NIST has finalized Internet of Things (IoT) risk management guidance, which derived from a draft publication.  The guidance informs government agencies how to understand and manage IoT risks throughout device lifecycles.  Industry can anticipate government focus on three high-level goals:

  1. Device security;
  2. Data security; and
  3. Individual privacy.

The publication highlights three differences between managing risks for IoT devices and conventional information technology devices:

  1. IoT devices interact with the physical world differently than conventional devices;
  2. IoT devices cannot be accessed and monitored the same as conventional devices; and
  3. The availability and effectiveness of cybersecurity and privacy capabilities are different for IoT devices than conventional devices.

While not mandatory, the guidance provides useful considerations for IoT cybersecurity and privacy risk management.

In the third of our series of blog posts on antitrust and e-commerce in Europe, we look at the €40 million fine imposed on clothing company Guess by the European Commission (EC) in December 2018.

The case is the first in which the EC finds that restrictions on the use of a brand name for online advertising may constitute a per se infringement of EU antitrust law. With the recent Nike decision¸ it emphasises the limits placed by EU antitrust rules on owners’ ability to control use of their brand. Together, the two cases form part of a resurgence in EC enforcement activity involving online distribution following its 2017 e-commerce sector inquiry.

What did Guess do?

In Europe, Guess distributed its products – online and offline – through a mixed network of subsidiaries and authorized third-party distributors. Guess’ agreements with distributors contained a number of restrictive provisions, including:

  • restrictions on use of the Guess brand name in online search advertising;
  • a general prohibition on online sales without prior authorization;
  • obligations to comply with minimum prices (resale price maintenance); and
  • restrictions on cross-border sales between EU countries.

These restrictions formed part of a comprehensive e-commerce strategy in which third-party distributers were expected to focus on offline sales, while online sales were channelled primarily through an online shop owned and operated by Guess itself. Guess’ internal documents showed that the overall purpose was “to avoid cannibalisation of [the] official Guess website.” The EC found that each of the four categories of restrictions above constituted a per se violation of EU antitrust rules.

Restrictions on use of the Guess brand name in online advertising

Guess prohibited distributors from bidding on Guess brand names as keywords when purchasing online advertising on Google. Guess regarded Google AdWords as a particularly important advertising tool as it generated around 30% of all visits to the Guess online shop. Internal documents identified two objectives for the advertising ban:

  • to maximize traffic to Guess’ own online shop, by limiting distributors’ ability to advertise their alternative sites online; and
  • to minimise Guess’ advertising costs, by preventing distributors from bidding up the price of Guess brand related terms.

The EC concluded that by reserving the exclusive rights to the Guess brand name to itself, Guess achieved a significant online competitive advantage over its retailers and, as a result, restricted intra-brand competition.

Other per se restrictions

In addition to the novel advertising restriction, Guess also imposed several more established per se restrictions on its distributors. First, they were prohibited from making any online sales without first obtaining specific authorization from Guess. Guess had established no criteria for authorizing online sales and its internal documents stated “Less is more” and “We need to set up very clear criteria which will help us not to answer positively.”

Second, certain distributors were required to comply with a list of minimum prices set by Guess. The intention was said to be “making the product image uniform.”

Finally, Guess implemented a number of measures limiting the ability of distributors to sell outside the territory allocated to them, including requirements to:

  • advertise and market only within their territory; and
  • sell only to end users (i.e., not to potential exporters).

What do we learn from this?

Various features of the case are worth pausing on. First, as well as creating a new per se violation of EU antitrust rules, the Guess case widens the gap between EU and US policy on verticals. While the FTC has also taken action against restrictions on the use of brand names in online advertising (in the 1-800 Contacts case), the FTC’s action related to agreements between competitors, not agreements between a supplier and its distributors.

Second, in Europe, the focus on this form of restriction is not limited to the EC. The German national competition authority has already taken enforcement action in the Asics case, and the French and UK national authorities have issued reports condemning them. Combined with public statements from EC officials that there are “quite some” such restrictions out in the market, further cases seem inevitable.

Third, Guess managed to adopt three of the four established per se violations identified as priority concerns by the EC in its e-commerce sector inquiry report (in addition to the new brand advertising restriction). Engaging in multiple per se violations is always likely to increase your enforcement risk.

