The Department of Justice (“DOJ”) recently sought to block the merger between AT & T and T-Mobile (“merging entities”). Indeed, many states, including New York, are now on board to stop the merger, too, reports the WSJ in States Join Suit Against AT & T. The fear: the new entity will have too much market power. This, in turn, will enable to the new entity to raise prices, restrict output, and/or reduce the quality of service. Rather than block the merger, the DOJ should permit it and require the corporate couple to have pre-nuptual agreement, which is something most but not all couples, including Russel Brand and Katy Perry, pictured below, now have.
In their Answer to the DOJ’s complaint, the merging entities claim that their merger will improve the quality of services they provide by, among other things, increasing the bandwidth — or decreasing the “spectrum shortage” — in the marketplace so as to cause less dropped calls. The Answer cites FCC Chairman Genachowski as saying that this “spectrum shortage” is a threat to the economy as more and more burdens are placed on the cellular highway. In short, the merging entities are telling the proverbial Rabbi — or Priest — that is the DOJ: we will be a good corporate couple, good corporate parents, and will foster a family of products that will cause pro-competitive benefits.
Instead of vetoing the marriage, the DOJ should allow it but require the merging entities to sign onto a proverbial corporate pre-nuptual agreement. The agreement would require the merged entity to report on a quarterly basis to the DOJ concerning the pricing and quality of its products compared to others in the marketplace. Such reports are often required by courts who issue injunctions. The agreement should also require the merged entity to achieve certain benchmarks which would determine whether the pro-competitive vows of the merged entities, as more fully set forth in their Answer, have been met. If not, the agreement would provide for the dissolution of the merged company. It seems that this is a better way to handle the merger than to outlaw it due to knee jerk fears which, in the end, may be unfounded.
Recently, the WSJ reported in Color Wars: Luxury Makers Battle Over Red-Soled Shoe that the Southern District of New York denied a preliminary injunction that fashion house Christian Louboutin (“CL”) sought against Yves Saint Laurent (“YSL”) for making high heeled shoes with a red sole. CL has a trademark over a “lacquered red sole” on “women’s high fashion designer footwear.” The Court ruled that the color in this context served a functional purpose and was therefore not protectable subject matter. At first blush, the Court’s decision may seem far reaching. It is not.
Color is generally not something you can trademark. There is an exception to this rule. I could trademark the pantone process blue used by my firm so long as I show that consumers associate the particular shade of blue with my firm, and as long as the color is not “functional.” Camouflage, for example, serves such a functional purpose by concealing the person from view. Black, as another example, by conveys a feeling of melancholy and formality, among other things, when used for a suit.
Surprisingly, the Court ruled in CL v. YSL that CL’s red bottomed trademark could not be protected even if CL were able to show secondary meaning: that consumers associated the red with CL’s brand, and not just as some fad in the fashion industry. In so proclaiming, the Court seemingly fan afoul of well established trademark principles.
However, the Court was right to rule the way it did given: (1) CL’s trademark application didn’t claim a particular shade of red, bur red in general; (2) the application also sought to protect the red sole not only for high heels, but for “high fashion footwear,” which covers a broad spectrum of shoes, including flats; and (3) color, especially red, plays a big role in the fashion industry, unlike in other industries. There is no arguable functional purpose to the color pink in the fiberglass industry, and so courts have allowed a fiberglass company to trademark the color for fiberglass. There is, however, such a purpose in the case of black for Jake and Elwood’s bluesy suits. The same is true of red soled sexy heels.
Doth not a rose by any other name smell as sweet? Of course it does. The same is true of an isolated gene. It may have different uses and molecular characteristics once separated from the human genome. However, the genetic code within the gene remains the same. Because such code is found in nature, the isolated gene should not be patentable subject matter. And yet the United States Court of Appeals for the Federal Circuit recently ruled in The Assoc. for Molecular Pathology, et. al. v. Myriad Genetics, Inc. (“Myriad”) that such a gene is patentable. In so holding, the Court went too far.
Myriad filed a patent over BRCA, which is an isolated gene from the human genome. Think of the BRCA as a link from a chain link fence. The company then used BRCA for various purposes, including the treatment for breast cancer. Indeed, the company filed a patent for such uses and applications. This patent was not the subject of the dispute.
