Columbia Business Law Review Online
North Face Apparel Trying to Close the Door on "South Butt"
Ari Taub - March 8, 2010We’ve previously discussed an interesting case being brought in Germany for infringement of the name "Cayman" by Crocs. But a case being litigated in federal court in Missouri blows the Croc debacle out of the water. The case was brought by apparel corporation The North Face ("TNF") against The South Butt" ("TSB"), a college-student-owned company. In its complaint, filed in 2009, TNF brought claims under the Lanham Act for trademark infringement and dilution, arguing that: (1) the similarity between the two companies’ logos and product market create consumer confusion, and (2) TNF’s mark would be degraded from overuse.
A mere glance at TSB’s logo reveals that it creates obvious problems. TNF’s logo features, on the right, an all-white, three-lined half rainbow, with each of the rainbow’s lines meeting the three white words "THE NORTH FACE" against a red background, with the tagline "Never Stop Exploring." TSB’s logo—seemingly intentionally—is extremely similar. Although the rainbow it features is upside down, has only two lines, is on the left, says "THE SOUTH BUTT," and has the tagline "Never Stop Relaxing," the font, size, and layout are all remarkably similar. TSB apparently intended its logo to be a parody, not a copy (as it says on TSB’s website, "I decided to create a way to poke fun at the norm, while making an affordable and quality product."), though there is a good chance that you will not be seeing a South Butt coat on store shelves in the near future.
Although its nuances are different, the consumer confusion issue was discussed earlier in relation to the Crocs case, and so I focus now on the dilution aspect of this case. Marks are an extremely valuable commodity for companies because they are unique and identifiable solely in connection with a given product. Dilution actions essentially protect the uniqueness of a mark, so that it continues to strongly identify its owner’s product. To explain, let’s assume that "Orange," a competitor of Apple, began manufacturing millions of laptops with a white illuminated orange on the top of each computer lid. Even if one could successfully argue that there was no "likelihood of consumer confusion" between the two products, since most people can tell the difference between an apple and an orange, Apple’s dilution claim would argue that, due to the extreme similarities between the products and their logos, the strength of Apple’s logo in identifying its product had decreased because of consumers’ increased exposure to the similar "Orange" logos.
Because this case was brought in federal court in Missouri, the court will be bound by 8th Circuit precedent. Instructively, in Anheuser-Busch v. Balducci Publications, the 8th Circuit had to decide whether a comedy magazine’s imitation of the "Michelob Dry" trademark (using the name "Michelob Oily" on a fake advertisement) constituted dilution under federal law. The court held that although the advertisement was clearly intended for satirical purposes, the magazine’s imitation would likely diminish the strength of Michelob’s marks, which had been duly protected under federal law, such that Michelob could prevail.. (For a similar result under the consumer confusion analysis, see Nike v. "Just Did It", a 7th Circuit case cited approvingly by the 8th Circuit in Anheuser-Busch.)
Ultimately, although the TNF v. TSB case has some humorous aspects, TNF has a legitimate legal interest in protecting the strength of its name and mark. Although people may not be confused as to whether The North Face is the producer of The South Butt, or whether TNF in any way endorsed TSB, the recurring exposure to a logo of such substantial similarity could certainly diminish the strength of TNF’s logo and name. It seems the joke is on the humorous college kid behind TSB in the up-hill legal battle he faces.
The Euro Continues to Slide as Concerns About PIGS Linger; Goldman is under Investigation for Transactions with Greece
Michael Papadakis - March 3, 2010The U.S. dollar recently hit an eight-month high against the euro, thanks to the sovereign debts of Portugal, Ireland, Greece, and Spain ("PIGS"). These countries abused their ability to issue cheap debt, a privilege owed to their association with the euro. As Jan Randolph, director of sovereign risk analysis at forecasting firm HIS Global Insight, stated, "In a sense, the euro worked too well ... [t]he benefits masked the fact that these countries were losing competitiveness in terms of labor costs, and now that gap can't be avoided." This problem was exacerbated by the EU’s unification of monetary policy, specifically the inability of individual countries to devalue.
Speculation and denials of a Greek bailout have attracted many recent headlines, as has Goldman’s role in facilitating Greek borrowing. Though Greece has promised to cut its budget, the markets remain skeptical that it can meet its upcoming debt obligations. For example, the spread between German and Greek bonds, which reflects a heightened default risk and rampant speculation, has increased to 3.47%, compared to 1.56% in mid-November—then a four-month high—and an average over the past decade of .57%.