Finally, the decision underlines the importance of taking care when generating internal documents. Guess made the EC’s job particularly easy by being so frank about the unlawful objectives of its restrictions on distributors.

 

  • Is an escalator in a shopping mall a consumer product? The Consumer Product Safety Commission thinks so; here’s their recommendation on escalator safety and the use of soft soled shoes.
  • Does the CPSC regulate the Internet of Things? To the extent networked products present safety risks, you bet they do. CPSC Commissioner Kaye has issued his own paper outlining a framework for the safety of IoT products.
  • What about an industrial use product now widely available for sale to consumers in home improvement stores and on the internet? Probably; read on to learn more!

It can often be difficult for companies to determine whether a product is a “consumer product” for regulatory purposes. Determining whether a product is a consumer product is an important first step in understanding the potential applicability of federal and state product safety rules and regulations to your product. Whether you are a manufacturer, importer, distributor, or retailer, this post is intended to provide a brief overview of the basic jurisdictional considerations for companies in the consumer products space–particularly those companies who also distribute industrial-use products.

What is a consumer product?

The Consumer Product Safety Act (“CPSA)” defines “consumer product” as “any article, or component part thereof, produced or distributed (i) for sale to a consumer for use in or around a permanent or temporary household or residence, a school, in recreation, or otherwise, or (ii) for the personal use, consumption or enjoyment of a consumer in or around a permanent or temporary household or residence, a school, in recreation, or otherwise…” Although the statute does not provide specific examples of “consumer products,” it does set forth particular categories of products which are not included the definition. This list includes the following types of products which are regulated by other federal agencies:

  • Any article which is not customarily produced or distributed for sale to, or use or consumption by, or enjoyment of, a consumer
  • Tobacco and tobacco products (Food and Drug Administration)
  • Motor vehicles or motor vehicle equipment (National Highway Traffic Safety Administration)
  • Pesticides (Environmental Protection Agency)
  • Firearms and ammunition (Bureau of Alcohol, Tobacco, Firearms, and Explosives)
  • Aircraft, aircraft engines, propellers, or appliances (Federal Aviation Administration)
  • Boats (U.S. Coast Guard)
  • Drugs, devices, or cosmetics (Food and Drug Administration)
  • Food (Food and Drug Administration)

The U.S. Consumer Product Safety Commission (“CPSC”) publishes a list of regulations, mandatory standards, and bans to assist industry and consumers with navigating which rules apply to specific consumer products. However, even if there is not a specific mandatory regulation in place for a product, the CPSC may still have jurisdiction over that product.

Are all hardware and home improvement items covered by the CPSC?

As a rule of thumb, if you can buy it at the hardware store or on an online retail site, a DIY home improvement product would be covered as a consumer product. But the analysis is somewhat more nuanced in determining the CPSC’s jurisdictional reach when products become part of customized systems that operate together in the home environment, such as electrical wiring, solar installations and security systems. A defect may not exist in those products as sold, but instead arise because of the way they are installed or otherwise incorporated into the home. Home systems, as opposed to distinct articles in a home, are traditionally regulated by building codes that can take into account important local considerations such as temperature, humidity and even geographic fault lines.

The CPSC has jurisdiction over products that are distinct articles in commerce enjoyed by consumers in and around the home. 15 U.S.C. § 2052(a)(1); see Consumer Product Safety Commission v. Anaconda Co., 593 F.2d 1314, 1320 (D.C. Cir. 1979) (holding that CPSC assertion of jurisdiction over wiring or plumbing systems “would seem to ignore a contrary congressional intention and potentially raises significant problems of federalism in areas of building construction currently regulated extensively by local jurisdiction”). But when the performance of an article in commerce necessarily depends on the design, installation and operation of that product in an integrated system, the jurisdictional analysis can change and an argument can be made that these systems are not consumer products. Id. Electrical wiring or plumbing systems discussed in Anaconda are classified there as involving “housing,” and not regulated as a consumer product. Id. at 1320 but see Kaiser v. Consumer Product Safety Commission, 574 F.2d 178 (3d Cir. 1978) (distinguished by Anaconda in holding that jurisdiction depends on CPSC findings on jurisdictional fact as to whether a component part of system is distributed to consumers as a distinct article in commerce).

What is an industrial or institutional product as opposed to a consumer product?

