Wednesday, July 21, 2010

Use of Trademarks by Online Hosts OK

Recent federal cases point out that online hosts such as eBay and Google are not responsible for their users’ trademark infringements.  A Second Circuit case, Tiffany v. eBay and Google v. Louis Vuitton Malletier, related to the identification of jewelry on-line as being from Tiffany, however, many of the items sold were counterfeit items.  To the extent companies like Tiffany want to prevent such users from using their mark for false goods, they must track down each user and then take steps to prevent the infringement.  This is extremely costly to those companies.

On the one side, it is important to note that not all uses of trademarks are infringing.  Marks can be used to properly identify products such as a car dealer advertising that it has Ford Mustangs for sale, a church stating it provides Starbuck’s coffee to attendees before services, or an individual stating that they only use Apple computers.  Therefore, users who are actually re-selling Tiffany products on eBay can state that the products are from Tiffany so long as they do not indicate that they are endorsed by or are affiliated with Tiffany.  Accordingly, online hosts can note that they have users who are re-selling Tiffany, or other trademarked, products.

On the other side, there is such a thing as secondary liability for trademark infringement which is a lot like conspiracy or aiding and abetting.  In the copyright context, Napster cannot provide a means for others to engage in widespread infringement knowing that this is what is going on, and then avoid liability by asserting that it is not the one actually engaging in the illegal copying.  In the trademark context, an online host cannot ignore specific infringement taking place on its site, turn a blind eye to infringement about which it should know, or otherwise facilitate infringement.

The recent case law continues to place the burden on trademark owners to enforce their marks.  Online hosting companies do not have to do this job for them.  However, they do have to respond and engage appropriately when infringement is brought to their attention.  Accordingly, companies with valuable trademarks have to continue to spend time policing their marks, one user at a time.  One can easily imagine the almost impossible task this can be given how any individual user on Facebook, Myspace, Twitter, eBay, Google, personal blogs, and so on, might be infringing at any given time.

This is another example of how the case law demonstrates the drastic changes taking place.  What is interesting is that the traditional models focus on control as held by the corporate entities, when it is the various consumers and small sellers who’s activities, in aggregate, are beginning to rival those of the corporate entities. 

Trademark law is about protecting consumers.  The traditional model is that the government gives the person with the most incentive the power to protect the consumers, i.e., the seller who wants to build their brand and convince consumers to buy their products.  Companies have traditionally ignored the consumers themselves and focused on the distribution chain as well as their competitors.  Perhaps trademark owners need to start using the technology that is causing them such a hard time to start to engage their customers more directly.  Perhaps a re-seller registration system focused on consumers rather than sellers where potential buyers could quickly communicate with the trademark owner to verify the authenticity of the product in question.  I’d be interested to know if that has been tried….

Wednesday, July 7, 2010

LLC Operating Agreement Controls Assignment of Membership Interest in Colorado

In the case of Condo v. Conners, No. 09CA1130, from May 27, 2010, the Colorado Court of Appeals held that the provisions of the operating agreement for an LLC which prevented a member from assigning his membership interest without the unanimous written consent of the other members are valid, and the assignment is void.

In Condo, one of the members of an LLC assigned his membership interest (in the form of the right to receive distributions from the LLC) to his ex-spouse as a part of his divorce.  The Operating Agreement for the LLC required that any assignment be approved in writing by the other members.  The other members of the LLC refused to approve the assignment and instead purchased the assigning member’s interest from him.  The former member’s ex-spouse then brought an action against the remaining members for tortious interference with contract and civil conspiracy on the basis that their actions had resulted in the divestment of her contractual right to the monetary distributions from the LLC.  The Court affirmed the summary judgment of the ex-spouse’s claims.

In reaching its conclusion, the Court of Appeals for Colorado first noted that for a tortious interference with contract claim to succeed, there must be a valid contract.  In general, Colorado statutes provide that an LLC membership interest is personal property which can be assigned and transferred.  C.R.S. § 7-80-702(1).  Any person who receives a transfer or assignment has the same rights as the member.  C.R.S. § 7-80-702(3).  However, the Court also noted that LLC's are governed by operating agreements which control over provisions of the statutes contrary to the operating agreement terms, subject to exceptions certain inapplicable exceptions.  C.R.S. § 7-80-108(1).  The goal of the statutes governing LLCs in Colorado is to give maximum effect to freedom of contract in operating agreements.  C.R.S. § 7-80-108(4)

Accordingly, because the operating agreement at issue prohibited assignments without the consent of the other members, the Court found that the assignment was void.  The assignment was void because the member who made the assignment was limited by the terms of the operating agreement, and because the operating agreement governed over contrary statutes which otherwise might have allowed for the assignment. 

The Court went on to note that Colorado does not require any “magic words” in the operating agreement to make the assignment void such as a specific statement that the assignment would be void.  Rather, the language in the operating agreement that the assignment, without the written consent of the other members, was not effective for any purpose, was sufficient to void the assignment.  As a result, the ex-spouse assignee was never, and could never be, a member, or have any membership interest.

In the operating agreements we do for clients, as well as buy-sell agreements incorporated therein, we broach this and other similar issues with the members of the expected LLC asking them, for example, to determine whether, and how, they will allow the transfer or assignment of membership interests (whether voting rights, rights to distributions, or otherwise).  It is an important exercise that many potential members do not initially recognize, or realize, they should address.  But very often, when potential members consider the issues, they do not want to allow the membership interests to be freely transferable and they want to have some control over who can be, or become, a member of the LLC.  For example, even if a divorce does not come into play, none of the members will live forever, and the succession of the membership interests in the estate of a deceased member, for the stability and perpetuation of the business, must be considered.

The Condo case reinforces that operating agreements are valid and will be enforced by the courts under Colorado law.  The case shows that the members at the formation of the LLC have real power and their choices have real consequences which should be taken into consideration before there is a dispute.  Furthermore, LLCs which exist, but where the members have not addressed these issues, or do not even have an operating agreement, can, and should, spend the time and money to put something in place before a dispute arises.