Instead, the dispute centers on whether Myriad has the right to a government sanctioned monopoly over BRCA. A majority of the Federal Circuit held that it did. The majority’s reasoning: while the genetic code that underlies the BRCA is the same as the genetic code found in the human genome, the molecular nature of the BRCA changes once isolated from its chain. This is akin to saying that a link from a chain link fence can be heated and bent into forms that would not be possible if the link were still in the chain link fence.
However, the fact remains that the link still is made of the metal from which it came, just as the BRCA has the same generic code. Of course, Myriad should be — and was — rewarded with a patent for new and non-obvious applications or uses of the BRCA for the treatment of breast cancer. And the Court rightly upheld Myriad’s patent over a genetically modified gene that the company constructed in the laboratory and which did not naturally occur in nature.
In the end, allowing Myriad to monopolize the BRCA gene with a patent precludes others from experimenting with the gene in order to find new commercial and non-commercial applications that benefit society. In so doing, the Federal Circuit has placed too much undeserved power over a naturally occurring item in the hands of one company.
Recently, the WSJ reported on the trademark dilution lawsuit filed by Plano, Texas, based Dr. Pepper Snapple Group (“Goliath”) against Dublin, Texas, based Dr. Pepper (“David”) in Dr. Pepper v. Dr. Pepper. David started using its DR. PEPPER mark in 1891, whereas Goliath registered its DR. PEPPER mark in or about 1905. (David started using DUBLIN DR. PEPPER in the 1990s.) Because Goliath registered first, it has priority over David, who is now selling outside of Dublin. But that doesn’t mean that David is is diluting the distinctive character of Goliath’s mark.
Unlike most other countries, the first party (“senior user”) to file a trademark with the United States Patent and Trademark Office has priority rights over another party (“junior user”) that started using the mark first. But the senior user’s rights are not unlimited. The junior user who first started using the mark in, say, Dublin, Texas, is usually entitled to keep using the mark in its original geographic and product market. To the extent that the junior user expands and does business in channels where the senior mark is used, and the senior mark is famous/distinctive like the NIKE and GUCCI marks, then the senior user could sue the junior user for dilution under federal and state law.
While these principles apply to the dispute between David and Goliath, it is highly unlikely that David’s use will dilute the distinctive character of Goliath’s mark. David has sales of only $7 million a year. This pales in comparison to the $5.6 billion in sales by Goliath. Indeed, David accounts for less than 1% of DR. PEPPER branded sales in the United States. Plus, David is the shining star in the economically downtrodden Dublin, and accounts for 80,000 visitors a year to the small town. Nonetheless, Goliath argues that David’s internet and phone sales across state lines are diluting Goliath’s brand. However, ninety-nine percent of the people in the United States, including myself, wouldn’t even had known about David if it weren’t for the WSJ article. It seems that Goliath’s extensive resources would be better spent improving product quality and service, not attempting to squash an inconsequential David that is vital to a struggling local Texas economy.
Recently, the United States Court of Appeals for the Second Circuit held in Barclays Capital v. Theflyonthewall.com (“Flyonthewall“) that while federal copyright law preempted the “hot news” doctrine in that particular case, Defendant Theflyonthewall could be held liable for infringing the copyright to Barclay’s and other Plaintiff banks buy/sell recommendations, notwithstanding First Amendment concerns. The Second Circuit should have gone father by abolishing the doctrine as preempted by the Copyright Act.
The “hot news” originated in International News Service v. Associated Press, a U.S. Supreme Court case decided in 1918. International News involved alleged free riding by International News Service (“INS”) on the Associated Press (“AP”). INS would obtain news from AP, sometimes illegally from a reporter like one on the left, on the East Coast. INS would then distribute the news on the West Coast. The Court held that such news was protected even in the absence of copying or a contractual obligation by INS to AP.
Similarly, in Flyonethewall, the Plaintiff banks had released by/sell recommendations concerning stock. Think of these recommendations as a wine rating you would see on Wine Spectator. Theflyonthewall not only divulges the banks recommendations before they got to their intended audience, but also copied some of the content verbatim on its site. As a result, Theflyonthewall was rightly found liable for copyright infringement. But the Second Circuit reversed the “hot news” claim as preempted in this particular case by the Copyright Act. Notably, the Court did not repudiate the doctrine all together as preempted completely by the Copyright Act. It should have.