While most of the “non-consumer products” fall into one the categories listed above and are easily recognizable, one less-obvious exclusion is a product “which is not customarily produced or distributed for sale to, or use or consumption by, or enjoyment of, a consumer.” The CPSA’s legislative history, general counsel opinions, and subsequent cases address and consider this provision in terms of whether the product is produced or distributed primarily for industrial or institutional, as opposed to consumer, use. In general, even if a product is sold primarily to industrial or institutional buyers, it is nevertheless a consumer product within the CPSC’s jurisdiction so long as it is produced and distributed for ultimate consumer use, or otherwise advertised and marketed for consumer use.

On the other hand, a product is likely to be considered an “industrial or institutional product,” if it is not only not customarily sold to or bought separately by consumers, but also is not produced for the purpose of their use and/or enjoyment, General Counsel Opinion 55 (1973); Hughes v. Segal Enterprises, Inc., 627 F. Supp. 1231, 1240 (W.D. Ark. 1986); Consumer Prod. Safety Comm’n v. Chance Mfg. Co., 441 F. Supp. 228, 232-233 (D.D.C. 1978) (finding an amusement park ride was a consumer product because, while not distributed directly to consumers, it was produced to be used for recreational purposes by consumers). How the product is advertised is also important. For example, the D.C. Circuit has held that to be a consumer product, “sales or distributions [to consumers] must be more than ‘occasional’ and there must be ‘significant marketing of the product as a distinct article of commerce for sale to consumers or for the use of consumers.” Anaconda, 593 F.2d at1319-22. A product may be considered an “industrial or institutional product” if one or more of the following factors apply: (a) the weight and cost of the product exceed those of usual consumer products of the same type; (b) the manufacturer did not sell directly to retailer dealers; (c) distributors and dealers did not advertise the product in consumer publications; (d) advertising for the product was only placed in special interest publications for commercial or industrial users; or (e) distributors believe that the product is being sold commercially, not to consumers. General Counsel Opinion 297 (1982)

It is also important to keep in mind that any doubts will be resolved in favor of finding jurisdiction of the CPSC, General Counsel Opinion 134 (1974), and the onus is on the manufacturer “to determine the distribution and use patterns of its products and to act accordingly.” General Counsel Opinion 107 (1974). Moreover, even if a product is originally produced or distributed for industrial or institutional use, if the product becomes “broadly used by consumers” or the distributor “facilitates its sale to or use by consumers, the product may lose its claim for exclusion if a significant number of consumers are thereby exposed to hazards associated with the product.” General Counsel Advisory Opinion 134 (1974); House Report No. 92-1153, 92d Cong., 2d Sess. (1972).

Conclusion

Looking for more information? In addition to relying on the laws described above, the CPSC list of regulated products and advisory opinions, the CPSC has a “Regulatory Robot” to help small businesses determine what safety rules apply to their product.

The New York style community is a world leader in pushing creative boundaries. Crowell & Moring’s New York Fashion & Beauty Breakfast Series is designed to create a forum that brings together fashion and beauty industry executives to explore topics of relevance and to develop lasting connections.

On June 6, 2019, industry insiders gathered for the third Fashion & Beauty Breakfast Series, titled “Spring Mingle – What’s News in Retail 2019,” to discuss developments in fashion during the first half of the year and what might lie ahead in the fashion and beauty industries. Key topics included sustainable fashion, intellectual property protection and makeup artists, and immersive retail experiences:

  • Sustainable fashion has become a widespread design philosophy among industry participants. For instance, H&M sets an example by offering their “Conscious Collection,” which consists of clothing made using sustainable and recycled materials, while Fair Harbor, a new market entrant, has engineered a process for making high-quality beachwear for men and women out of recycled plastic.
  • The focus on women’s faces, driven by the ascendance of selfies which, by definition, have to be close-ups…begs the question…when does a “look” become a work of art? Currently, copyright law only protects works of art that are fixed in a permanent state, and makeup washes off.  Is this requirement worth revisiting, as the lines between fashion and high art continue to blur? How about as the lines between teenager, influencer, celebrity and artist are eroding altogether?
  • The Hudson Yards isn’t the first development to combine dining, shopping, and cultural experiences; however, it is betting that consumers will flock to brick and mortar for shopping “experiences.” On the “Floor of Discovery,” brands that started online have not only opened storefronts but are also using their platforms in the space to test new concepts and immersive experiences, seeking to capitalize on the statistic that in markets where you have physical retail, e-commerce business increases by 30%.

