opportunities that may present abroad. For instance, various Canadian courts in 2018 have approved settlements totaling CAD $45 million. Meanwhile, in Europe, the London Court of Appeal recently permitted a consumer class action lawsuit against MasterCard to proceed, and another related key case involving a group of U.K. supermarkets is set to be heard at the British Supreme Court. While opt-out deadlines have not yet been set in these cases, retailers that accept credit cards internationally should monitor developments arising from these important jurisdictions.

In light of the potential recovery and multiple opportunities at stake in this space, it is important for retailers to strategically evaluate their options and select a pathway to recovery that aligns with and will further the business objectives of each individual retailer.

Our colleagues in International Trade report on new customs rulings each week, and this week’s ruling involves a classic children’s toy. If your company imports this item, read on for additional details.

In NY N303641, Customs and Border Protection (CBP) discussed the classification of the “Snoopy Sno-Cone Machine.” The imported item is a snow-cone making set for children. It consists of a plastic housing with a metal cylindrical blade. The plastic housing is in the shape of a doghouse and has a closeable chute for the ice shavings to exit the housing. Also included is the Snoopy ice pusher which serves as a plunger to push ice cubes against the grating cylinder blade, a plastic crank to turn the blade, rubber foot pads to help level and hold the housing to a table or other platform, and a clamp to hold the sno-cone maker to the edge of the table. The product comes with three disposable paper cups, a package of fruit punch mix to flavor the ice shavings, and a 6-inch plastic shovel to transfer the ice shavings from the grater chute to the cups. A small squeeze bottle in the shape of a snowman is also provided to hold and dispense the fruit punch flavoring over the ice shavings.

The sno-cone machine grates ice to then be eaten as a snow cone; however, it has limited functionality. The machine is simpler than a household ice crushing machine, such that the grinding chamber can only accommodate one ice cube at a time, therefore CBP considers it distinguishable from a typical manually operated machine used to crush ice. The Snoopy Sno-Cone Machine is principally designed for the amusement of children ages 6 years and older.

CBP determined that the applicable subheading for item in question is 9503.00.0073 HTSUS, which provides for “Tricycles, scooters, pedal cars and similar wheeled toys…dolls, other toys…puzzles of all kinds; parts and accessories thereof… ‘Children’s products’ as defined in 15 U.S.C. § 2052: Other: Labeled or determined by importer as intended for use by persons: 3 to 12 years of age.” The rate of duty will be free.

On April 24 , Crowell & Moring’s Frances Hadfield will speak at the Sports & Fitness Industry Association’s (SFIA) Business & Risk Management Summit. Frances will provide best practices and strategic advice for sports industry retailers who are struggling to protect their products and businesses from increased manufacturing costs overseas. Her presentation, “Trade, Tariffs & Trump” will explore some of today’s most pressing trade issues, including:
• China tariffs, MTB and GSP bills
• How to protect yourself in today’s unpredictable trade environment
• Compliance issues

Click here for more information about the event or to register.

On March 28, 2019, the Department of Labor (“DOL”) offered hope to retailers and others in the employer community seeking clarity regarding compliance with the Fair Labor Standards Act’s overtime calculation rules, by issuing a notice of a final rule to update the principles applicable for calculating the “regular rate.” It has been more than 50 years since the DOL last updated its regulations on this issue. While compensation practices have evolved, employers have been discouraged from offering certain benefits and perks to employees in the absence of clarity as to whether they should be included in the “regular rate” calculation. The DOL’s new rule promises to resolve some of this uncertainty.

The proposed rule would exclude from the regular rate:

  • The cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods and services;
  • Payments for unused paid leave, including paid sick leave;
  • Reimbursed expenses, even if not incurred “solely” for the employer’s benefit;
  • Reimbursed travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System and that satisfy other regulatory requirements;
  • Benefit plans, including accident, unemployment, and legal services; and
  • Certain tuition programs, such as reimbursement programs or repayment of educational debt.

DOL’s proposed rule also clarifies what does and does not constitute a discretionary bonus, which is traditionally excluded from the regular rate calculation. The proposed rule clarifies that simply calling a bonus “discretionary” does not make it so for purposes of overtime calculation. Retailers should note, in particular, that bonuses the proposed rule excludes from the regular rate include spot bonuses and employee-of-the-month awards. Included in the regular rate are bonuses paid according to an agreement (e.g. promised to an employee when she is hired) and those announced to employees to encourage them to remain with the organization or work more efficiently.