The problem with the “hot news” doctrine is that there are no rational bounds on where it can be stopped. In the case where one newspaper copies text from another, you have a copyright violation. Where a reporter has a confidentiality contract with a newspaper but divulges news to another competitor, there may be a tortious interference claim. Or if one newspaper uses illegal means to get information from another, as in International News, an unfair competition claim exists. But “hot news” theory can be expanded to all sorts of ideas and information that are not otherwise obtained illegally or protected by copyright, patent, or contract. It in essence is relies then on a “sweat of the brow” theory. Without such bounds, the “hot news” doctrine expands intellectual property rights beyond the bounds Congress intended, revealing itself to be, in the end, full of hot air.
I hate when people smack their mouths when they chew gum. But I wouldn’t want the Bloomberg administration to pass a law banning it in New York City. The city has better things to do with my tax dollars, such as improving public schools. And yet this is the path the administration seems to be on, as Mr. Moynihan points out in Bloomberg’s Nanny State Targets Street Food.
The Nanny State article shows why regulation can be very dangerous: entrenched competitors, in the form of brick and mortar restaurants, want to use the state to make it more difficult for trucks selling street food to do business. The city encroaches on individual liberty for a private purpose. This should not be the province of city government, or any government, for that matter.
Of course, regulation has another negative consequence: it limits liberty. Smokers were easier targets than the street vendors for the city. That’s why Bloomberg first targeted smokers with his smoking ban in not only bars, but in parks, too. While I am not myself a smoker, I think this was going too far, too. With bars, the argument is that you are in a closed space and so smokers shouldn’t be able to impose their externality on non-smokers. I get it. That is not the case with the park. And yet, unlike with the park, most people go to bars to drink booze and more often than not get drunk. Their purpose is not health. Quite the contrary. Secondary smoke is part of the package. Bars should be free to choose whether or not they outlaw smoking. That will leave the right to choose where it should be — with consumers.
In the case of New York City parks, smokers should have the right to use them, too. I am exposed to all sorts of pollution by choosing to live in New York City. Smelling some smoke in a park is not the worst of them. I hate when people smack their mouths when chewing gum, and when they blow loud bubbles, on the streets and subways. If I were mayor, I would pass a law banning those things, in addition to: sagging pants, tank tops on men, yelling in public, too much perfume (or cologne), too much popcorn eating, too many Yankee hats, live music on weekdays, impromptu music in parks, among others. At some point, such heavy handed regulation by the city will make Gotham the place where freedom and fun come to die.
Recently, the Washington Lawyer ran a great piece called Net Neutrality: Who Should Be Minding Online Traffic? The article goes back and forth between the extremes of: (1) heavy handed Orwellian like regulation of the Internet by the Federal Communications Commission (“FCC”), and (2) self-regulation and content discrimination by greedy Internet Service Providers (“ISP”). This seems to be a false dichotomy. Even in the absence of heavy handed FCC regulation, which can crush innovation, the Sherman Act (“Act”) is an available tool to punish unlawful Internet hogging or collusion by ISPs.
The Internet is a public good. It was created by the government. Before, it was called ARPANET. It was a tool of the military. As a result, the Internet is akin to a public park. At the same time, there are now Internet Service Providers (“ISP”) who provide Internet users with differentiated access to this public good. Think of the ISPs as competing private tour guides in Central Park. Some tours will be faster but more pricey than other slower tours.
The net neutrality debate wrongly omits how the Sherman Act can help police the ISP market without the need for heavy handed regulation by the FCC. To the extent an ISP has market power and tries to keep competing companies out of the market, the essential facilities doctrine would likely apply. To the extent that there is an oligopoly of price fixing ISPs, then there will be claims under Section 1 of the Act. If an ISP tries to obtain too much market power through a merger, the government can oppose it. The problem with too much regulation by the FCC is that it discourages technological innovation by ISPs who compete for customers by providing better service at a lower price. If the FCC requires such companies to take a one size fits all approach to every customer, competitive innovation will likely suffer. So, too, will consumers seeking faster rides through the Central Park that is the Internet.
As Inc. Magazine reports in Spy Games, companies are increasingly using stealth methods used by the likes of the Central Intelligence Agency (“CIA”) to conduct research on their competitors. While aggressive competition is good for the market, the question remains whether such tactics end up in a race to the bottom. Rather than focusing on improving product or service quality, these companies try to out sleuth one another, only to likely find out they are hiring the same former CIA talent.
