April 16, 2024
As you probably know, my practice focuses primarily on intellectual property law. Nonetheless, many of the cases I handle tend to cross over into other legal areas, and, for whatever reason, lately I’ve handled a bunch of matters related to restrictive covenants and trade secrets. It’s an area of law I’ve dealt with before, but this sudden uptick of cases at one time is definitely out of the ordinary. Maybe it is something in the water — or maybe it has to do with the Federal Trade Commission’s proposal to ban non-compete agreements, along with the New York State legislature passing a bill banning them (Governor Hochul vetoed it.) It’s hard to say. But it is an interesting, and, if you’re a business owner, important subject.
So let’s talk about restrictive covenants, trade secrets, how they relate to each other, and the enforceability of restrictive covenants because, based on my recent experience, there’s a good deal of misunderstanding — even among lawyers — about what restrictive covenants can and can’t do, what trade secrets actually are, and the enforceability of restrictive covenants.
A note about terminology: Media coverage of the FTC’s proposed ban or relevant state legislation focuses on “non-competes” — agreements where an employee agrees not to compete against his or her employer after leaving employment. In my view, non-competes are just one type of restrictive covenant — the umbrella term I’m using here. This term encompasses not just “non-competes,” but also agreements barring a former employee from soliciting his or her former employer’s customers, vendors, or employees.
Ok, let’s get down to business: Are restrictive covenants enforceable? The short (and very lawyerly) answer is: it depends. Under existing law, restrictive covenants are enforceable to the extent that they are necessary to protect the former employer’s legitimate interest(s), don’t impose an undue hardship on the employee, and aren’t harmful to the public.
These are key points. In New York (where I’m based), courts look at a couple of things (there are some variations between states) to determine if a restrictive covenant meets these criteria. For example, is the covenant for a reasonable time period and is it limited to a reasonable area? One that limits a former employee’s ability to work for companies that directly compete with the former employer for six months may well be reasonable. One that bars a former employee from working anywhere in the world for 50 years, though? Probably not.
In determining whether a restrictive covenant is reasonable, courts also look at whether it’s necessary to protect an employer’s interest. Usually this means that courts want to see that there are trade secrets, confidential information, and relationships an employee developed through his or her employment that need to be protected. In my experience, this is where we run into problems.
Have I seen people take their former employer’s trade secrets, or confidential or highly proprietary information, to their next job? Absolutely. But are there other cases where the information might not really be secret or proprietary? Yes, because there seem to be a lot of misconceptions about what really constitutes a trade secret or confidential information.
For starters, just because an employer calls something a trade secret or says something is confidential, doesn’t mean that a court is going to agree. In fact, courts understand these terms very differently from most people. I think that if you asked a group of reasonably well educated people whether an employer’s client list is a trade secret, most would probably say it is. However, unless it would be really hard or almost impossible to figure out the identity of the clients on that list, many courts will say that list is not not a trade secret. The same goes for a list of vendors.
In other words, in many circumstances, what people think are trade secrets aren’t actually trade secrets. In turn, this means that many restrictive covenants are less enforceable than many employers hope or believe.
However, there are a whole bunch of significant qualifications to this. Most importantly, just because a restrictive covenant may not be enforceable, or may be only partially enforceable, an employee doesn’t have the freedom to do whatever they want with their employer’s information. While someone is employed, they’re required to act in their employer’s best interests; they can’t, for example, influence a client to take its business elsewhere. Similarly, as a general rule, work product created during an employment relationship and on an employer’s equipment, belongs to the employer.
So while our governments and their agencies fight it out over changes to restrictive covenants, make sure you understand what any that apply to you or your company actually can enforce or prevent.
April 2, 2024
In March 2018, iconic fashion house Chanel sued What Goes Around Comes Around (“WGACA”), a reseller of luxury goods à la Poshmark and The RealReal (which Chanel has also sued). These retailers are essentially online thrift stores (WGACA is also brick-and-mortar), solely trafficking in high-end designer goods and apparel instead of ratty Wranglers and stained JCPenney tops.
WGACA, Poshmark, The RealReal, and others of their ilk tout how recycling luxury items is good for the environment (not to mention their bottom lines); Chanel, however, finds their practices less than noble. In its lawsuit, Chanel accused WGACA of trademark infringement and false advertising by selling unauthorized Chanel products and using the Chanel trademark too prominently in its marketing. I wanted to highlight this case because it’s an important lesson in what is and is not permitted when it comes to using someone else’s trademarks and other materials associated with a brand.