Unfortunately, the European Union’s ("EU") financial problems do not end with Greece. Many, including George Soros, believe Greece is just the tip of the iceberg, as the much larger problems of Spain and Portugal loom. Arguing for EU assistance, Greece itself stated that Portugal and Spain are "next in line" if Greece defaults on its obligations. The argument is we would see a domino effect as European banks suffered heavy losses and capital dried up for debt-laden Portugal and Spain. Fearing the consequences of such a situation, France, Germany, and the Netherlands have agreed to buy billions in Greek bonds. The assistance comes at a steep price, however, as the EU is demanding greater budget cuts than the Greeks originally proposed.
So how did Goldman get involved in this mess? It helped Greece "mask its debt" from investors and the EU using currency swaps that reduced Greece’s reported foreign debt by €2.367 billion. Some may remember that Greece had been made to wait two years in order to improve its finances before it was eventually allowed to join the euro on January 1, 2001. According to one report, these swaps allowed Greece to get in by taking advantage of rules stating that swaps were not included in deficit calculations. Goldman, however, points out that these swaps lowered Greece’s debt by only 1.6%, from 105.3% to 103.7% of GDP.
Although the swaps were legal at the time, Goldman’s subsequent activities could subject it to liability. In the years following the arranged currency swaps, Goldman managed $15 billion in bond sales for Greece. In at least six of the ten sales documents corresponding to those sales, no mention was made of the swaps. Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill, says that Goldman could face legal liability "if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading. But that would be a tough hill to climb, in terms of burden of proof. There would have to be some sort of smoking-gun memo." The US Federal Reserve, the SEC, and the EU regulators are presently looking into Goldman’s activities.
Decoding the Antitrust Issues in the Google Book Deal
Yuliya Neyman - March 1, 2010The courtroom was filled to capacity. The parties on both sides were a venerable who’s who of BigTech, BigLaw, and BigPub. The media was in full attendance.
The search giant was in court, yet again, over the controversial Google Books scheme, by which Google attempted to upload and digitize millions of books without author or publisher permission. The trial has been ongoing since 2005, when a class of authors and publishers sued Google, claiming that it had violated their copyrights by scanning their books into an electronic database and displaying short excerpts without their permission. The hearing on February 18th was about an Amended Settlement Agreement (ASA) between Google and the class. U.S. District Judge Denny Chin heard from editors, publishers, rivals (like Microsoft), competitors (like Amazon), and even an illustrator advocate who read him the Three Little Pigs.
But one objector was not like the others: among those furious over copyright and privacy issues stood the U.S. Department of Justice. The DOJ was not as concerned with the copyright issues (although it did see some red flags) as it was with antitrust questions. The DOJ had announced last April that it was investigating whether the Google settlement agreement would unreasonably restrain trade or create a monopoly in Google’s favor. In response to the DOJ’s inquiry, Google revised its settlement agreement, but the DOJ was not mollified. It announced the ASA "still confers significant and possibly anticompetitive advantages on a single entity … Google would remain the only competitor in the digital marketplace with the rights to distribute and otherwise exploit a vast array of works in multiple formats."
In order to understand what was bothering the DOJ, it is helpful to first understand the settlement’s terms. The ASA: (1) creates a Book Rights Registry, which serves as a clearinghouse between authors and publishers and locates rights holders and/or those acting on their behalf, (2) allows Google to show previews of out-of-print copyrighted books, unless otherwise specified, (3)allows Google to show indexes of in-print books, unless the owner specifies otherwise, (4) allows Google to establish and use freely a database for public domain books, (5) obligates Google to obtain licenses from individual rights-holders for books published post-2009.
The DOJ objects to these terms on a number of grounds. First, it argues that the ASA gives Google exclusive rights to sell full books to libraries; moreover, Google gets virtually exclusive control over "orphan works"—books whose rights holders cannot be located. Second, it suggests competitors (such as Amazon.com) cannot really enter the market unless they do what Google did, namely, illegally scan everything it can, and then settle whatever suit gets brought against it. Google’s take is essentially "We jumped into the fire, so why can’t you?" But DOJ lawyers disagree, saying that incentivizing companies to break the law just to stay competitive is "poor public policy and not something the antitrust laws require a competitor to do." Finally, the DOJ argues that the settlement unfairly benefits Google’s online search engine by giving it exclusive access to all downloaded works.