The plot seems oddly similar to the Twilight Zone episode called Mr. Denton on Doomsday. In the episode, gunslinger Al Denton is given another chance to be a top flight slinger by salesman Henry J. Fate. Fate offers Dent a potion that will guarantee to make Dent the fastest gunslinger in the West, but only for ten seconds. Denton swallows the potion when has to face Pete Grant, a younger gunslinger, in a duel. Denton is the company who hires the ex-CIA agent. But, to Denton’s surprise, the younger Grant is holding an empty bottle of the potion. Grant is the competitor who has also hired the same ex-CIA agent.
In the end, each man has the same potion induced ability and shoots one another in the hand. The shots disable them both for the rest of their lives. Fate, the salesman, rides off into the sunset. Perhaps those companies in the marketplace who are keen on regularly using sleuth tactics to get the upper hand on others will find that they are being played against one another by the former CIA agents the companies hire. These ex-agents owe no fiduciary duties to their new employers and either go to the highest bidder, or service several at the same time, just like Fate. In the end, these companies are left no better off than where they started, and sometimes worse off due to the opportunity costs. They have may have expended valuable resources searching for the potion, rather than finding and practicing new gunslinging techniques or, failing that, hanging up the gun for another more prosperous service market.
Recently, Mr. Raj Rajaratnam was found guilty of violating insider trading laws, which seek to ensure that all members of the trading public, regardless if they are large or small, rich or poor, receive exactly the same information. The goal is worthy, but is it realistic? Whether we like it or not, connected people get better information, just as super connected legacy children get into Harvard. At the very least, the government should make insider trading rules less ambiguous so as to not make every aggressive trader, like Mr. Rajaratnam, into a potential poster child of the new Gordon Gekko.
Various scholars, including Yale Law School’s Jonathan Macey in Deconstructing the Galleon Insider Trading Case, point out that the Securities Exchange Commission (“SEC”) has a more expansive and ambiguous view of insider trading than the U.S. Supreme Court. On the one hand, the SEC takes the view that everyone in the marketplace should have access to the same information, regardless of the effort they take to obtain it. As a result, non-public information should never be traded upon, regardless of how you get. On the other hand, the Supreme Court says having special access to non-public information is legal so long as you didn’t commit a crime to get it, such as when your lawyer steals your confidential information and trades on it. The SEC’s ambiguous insider trading rules have given it more unfettered discretion as to when to lower the gauntlet, and on whom. This is dangerous. As Mr. Macey points out in his article, much of what companies disclose in their filings is so watered down because of regulatory concerns that they leave you wanting to know the “real story” via other means. Like a good reporter, you may be able to get your hands on the scoop by interviews, or otherwise, whereas others are not. While the efficient market hypothesis posits market prices reflect all available material information, we all know this is not reality. Until that happens, which may be never, the SEC should develop a bright line rule more in accordance with the Court’s rulings so that folks can be aggressive in making good connections for much needed information without ending up in jail.
As reported in U.S. Rolled Dice in Bin Laden Raid, the green light to eliminate Mr. Osama Bin Laden eventually came down to “gut instinct.” While we all understand the role of numbers and rational thought in business decision making, we think that the West sometimes places too little emphasis on what can oftentimes be your best friend in uncertain times: your gut.
As we all know, there are times in business when the numbers tell the whole story. There is no gray area. There is no need to use your intuition to make a decision. And yet many decisions in business are not so black and white. For one thing, the numbers may be cooked by the seller of the stock you are thinking about buying. You may not know this by looking at the numbers, but may intuit it by feeling out the underwriter or broker. Like the Navy SEALS in the picture to the left, your eyes may not see anything behind those trees in your midst, but sometimes your intuition will tell you something is lurking there. Unfortunately, the West sometimes places too much emphasis on rational thought, and not enough on the value of intuition, a point that Mr. Nassim Nicholas Taleb makes in The Black Swan: The Impact of the Highly Improbable. Perhaps this is because of a reductionistic approach to studying decision making taught by many schools in the West, including the Economics Department at the University of Chicago, which oftentimes attempts to reduce the complexity of human decision making into mathematical equations. While this may be a helpful crude tool to understand a complex system, it is is not sufficient. Due consideration also needs to be placed on the role of intuition — the gut — in making good decisions.