Full disclosure: Another reason I find this case interesting is that as the quality of mass retailers gets worse and worse every year, the only way for me to find well-made goods at a non-astronomical price is through the resale market. So yeah, I’m a little personally involved here.
Chanel, Inc. v. WGACA, LLC, went to trial in January of this year. On February 6, the jury returned a verdict for Chanel and awarded them $4 million in statutory damages for willful trademark infringement. How did they reach this conclusion?
Let’s start with some background. Under the first sale doctrine, once a genuine product is sold, the person who purchases it is free to resell it without risk of liability to the brand owner. Likewise, it’s totally fine to use someone else’s brand or trademark to accurately describe the pre-owned item in sales materials. For example, I can snap a photo of a pair of Nike Air Force 1s or a Birkin bag taking up space in my closet, list it for sale on eBay or Facebook Marketplace and use the brand name in my written description along with pics of the brands’ trademarks (assuming the item I’m listing is genuine) — provided I use the marks or brand names only to the extent necessary to describe what I’m selling, and I don’t do anything that might suggest that I’m affiliated with Nike or Hermès or that either company is endorsing my resale of the items.
While there was no question that many (although not all) of the goods WGACA offered were genuine, WGACA ran into trouble with Chanel because there was significant evidence that WGACA used Chanel’s marks too prominently and too often. For example, on social media, it hashtagged posts with #WGACACHANEL. Elsewhere, WGACA featured a Chanel mark more prominently than its own brand mark. Moreover, WGACA’s website and other communications included the statement “WGACA CHANEL – 100% Authenticity Guaranteed.” The jury appears to have viewed this as WGACA suggesting it was endorsed by or had a relationship with Chanel, and on this basis, ruled for Chanel.
WGACA also sold items that, according to Chanel, were never approved for retail, including handbags with voided or pirated serial numbers as well as decorative items Chanel lent to retailers. On this issue the District Court granted summary judgment in favor of Chanel, finding these items were never authorized for sale by anyone, much less WGACA.
What lessons should resellers take away from this? For starters, there’s plenty of room to truthfully advertise the resale of authentic luxury goods. However, it’s important to have specific processes in place to vet any advertising to make sure it doesn’t suggest an affiliation with the brand where there isn’t one. In a similar vein, resellers need to develop programs that ensure the goods they offer for sale are authentic and were originally sold by the brand or, if that’s not always possible, to accurately communicate with consumers.
But the case isn’t closed yet. It remains before the District Court on Chanel’s request that WGACA be prevented from, among other things, using Chanel’s marks to promote WGACA’s business; including the word Chanel in any hashtags; and using in its advertising any Chanel-branded items other than items actually for sale by WGACA.
I’m curious to see what happens at the preliminary injunction hearing. Here, I’m particularly interested in what the Court has to say about the use of hashtags on social media because this seems like an area where, to date, most courts have assumed that a hashtag using a brand name is infringing or gives rise to liability. Perhaps this Court will give us a more nuanced analysis. I hope so, since I believe that resellers like WGACA and The RealReal will continue to thrive as consumers look to both save money and purchase goods with a smaller environmental impact which, as mentioned above, is a key element in these resellers’ marketing. Of course, one could question whether their “green” claims constitute false advertising, but that’s a question for another day.
March 19, 2024
I’ve posted quite a bit about the growing legal battles involving AI companies, copyright infringement, and the right of publicity. These are still early days in the evolution of AI so it’s hard to envision all the ways the technology will develop and be utilized, but I predict AI is going to come up against even more existing intellectual property laws — specifically, trademark law.
For example, in its lawsuit against Open AI and others (which I wrote about here), the New York Times Company alleged the Defendants engaged in trademark dilution. To take a step back, trademark dilution happens when someone uses a “famous” trademark (think Nike, McDonalds, UPS, etc.) without permission, in a way that weakens or otherwise harms the reputation of the mark’s owner. This could happen when an AI platform, in response to a user query, delivers flat-out wrong or offensive content and attributes it to a famous brand such as the New York Times. Thus, according to the Times’ complaint, when asked “what the Times said are ‘the 15 most heart-healthy foods to eat,’” Bing Chat (a Microsoft AI product) responded with, among other things, “red wine (in moderation).” However, the actual Times article on the subject “did not provide a list of heart-healthy foods and did not even mention 12 of the 15 foods identified by Bing Chat (including red wine).” Who knows where Bing got its info from, but if the misinformation and misattribution causes people to think less of the “newspaper of record,” that could be construed as trademark dilution.