In response, Google has advanced several arguments of its own. First, it has employed the argument set out in Broadcast Music, Inc., claiming that it is creating a new and valuable product that would not otherwise exist, and expanding the book market by adding digital copies to already-existing hard copies, and thus conferring a benefit on consumers. This view was echoed strongly at the hearing by the National Federation of the Blind, which has stated, in Google’s defense, that Google’s digital library would give its members unprecedented access to literature.
Second, Google has made a kind of "breaking the ice" argument, saying that its endeavor has lowered the barriers to entry for other companies by establishing a value for digital books and locating the authors of millions of previously unclaimed works.
Finally, Google has emphasized that the settlement is nonexclusive in every way, because both class members and authors can opt out. The latter, in particular, are free to opt out of Google’s digital book pricing algorithm and set their own book prices. But opposing parties say it is impracticable for them to opt out of the agreement.
Federal Judge Denny Chin declined to hand down a ruling on the 18th: first, he has to trudge through massive volumes of discovery to try to make sense of the case. This has left pundits and professors alike to speculate about whether the DOJ will prevail in its antitrust challenge.
Harvard Professor Einer Elhauge, whose article on the Google Books deal dropped a day before the hearing, says the right question to ask is: "Does settlement lower consumer welfare from what it would be without a settlement?;" If that’s the question, Elhauge thinks Google will get the green light: "The right question is whether the settlement leaves consumers and the public interest worse off than they would be in the but-for world without the settlement, and there is simply no reason to think it does,"; he writes.
Judge Chin’s ruling is expected in the next few weeks.
Delaware Bankruptcy Court Approves $45 Million in "Incentive" Bonuses For Tribune’s Top Executives: Is § 503(c) Getting the Job Done?
Maury Slevin - February 24, 2010If you think a bankrupt company that has spent the past year laying off 3,000 employees, cutting severance packages, and freezing salaries would adopt frugal executive compensation packages, think again.
On January 27, 2010, chief judge of the Delaware Bankruptcy Court, Kevin J. Carey, approved a $45.6 million incentive program for "top executives and managers of the Tribune Company," a household media conglomerate that filed for Chapter 11 in December 2008. Explaining his ruling, Judge Carey stated that "there is a reasonable relationship between the plan and its objective to restore profitability," and that the plan provides "incentives [to Tribune’s executives] designed to improve the company’s chances to survive."
Bonus proponents emphasized that the plan was needed to motivate top executives at Tribune not only to stay with the firm, but also to perform well. As Tribune’s chief operating officer Randy Michaels stated, "incentivizing employees is essential to Tribune’s future success. We must continue motivating our people to overcome obstacles, achieve our performance goals and take the company to the next level." Opponents, however, find the bonuses excessive and a drain on the company’s cash flow. Bill Salganik, president of The Newspaper Guild—a media union that filed an initial objection to Tribune’s bonus request—stated, "if Tribune has [$45.6] million available to spend, we think it would be better spent on providing more and better news and service for readers and viewers and advertisers."
In light of recent debates in Washington and on Wall Street over appropriate levels of compensation for top corporate executives, Tribune’s incentive program raises this question: How does the Bankruptcy Code allow a company to dole out millions in bonuses while simultaneously laying off thousands of employees. The answer, in short, is that the Code is not meant to.
Originally, the Bankruptcy Code required court approval for bonus plans that were considered outside the ordinary course of a company’s business. Under Lionel, a debtor had to show some business justification for requesting that bonuses be paid to the company’s top executives. This weak test, however, allowed companies, post-Lionel, to distribute large bonuses to executives, justifying the payouts—known as Key Employee Retention Plans (KERPs)— as necessary to retain their executives during the companies’ Chapter 11 reorganizations.
The KERPs, however, often rewarded the very managers who drove the debtor into bankruptcy. As one bankruptcy judge stated, "All too often, [executive retention plans] have been widely used to lavishly reward . . . the very executives whose bad decisions or lack of foresight were responsible for the debtor’s financial plight."
To prevent such perverse situations, the late Senator Edward Kennedy pushed for inclusion of a new Code provision, § 503(c), in the 2005 Bankruptcy Act. Under § 503(c)(1)—known as the KERPs provision—a company is prohibited from paying retention bonuses to its executives unless (1) the bonus is "essential" to the retention of the individual because he has a bona fide job offer from another company paying the same or a higher rate of compensation, and (2) the individual is "essential" to the survival of the debtor’s business. If a bonus plan is not deemed to be retention-based, however, the court will then apply § 503(c)(3), which is the functional equivalent of Lionel’s toothless business judgment test.