Are you an industry executive who is interested in joining our next Fashion & Beauty Breakfast Series event? Contact mhsieh@crowell.com for more information or visit our Fashion Law webpage to learn more.

#C&MFashionBeauty

On Wednesday, Ann Marie Buerkle made a surprise announcement that she is withdrawing her nominations to serve as the Chairman of the U.S. Consumer Product Safety Commission (CPSC), and to serve an additional seven year term at the agency.  As noted in an earlier post, President Trump re-nominated Buerkle in January of this year to be permanent Chairman of the CPSC.  This was the third time that President Trump nominated Buerkle for this role.  In 2017 and 2018, the Senate failed to vote on Buerkle’s nomination once reported out of committee.

Buerkle has served as the Acting Chairman of the CPSC for two and a half years, since February 9, 2017.  She will continue as Acting Chairman until September 30, and will complete the remainder of her current term, which runs until October 27 of this year.   Buerkle’s announcement comes as she was awaiting Senate confirmation of her nomination to be Chairman and re-nomination to a new term.  Had the Senate voted to confirm, Buerkle would have led the CPSC for another seven years.

The significance of Buerkle’s decision not to pursue a new term is that once she leave the agency at the end of October, the Commission will, once again, have an even 2-2 split of commissioners along partisan lines.  This, of course, assumes that the White House will not nominate, and the Senate will not confirm, a new (Republican) Commissioner prior to the expiration of Buerkle’s term.  But, if not, the Commission may once again be in limbo or deadlocked with a 2-2 voting “tie.”  And, in the absence of the nomination and confirmation of a new Chairman prior to September 30, another “Acting” Chairman will be named, likely Republican Commissioner Dana Baiocco or Peter Feldman.

Companies and consumers alike will eagerly await information on the next nominee.  As always, we will continue to update our readers as this dynamic unfolds.

As more organizations incorporate technology in newfound ways to increase efficiency and effectiveness, government agencies have done the same. Take, for instance, the CPSC’s new recall app, which makes recall information more accessible to consumers on their mobile devices. Now government agencies are looking towards companies to apply the latest technologies to protecting consumer safety.

In a recent statement, the FDA expressed its expectations that companies use even more technology in the execution of recalls. The FDA’s guidance on the “Initiation of Voluntary Recalls Under 21 CFR Part 7, Subpart C” is helpful for anyone undergoing a recall and includes recommendations in three key areas: (1) Training, (2) Record Keeping, and (3) Procedures. In particular, the FDA has openly embraced “tapping into modern approaches such as Blockchain technology to further advance [their] mission of protecting public health.” This is an endorsement of sorts of Walmart and its Sam’s Club division’s plans to implement Blockchain technology to provide real-time, end-to-end traceability of leafy green products back to their suppliers’ farms in September 2019.

In addition to the FDA, many government agencies have expressed their commitment to using new technology to protect consumers from potentially dangerous products. In addition to its new app, the CPSC offers CPSC Recall Widgets that will allow others to put CPSC recall information on their own websites. If you’re a member of the consumer product industry, automotive industry or any other industry where recalls and corrective actions are necessary, you should take note.

To read the statement made by FDA Associate Commissioner for Regulatory Affairs Melinda K. Plaiser regarding the agency’s issue of new draft guidance on the initiation of regulatory affairs, click here.

To view the proposed draft guidance for the initiation of voluntary recalls, click here.

To learn how the use of Blockchain in product recalls also could impact the insurance underwriting process, click here.

For twenty years or more, the European Commission (EC) has taken little or no formal enforcement action against anticompetitive distribution practices. However, the recent fines on Nike, Guess and others mark a dramatic change of policy. In the latter half of 2018, the EC imposed fines totalling over €150 million in relation to online distribution practices.  And its recent antitrust fine on Nike – €12.5 million for restricting cross-border and online sales – continues the trend.

All of these developments can be traced back to the EC’s 2017 e-commerce sector inquiry report. In our second blog post about antitrust and e-commerce in Europe, we look back at that report, what’s behind it, and what it tells us about antitrust risk for those engaged in e-commerce in Europe going forward.