There are, however, potential pitfalls for brands who want to use trademark dilution to push back against AI platforms. It’s difficult to discover, expensive to pursue and there can be a lot of ambiguity about whether a brand is “famous” and able to be significantly harmed by trademark dilution. In the New York Times’ case, the media giant has the resources to police the Internet and to file suits; nor should there be any dispute that is a “famous” brand with a reputation that is vitally important. But smaller companies may not have the resources to search for situations where AI platforms incorrectly attribute information, or have a platform visible enough to meaningfully correct the record. Plus, calculating the brand damage from AI “hallucinations” will be very difficult and costly. Also, this area of the law does nothing for brands that aren’t “famous.”
Another area where trademark law and AI seem destined to face off is under the sections of the Lanham Act — the Federal trademark law — that allows celebrities to sue for non-consensual use of their persona in a way that leads to consumer confusion, or others to sue for false advertising that influences consumer purchasing decisions. AI makes it pretty easy to manipulate a celebrity’s (or anyone’s) image or video to do and say whatever a user wants, which opens up all sorts of troublesome trademark possibilities.
Again, there are a couple of serious limitations here. For starters, the false endorsement prong likely only applies to celebrities or others who are well-known and does little to protect the rest of us. Perhaps more important (and terrifying), it seems likely that there will be significant issues in applying the Lanham Act’s provisions on false advertising in the context of deepfakes in political campaigns — like, for example, the recent robocall in advance of the New Hampshire primary that sounded like it was from President Biden. To avoid problems with the First Amendment, the Lanham Act is limited to commercial speech and thus will be largely useless for dealing with this type of AI abuse.
One other potentially interesting (and creepy) area where AI and trademark law might intersect is when it comes to humans making purchasing decisions through an AI interface. For example, a user tells a chatbot to order a case of “ShieldSafe disinfecting wipes,” but what shows up on their porch is a case of “ShieldPro disinfecting wipes” (hat tip to ChatGPT for suggesting these fictional names). While the mistake of a few letters might mean nothing to an algorithm (or even to a consumer who just wants to clean a toilet), it’s certainly going to anger a ShieldSafe Corp. that wants to prevent copycat companies from stealing their customers (and keep their business from going down that aforementioned toilet).
March 5, 2024
Continuing from a previous post reflecting on the seven years since starting my law practice, here are a few more things I’ve learned along the way about business development, entrepreneurship, and growing a law firm. Hopefully, some (or all) resonate with anyone working to grow their career or business.
When I first started my firm, and for several years after, I spent a lot of time thinking there had to be a clear and logical blueprint for business development. If I could just find the right program, join the ideal networking group, or read the best book on the subject, surely I’d be able to grow my business to where I felt it should be. It was particularly easy to succumb to this kind of thinking when I was feeling unsure about what I was doing, if I hadn’t hit a milestone I wanted to reach, or if I saw someone else posting how their firm was killing it. Obviously, my not measuring up was because I hadn’t yet found the right program, group, or book.
I now know that’s not how it works. Having tried a lot of programs, joined (and left) many networking groups, and read a slew of books, I’ve come to the most definite conclusion that, at least for me, there is no one perfect formula to grow a law firm (or any business). I’m sure the various programs, groups, and books work for some people. I, however, am not one of them. And I’m quite certain I’m not alone in that. So, with that in mind, what has worked for me?
First, starting and growing a business takes confidence and the ability to put yourself out there, in emotional and financial harm’s way. It’s a big risk. Some people have no problem here; but again, I am not one of them and the prescriptions of a given program, group, or book weren’t going to change this for me. The solution could only come from within. And that meant spending time thinking about what made it so hard for me to have the confidence that comes so easily to others. Ultimately, I understood it was a fear of criticism. I’ve talked about this a bit before in that previous post, but the tl;dr is I was always terrified that if I wrote something on LinkedIn, on my blog, or in an email, someone somewhere was going to say it was stupid. I suspect some of this fear has to do with gender, but that’s an issue for another day.