At first blush, § 503(c)(1)’s language appears to severely limit a company’s ability to pay out retention bonuses to its executives. The problem, however, is that companies can easily circumvent the restrictive § 503(c)(1) test, and thus come under the less stringent § 503(c)(3) test. As companies have discovered, courts will approve bonus plans under § 503(c)(3) that are de facto retention payments, so long as the plans, as a whole, are not clear "pay to stay" compensation. In Dana Corporation, for example, the defendant Dana’s bankruptcy bonus plan was originally rejected under § 503(c)(1) because its provisions were deemed too retention-based. The court, however, eventually approved Dana’s modified plan—now under § 503(c)(3)—which "arguably contained some similar provisions to the previous [bonus plan]" by applying a "holistic approach," rather than focusing on specific retention-based provisions in the bonus plan. As former Congressman Chris Cannon stated before the Committee on the Judiciary, "[The Dana decision] shows [how] experienced bankruptcy courts . . . are straining to interpret the [C]ode in a way that would help keep Chapter 11 companies from becoming Chapter 7 economic shipwrecks."
Reaching a similar conclusion to that of Dana, Judge Carey found that "[Tribune] need only show that the proposed plan is an exercise of their business judgment." If such bonus payments, however, are, as Judge Carey phrased it, "incentives designed to improve the company’s chances to survive," the question, then, is really: What are they incentivizing?
Tribune’s lawyers argued that the bonuses are needed to keep executives motivated during rough economic times. Almost sarcastically, The Newspaper Guild responded, "We think more highly of our bosses. While we sometimes disagree with them, we think they’re dedicated professionals who would do their best with or without bonuses—just as thousands of non-executive employees are working hard for Tribune every day with no bonuses." It seems, though, that a plan that incentivizes retention—a proposition implied in the Guild’s statement—cannot in good conscience be considered an incentive to work harder.
Whether retention bonuses are needed to give Chapter 11 companies the best chances of emerging from bankruptcy—as many in Washington and on Wall Street believe—is an interesting debate best left for another day. But have no illusions: The current "holistic" approach to § 503(c) is failing to fully fulfill Congress’s original intent to prohibit KERPs and other forms of retention-based bonuses.
Weatherproof: Blatant Legal Oversight Or Ingenious Foresight?
Ari Taub - February 22, 2010President Obama may have become so famous that he has a cause of action simply for the use of his face. Recently, apparel company Weatherproof used a picture of the President as the focal point of its new advertisement, which it plastered as a full-blown billboard in New York’s Times Square. It depicted President Obama wearing Weatherproof’s jacket, along with the tagline "A Leader in Style." After the White House threatened Weatherproof with legal action, the ad was removed without contest.
The question remains, however, whether Weatherproof could have successfully defended this action in court. It does not appear that they could have. The cause of action under which an individual can sue for the use of his "fame" is called the right of publicity, which is often thought to be a derivative of the right of privacy. However, the right of publicity is grounded in a "right to one’s personality," which is not constitutionally protected, where the right of privacy has been deemed as such.
If the White House did sue Weatherproof in New York for the Times Square advertisement, there is a strong possibility it would prevail. Under the applicable New York statute, first applied in the Haelan Laboratories case, the answer becomes quite clear: the use of any living person’s "name, picture, portrait, or voice" for purposes of trade or advertisement without that person’s consent, creates liability—since President Obama is a "person," his picture was used for purposes of trade and advertisement, and he failed to give consent, the plain reading of the statute should create liability. One could even argue that the term "Leader," is synonymous with President Obama’s name, and, as such, may created liability by the use of that word, as well.
The liability that would be created should not be confused with the use of the President’s likeness on the front cover of a magazine, for example. Indeed, President Obama has appeared on no less than 30 major magazine covers since being sworn in last January! Although some states, such as California, have muddied the water on this issue, by embarking on the complicated task of discerning whether the use was predominantly for purposes of advertising, most states have generally exempted from liability the use of a public figure’s picture on magazines and other similar outlets, so as not to encroach on the all-important First Amendment rights of freedom of the press and freedom of speech (notwithstanding the fact that the magazines are arguably using the President’s picture for "trade").