1. The EU E-Commerce Sector Inquiry

Cross-border sales have been traditionally viewed as an important tool for European integration and, as a result, enjoy special protection under EU antitrust rules. Under the so-called single market objective, restrictions on trade between EU/EEA Member States are treated as per se unlawful. Furthermore, e-commerce is considered an important mechanism for allowing consumers in one Member State to approach suppliers in another and, therefore, most restrictions on online sales in distribution agreements are treated as per se infringements.

That was the theory. However, in practice, the EC had failed to take enforcement action to back it up. In 2015, the EC launched an inquiry into what it called the e-commerce sector. When the results were published in May 2017, they identified a range of potentially problematic distribution strategies in online distribution. The EC highlighted four main areas of concern:

  • cross-border sales and advertising restrictions (so-called geo-blocking);
  • restrictions on online pricing;
  • the use of selective distribution systems to limit online commerce; and
  • restrictions on the use of online marketplaces (such as Amazon).

As stated, contractual restrictions on cross-border and online sales have long been regarded as per se unlawful, so in principle, little changed here. (The EU has, nonetheless, now adopted a Geo-Blocking Regulation, which specifically prohibits certain types of geo-blocking.)

Similarly, fixed and minimum resale prices are well-established per se infringements under EU antitrust rules. What the e-commerce sector inquiry highlighted was that online markets are particularly sensitive in this regard; as prices are transparent and are easier to monitor through tools such as pricing software. At the same time, suppliers sometimes wish to protect their brick and mortar stores from aggressive online competition by controlling online pricing.

Selective distribution systems are those where the supplier sells only to particular retailers or distributors, which are selected on the basis of specified criteria. In these distribution systems, sales outside the authorised network are prohibited. Such systems are typically used for luxury and high-value branded goods. The concern identified in the EC report was that pure online players were being excluded from selective distribution systems without justification.

The final priority concern identified by the EC report was contractual restrictions on the use of online marketplaces, such as Amazon and eBay, by retailers and distributors. These are viewed as partial restrictions on online sales and are, therefore, presumptively unlawful – although potentially justifiable in the context of selective distribution or otherwise. (This is an issue explored further by the EU Court of Justice decision in Coty which will be the subject of a later post in this series.)

2. EU Action Following the E-Commerce Sector Inquiry

The importance of the sector inquiry report lies not so much in its description of the law as in the fact that it has triggered actual enforcement by the EC – an action that led to very large fines. In July 2018, the Commission imposed fines totalling €111 million on four manufacturers of consumer electronics – Asus, Denon & Marantz, Philips and Pioneer – for imposing resale price constraints on online retailers. In December 2018, the Commission fined Guess €40 million for imposing geo-blocking and advertising restrictions on its distributors and retailers in relation to online sales.

All of these cases have been expressly identified by the EC as arising out of the sector inquiry.  And more will follow. In April 2019, the Commission sent a charge sheet (SO) to Valve and five video game publishers in relation to their agreements concerning the Steam video game distribution platform.  An investigation into online hotel booking arrangements between individual hotels and the largest European tour operators including Kuoni, REWE and Thomas Cook is also ongoing; as is an investigation of the licensing and distribution practices of Sanrio (owner of the Hello Kitty brand) and Universal Studios.

3. National Developments

The EU e-commerce sector inquiry both reflected and inspired similar action by national antitrust authorities in Europe.  The French Competition Authority had already issued an Opinion on the functioning of competition in e-commerce in 2012. In 2017, the UK CMA published a Market Study on online price comparison tools. In February 2019, the Dutch Competition Authority published new guidelines on vertical agreements and announced it would be more vigorous vis-à-vis vertical restraints and online sales. In April 2019, the German Federal Cartel Office (FCO) published a report on its sector inquiry into comparison websites.

These national publications have also been accompanied by enforcement action. In 2015, the FCO took infringement action against Adidas and Asics in relation to their online sales policies, in particular by removing the ban on the use of online marketplaces. In the UK, the CMA imposed a £1.45 fine on Ping for prohibiting the online sales of golf clubs. And most recently, in October 2018, the French Competition Authority imposed a €7 million fine on Stihl, a manufacturer of chainsaws, for requiring its distributors to hand-deliver its products to customers so that they could receive safety instructions.

Unfortunately, these blossoming national actions have also led to inconsistencies. The position taken by the German FCO in relation to online marketplace bans in cases like Asics is stricter than, and not fully consistent with, that taken by the EC. And in the Stihl case, the behaviour condemned by the French authority had been informally cleared by the German, Swedish, and Swiss authorities, which had each been consulted by Stihl. (The French decision is currently under appeal before the French courts).