What helped me get over this? It began by simply recognizing and acknowledging the issue. Therapy (duh!!) was big. Meditation helped as well. I also work with a fabulous business coach who often gives me new ways of thinking about things. I have a bunch of different pieces of advice she’s given me over the years written down where I can refer to them when needed (frequently!). One of my favorites is a reminder that we all tell ourselves stories and hold certain beliefs, but we need to look at data to see if the stories have any truth to them. I also work with a wonderful writer and editor on a lot of my posts and articles. This allows me to get my ideas down quickly without constantly judging or second-guessing myself, knowing someone else will make sure there are no incomplete thoughts or missing punctuation.
Secondly, I’ve learned that sometimes doing something is better than doing something perfectly — and way better than doing nothing. I, like many others who have gone to fancy schools, worked for BigLaw, and grabbed at every gold ring along the way, tend to think that everything I do has to be perfect. Obviously, with legal work, exactitude is crucial. However, when it comes to business development, I realized that by getting bogged down in the search for the perfect way to do something, I often didn’t get anything done. Again, outside help has been really important for me in putting aside my urge toward perfection and focusing on just getting things done even if they’re not 100% perfect. Over time, paying attention to what works and what doesn’t has helped me refine my approach so that even when I know I’m not perfect, I keep moving in the right direction.
Which brings me to a third thing that’s helped me: consistency. In other words, practice. For me, the act of doing something over and over again has been hugely helpful in becoming more comfortable with it. Truthfully, I’m not sure how exactly I stumbled on this, but it works for me. What you’re reading right now is a perfect example: when I started writing these posts, each and every one was a torturous struggle through hours of pain. Now several years and countless posts later, simply through repetition, the process has become much easier. And that, I assure you, feels great.
February 20, 2024
The Second Circuit recently issued a(nother) decision in the dispute between bridalwear designer Hayley Paige Gutman and her former employer, JLM Couture, Inc. over ownership of Instagram and Pinterest accounts Gutman created while employed by JLM. You can find background on this case here.
The Second Circuit reversed the District Court’s 2022 decision, which held JLM owned the accounts. More notably, the Second Circuit rejected the lower court’s six factor test considering how the account describes itself; whether the account was promoted on the employer entity’s advertisements or publicity materials and linked to other internet platforms of the entity; whether it promoted the business; and whether employees of the entity (other than the account creator) had access to and managed the account.
In reversing the lower court, the Second Circuit held social media accounts “should be treated in the first instance like any other form of property,” and, in figuring out who currently owns one, courts should look to who owned it when it was created and whether there is any evidence the account was ever transferred to someone else. “[T]he law has long accommodated new technologies within existing legal frameworks,” the Circuit wrote. Translation: “Enough with the new tests already. We have plenty.”
Overall, the Second Circuit’s conclusion lines up with what I suggested in a New York Law Journal article last month: Who Owns a Social Media Account? It’s Pretty Simple, Really. The article is paywalled, but the gist is this: Courts should stop coming up with new tests to determine whether a social media account belongs to a business or an individual associated with the business and, instead, look to existing and well-established legal frameworks to determine ownership.
Hopefully, this is what will happen when the District Court takes up Gutman’s case again. Here, the Second Circuit sent the case back to the lower court with a note that the ownership of the social accounts may turn, at least in part, on the terms of service of the relevant social media platforms and, specifically, does “ownership” of a social media account include the right to transfer the account to another. The Second Circuit also suggested that the District Court might want to separate the ownership of content posted on the accounts from the ownership of the accounts themselves, noting that rights to the accounts and rights to the accounts’ content may or may not be the same.
And on it goes. I’ll be paying particular attention to what the District Court says about the role of the terms of service for social media accounts. As we all know, social media companies change their terms of service — a lot. Does this approach give an outsized role to the terms of service even though the litigants in cases over ownership of social media accounts have no input into the terms of those agreements? Second, how will courts factor in changes to terms of service that parties may or may not be aware of, particularly as at least one of the parties to a dispute over ownership of a social media account probably never agreed to the terms of service? I suspect these issues will mean the District Court downplays the significance of the terms of service and instead looks at doctrines governing the ownership of other intangible property. Because tests that are well established… tend not to fail.