Although the use of the President’s face on the Times Square advertisement may have been a violation of the President’s right to publicity, and although Weatherproof’s attorneys likely advised as such, it was still improbable that litigation would actually ensue. However, notwithstanding the ad’s durational brevity, the impact might have been exactly what Weatherproof wanted: to have people, bloggers, and news outlets talking about the company. In this respect, it seems Weatherproof was highly successful.
Merrill? I thought we were buying Lehman.
Michael Papadakis - February 17, 2010Bank of America, America's largest bank by assets, is experiencing its share of headaches in 2010, mostly stemming from its hasty acquisition of Merrill Lynch. Bloomberg recently reported that Lehman Brothers, not Merrill Lynch, was Bank of America's buy target back in September 2008. According to New York Attorney General Andrew Cuomo's recent charges against ex-CEO Kenneth Lewis and ex-CFO Joe Price, the board came to the meeting thinking it was buying Lehman and the Merrill books were only reviewed for 25 hours before the meeting. Never the less, the board approved the alternate merger and sent out materials for a shareholder vote.
What happens next is Wall Street and Washington at their finest, though "this transaction helped solve [the current financial crisis]," according to Fordham Law Professor Steven Thel. It quickly became apparent to Lewis and Price that Merrill’s "downside" was larger than first expected, as the firm lost $7.5 billion in October alone. Both general counsel Timothy Mayopoulos and outside counsel, Wachtell partner Eric Roth, advised the executives of their duty to disclose Merrill's massive losses to the shareholders. Lewis and Price, however, disregarded this advice, failing to disclose losses even as they mounted to $16 billion by the December 5th 2008 shareholder vote on the merger; Roth was "marginalized" and Mr. Mayopoulos fired.
In December, Lewis tried to back out of the deal altogether, but the government "forced" him to move forward. According to the Washington Post report, Former Treasury Secretary Paulson threatened Lewis that he would remove management if the Bank, which had already received $25 billion in TARP funds, didn't go through with the deal. Lewis was also assured that the government would provide additional bailout funds to help absorb Merrill's toxic assets. The board was informed that the merger was going ahead and the deal was completed on January 1, 2009. A few days later, the extent of Merrill’s losses was revealed to the market. Shortly thereafter, the government came through on its end of the bargain, providing an additional $20 billion in cash and guaranteeing $118 billion in assets.
Unfortunately, the Bank of America shareholders paid for the government's and Mr. Lewis's agendas. The stock plummeted 75% between the announcements of the merger (9/15/2008) and the Merrill losses (1/9/2009). Even after the government announced its additional support, the price continued to fall. While the price has made a modest comeback, it is still at less than 43% of pre-merger levels (09/12/08 – 02/09/10).
As Lewis likely realized when he attempted to back out of the purchase, this was not a good deal for shareholders. One director seems to have been very aware of this fact, writing in an email to another director that "Unfortunately it’s screw the shareholders!!" The response from his more disclosure savvy college: "No trail."
These most recent civil fraud charges against Lewis and Price come on the heels of announced settlements between Bank of America and both the SEC and North Carolina Attorney General. The $150 million settlement with the SEC, however, is facing opposition from U.S. District Judge Jed Rakoff. He questioned why the SEC failed to bring fraud charges and cleared the individual executives of wrongdoing. This comes after he previously refused to approve a $33 million agreement last Fall, calling it a "contrivance designed to provide the SEC with the facade of enforcement." Rakoff, now citing Attorney General Cuomo's charges, is asking why the individuals are getting off without penalty while the shareholders are fined.
Simmons Goes Bust: A Case For Fraudulent Conveyance?
Maury Slevin - February 15, 2010On the surface, the bankruptcy of Simmons Bedding Company is that of your garden-variety company going bust during rough economic times. But on closer inspection, a pattern—though not atypical for leveraged buyouts (LBOs)—of risky borrowing emerges, which not only helps explain the cause of Simmons' bankruptcy, but also provides possible ammunition for creditors to recoup their money lost.
The story seems straightforward. As consumer spending dropped to record lows, Simmons' sales dropped significantly, making it unable to meet the loan requirements on its debt. Upon impending default on its loans, Simmons negotiated a capital reorganization plan and filed for Chapter 11. Now, Simmons looks to emerge from bankruptcy with half its debt reduced, and with new management in place.But how did Simmons reach this catastrophic end? Despite common perception, the problem actually started long before the 2008 financial meltdown.