The proposed rule has been published for public comment pursuant to the Administrative Procedure Act. Comments are due on or before May 28, 2019. The final rule will likely be promulgated a few months after close of the comment period.

 

On Friday, a federal grand jury in California returned an indictment against two business executives, Simon Chu and Charley Loh, for their alleged roles in distributing defective dehumidifiers and, critically, failing to report required information to the U.S. Consumer Product Safety Commission (CPSC). In announcing the indictment, the U.S. Department of Justice proclaimed that this is the first criminal prosecution of an individual or firm for failing to report to the Commission under 15 U.S.C. § 2064(b), commonly referred to as “Section 15(b)” of the Consumer Product Safety Act (CPSA). This is a newsworthy development that deserves attention across the product safety community.

The Consumer Product Safety Act (CPSA): As many of our readers know, Section 15(b) of the CPSA requires that every manufacturer, importer, or distributor of a consumer product who obtains information that its product(s) “may contain a defect which could create a substantial product hazard,” has a duty to furnish certain information to the CPSC immediately. The same holds true for products that are non-complaint with mandatory federal safety standards or could create “an unreasonable risk or serious injury or death.” Failing to furnish such information to the Commission is a “prohibited act” under Section 19 of the CPSA.

Historically, “failure to report” cases have been handled civilly by the agency and/or DOJ. For example, the CPSC has announced numerous civil penalties levied against firms over recent years for failing to report. However, Section 21 of the CPSA provides that knowing and willful violations of Section 19—a list of prohibit acts including failure to furnish information required by Section 15(b)—may be punishable criminally. In other words, the product safety laws provide the Government with the option of seeking criminal penalties for knowing and willful violations.

The Indictment: Although the indictment does not name companies or conspirators (in addition to defendants Chu and Loh), the operative facts underlying the indictment appear to stem from the Gree matter before the CPSC—recalls involving Chinese dehumidifiers in the 2013-2014 time period that ultimately led to a (then record) $15.4 million civil penalty agreement between the Commission and various foreign and domestic Gree entities, including Gree USA Sales, Ltd. of California.

Here, in sum, the DOJ’s indictment alleges that from July 2012 through April 2013, defendants Chu and Loh received multiple consumer reports that their Chinese-made dehumidifiers were catching on fire. Despite these reports, and subsequent test results that showed the material used in the dehumidifiers did not meet the UL safety standard for dehumidifiers and/or fire resistance, defendants did not contact the CPSC until March 2013. And even when defendants and their unindicted and unnamed co-conspirators did notify the Commission, they made representations that they had not concluded that the dehumidifiers were defective or that a recall was necessary. One report made on April 30, 2013 went as far as stating that the dehumidifiers were “safe for use as intended.” Ultimately, the unindicted companies and CPSC announced a joint recall of approximately 2.2 million of these Chinese humidifiers in the U.S.

What This Means: Consumer product companies, and their officers and executives, should pay close attention to this development—up until Friday, the most egregious violations of the consumer product safety laws seemed to be resolved through civil channels—penalties and occasional lawsuits commonly filed to enjoin certain bad actors from continuing to sell defective or otherwise violative products. This indictment, however, demonstrates a willingness on behalf of the Government to prosecute individuals or firms criminally for, at a minimum, the most egregious violations of the product safety laws. Companies and executives in consumer product industries must remain aware and cognizant of their legal obligations to report and otherwise under the CPSC, as defined through the CPSA, Federal Hazardous Substances Act, and other product safety laws.

For additional analysis that focuses on the import angle of this matter, please see my colleague Frances Hadfield’s post here.

The U.S. Department of Labor recently issued a proposed final rule that would increase the minimum salary required for most ‘white collar’ employees to remain exempt from the FLSA’s overtime requirements. DOL anticipates that the new rule will make one million more U.S. workers eligible for overtime, many of whom work in the retail sector. The DOL proposed rule will increase the minimum salary to $35,308 annually, or $679 per week, from the current $455 per week level.

In addition to raising the minimum salary for most exempt employees, the proposed rule makes several other changes that will be important for many retailers. One of the specific topics on which DOL seeks public comment is its proposal to increase the minimum salary again, every four years.

On Friday, March 22, DOL announced that it will accept public comments on the rule until May 21. The proposed rule and request for comments can be viewed in full here. It is likely that the DOL’s proposed rule will be finalized sometime yet this year.