European national antitrust authorities have also expanded the range of priority issues for enforcement. The French Opinion of 2012, the UK Market Study of 2017, and the German Asics case of 2015 all identified restrictions on the use of brand names in online advertising (e.g. the use and acquisition of Google AdWords) as a potentially anticompetitive restriction. In its Guess decision last year, the EC followed suit, finding that such restrictions constitute another (new) form of per se infringements.

4. Where Does This Leave Us?

The combination of (i) active enforcement including the imposition of fines of tens of millions of Euros and (ii) a complex, inconsistent, and still evolving set of legal rules creates a high risk environment in relation to online distribution in Europe.

However, it is possible to identify key areas of risk.  Any of the following restrictions in the context of online distribution currently attracts significant enforcement risk in Europe:

  • restrictions on the ability of retailers or distributors to make online sales or sell online to any and all territories in the EEA;
  • online pricing restrictions;
  • the exclusion of online retailers from distribution networks, absent careful justification;
  • prohibitions on the use of online marketplaces, absent careful justification; and
  • restrictions on the use of brand names in online advertising.

Finally, in case of doubt, companies are currently well advised to seek legal advice that takes due account of national law developments and differences.

 

 

Last year, “GDPR” was without any doubt one of the most hyped boardroom buzzwords, and a popular topic at conferences. This European-wide General Data Protection Regulation aims at harmonizing European data protection legislation and empowering EU-based individuals by enhancing their rights and the protection of their personal data. It was without any doubt the huge potential fines for infringement (up to 4% of an organization’s worldwide turnover) that put the GDPR on the C-suite’s agenda.

One year after its go-live it is time to look back and determine what this first GDPR year has meant for the retail sector. Did it disrupt well-established business models? Were there any fines and if so, were they as huge as many expected? Was the budget allocated to GDPR-compliance money well-spent? Or was it a lot of fuss about nothing?

Those who saw GDPR as a mere tick-the-box compliance exercise and just wanted to avoid a fine might be disappointed that huge GDPR fines have not been the standard front-page story in the last couple of months. This does not mean, however, that no fines have been issued. The European Data Protection Board recently reported total fines of nearly 56 million euro. To put things in perspective, however, it should be mentioned that the three most important fines (€50M in France, €400K in Brazil and €220K in Poland) account for most of that sum.

While the fines mentioned above were issued to a major technology company, a hospital and a data broker respectively and, thus, not to retail companies, there is no reason to believe that retail companies should consider themselves exempt from regulatory investigations or other actions. With a total of 144,376 queries and complaints submitted to European data protection authorities and with a total of 89,271 reported data breaches, it is indeed very unlikely that any sector can get away with non-compliance.

Investigation and enforcement procedures take time, so given these numbers there is more to come for sure. GDPR’s impact on  the retail sector is highlighted by the fact that most of the complaints related to telemarketing, promotional emails, and video surveillance/CCTV. So while the sleepless nights were not as numerous as expected, we should still be keeping a close eye on this one-year-old.

Those who saw the GDPR as an opportunity to get their data-house in order and to enhance the quality of the personal data stored under their supervision are certainly reaping the benefits of last year’s GDPR efforts. With data increasingly becoming a liability, and with the move from Big Data strategies to Smart Data strategies, knowing where your data resides and what you can use them for is not only a GDPR requirement, but absolutely crucial for any data-driven business development initiative.

Additionally, GDPR efforts are being leveraged by many companies to prepare for compliance with recent and upcoming data-centric legislation in other jurisdictions. The California Consumer Privacy Act (“CCPA”) in the United States and the General Data Protection Law (Lei Geral de Proteção de Dados Pessoais  or“LGPD”) in Brazil are just two of the most important examples.

Furthermore, organizations that embraced the GDPR as an opportunity have enhanced the quality – and thus value – of their data, used them for well-considered loyalty programs and built crucial bridges between their Legal, Compliance, Sales and Marketing departments.

After one year, GDPR’s impact on the retail sector demonstrates that a key strategy to success seems to be linking GDPR compliance efforts to business-specific customer-centric initiatives, creating a win-win with true business value on the one hand and regulatory expectations on the other hand.

 

 

 

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.