In 2003, Thomas H. Lee Partners (THL) acquired Simmons for $1.1 billion. Of the $1.1 billion, $327 million was cash, while the rest was borrowed from various commercial banks using Simmons' assets as collateral. Resultantly, upon acquisition, THL increased Simmons’ debt to roughly $745 million. At that point, some on Wall Street considered this to be a risky position; as analysts at Moody's Investors Service warned, the "higher debt burden will limit the company's ability to respond to unexpected negative business developments, including economic…threats…."
But THL did not heed this warning. THL borrowed additional money in the form of discounted notes, once in 2004 for $137 million, and then again in 2007 for $300 million. Of this debt, THL paid itself $375 million in special dividends, known as dividend recapitalizations. This allowed THL to recover its initial investment, and even pocket a profit of $48 million, while Simmons' debt simultaneously rose to over $1 billion. The transaction essentially guaranteed THL a profit regardless of how Simmons performed; as such, it can be argued that THL did not care about the potentially unmanageable debt that Simmons was incurring. As Robert Hellyer, Simmons’s former president, pointed out, "the mind-set was, since the money was practically free, why not leverage the company to the maximum."
At this point, the question to ask is what recourse do creditors have against these risky borrowing tactics?
The prevailing argument is that creditors should bear the burden of money lost, primarily because they willingly chose to forego contracting for better debt protection. This forbearance implies that creditors assumed the liability of default. In fact, it is the discounted noteholders, who lent the money to pay the dividend recapitalizations, that will suffer the most from Simmons' bankruptcy. As a writer for the The Deal points out, "it would be wrong to label [the discounted noteholders] victims, for they knew, or ought to have known, the risk they ran when they bought the notes."
Alternatively, some argue that LBO transactions may fall under the protection of fraudulent conveyance. Under the Bankruptcy Code, a trustee of a debtor’s estate is entitled to avoid any transfer that an unsecured creditor could have avoided under applicable state law; this entitles trustees to apply applicable state fraudulent conveyance law. Under the Uniform Fraudulent Transfers Act, a debtor transfer is fraudulent if the transfer was made a) without receiving fair consideration in return, and b) the debtor left his business severely undercapitalized, incurred debts beyond his ability to pay, or became insolvent as a result of the transaction.
For Simmons' discounted noteholders, they must first show that Simmons failed to receive fair consideration for the dividend recapitalizations. As was found in Moody v. Security Pacific Business Credit Inc., loan proceeds that are essentially used to pay dividends to shareholders can be successfully challenged as debtor transfers made without receiving fair consideration in return. As such, Simmons' noteholders have at least a decent argument that they meet the first condition.
The second condition, however, is more difficult to meet because it requires proving that Simmons' dividend recapitalizations in 2004 and 2007 rendered the company insolvent, undercapitalized, or unable to meet its loan requirements at the time of the transaction. This requires the noteholders to explain not only why they lent money knowing that it would later render Simmons insolvent, but also why Simmons managed to remain solvent until 2009. Though it's possible to argue that the latter condition should encompass transfers that left a company undercapitalized to the point that it had zero protection against economic downtowns, some, if not many, would see this as a stretch of fraudulent conveyance law. Alternatively, the noteholders could argue that they did not know the loan proceeds would be used to pay dividends to THL, but blame could still be apportioned to the noteholders for failing to include restrictions in the loan agreement. Moreover, the practice of paying out special dividends was not atypical for the market; in fact, from 2003 to 2007, 188 companies issued $75 billion in debt that was used for dividend recapitalizations. As such, the Simmons noteholders would need to distinguish why these particular transfers should be deemed as fraudulent.
Needless to say, there is no clear answer. Yet, as further leveraged companies fall into bankruptcy, we are likely to see an increase in fraudulent conveyance claims. It will be interesting to see how the courts come out on this issue.
NFL’s Antitrust Challenge: Handicapping the Competition
Yuliya Neyman - February 10, 2010The Saints may have won the Superbowl, but the NFL is still battling it out in the legal world's equivalent of Dolphin Stadium: the Supreme Court has heard oral arguments, and is now deliberating on whether the NFL should be slapped with a hefty antitrust judgment for awarding an exclusive merchandising contract to Reebok.
The plaintiff is American Needle Co., an apparel manufacturer that used to sell NFL hats but hasn’t been able to since 2001, when the NFL awarded an exclusive headwear license to Reebok. American Needle claims that the 32 NFL teams colluded by agreeing amongst themselves to deal exclusively with Reebok: a violation of §1 of the Sherman Antitrust Act.
The NFL doesn't see it that way: it says the contract was between Reebok and NFL Properties, LLC, not between Reebok and each of the 32 discreet teams. The NFL's position is called the single entity defense, which is exactly what it sounds like: if a company is a single entity, it's immune from Sherman Act scrutiny. After all, in the collusion world it takes two to tango.
The question before the Supreme Court was seemingly simple: is the NFL, along with its 32 teams, a "single entity" and therefore immune to the Sherman Antitrust Act when they act jointly in a business effort?
The answer, predictably, is not so easy: during the oral argument on January 13, none of the justices seemed to tip their hat completely to one side or the other. Justices Roberts, Breyer, Scalia and Sotomayor didn't seem convinced by the NFL's general single entity argument; but Roberts and Justices Stevens, Ginsburg, Kennedy, and Alito thought maybe an exception for the NFL should be made in light of how lengthy and expensive antitrust trials can get.
Those trying to handicap say the court may send the case back down to the circuits, to decide what kinds of commerce are closely enough related to pro football itself that they escape antitrust liability. Justice Roberts, for example, quoted American Needle’s contention that selling trademarked goods is more akin to selling houses than to promoting football. This line of questioning suggests that the justices are thinking ahead to what other areas such a decision would impact.
So who cares? Obviously, other professional sports leagues: the NBA, NHL, ATP and WTA tours (tennis), Major League Soccer and National Association of Stock Auto Racing all submitted amicus briefs in support of the NFL. The NCAA, which itself is no stranger to antitrust suits, also submitted an amicus brief in support of NFL. The MBA is perhaps noticeably absent from this list, but that may be in part due to a relatively smaller personal stake—the MBA received its own antitrust exemption during the 1920s.
Also pretty obvious: other companies that hold exclusive NFL contracts. VF Imagewear, Inc., a company that has an exclusive license to sell NFL apparel, and Electronic Arts, Inc., which has an exclusive license to develop NFL video games, both filed amicus briefs for the NFL. The message: a ruling for American Needle could threaten their contracts.
Slightly less obvious: credit card companies. Visa and MasterCard both submitted an amicus brief for the NFL, claiming a favorable ruling would promote joint ventures and thus support business expansion. Drawing upon their own experiences with joint ventures in the financial services sector, MasterCard and Visa noted that "[they allow] firm to spread risk, often enabling them to invest in the creation of new products where the investment risk would be too great for any firm to bear alone."
On the other side are the unions. Players associations for football, baseball, hockey and basketball submitted an amicus brief supporting American Needle; expressing their fears that an adverse decision will give too much power to employers like the NFL. In their brief, they explain that "The NFL owners' appeal in this case is a Trojan horse designed to free sports team owners from [Sherman Act] Section 1 scrutiny so they can restrain competition with impunity in the market for player services." The coaches union submitted a separate amicus brief, complaining that their salaries would be adversely affected by a decision exempting the NFL from the Sherman Act.
The Saints will be back in training camp by the time the Supreme Court hands down its decision. The fate of the NFL's antitrust case, however, is far less certain.
Porsche Makes Noise in Germany over 'Cayman' Mark
Ari Taub - February 8, 2010Is Porsche the first thing you think of when you hear the word "Cayman?" If so, would you still be led to think of Porsche if the word "Cayman" appeared on a plastic shoe? Porsche apparently thinks so. Porsche has sued Crocs, a Colorado-based shoe manufacturer, for Crocs’ use of the trademarked name "Cayman" a name registered by Porsche for one of its car models. According to the suit, there seems to be a fear that consumers will be led to believe that Porsche is somehow endorsing the shoe. Interestingly, Porsche has opted to sue in their home country of Germany rather than in the United States, where most of Crocs’ sales are made. This was almost certainly a strategic decision, since U.S. law is highly unfavorable to Porsche's claims.
For this trademark action to be sustained in the United States, Porsche would have to show that "Cayman" was a registered trademark and that the Crocs infringed on that mark in a manner encompassed by the registration. Alternatively, even without a registered mark, if Porsche can demonstrate that the name "Cayman" has become so distinctive to consumers that it has become strongly associated with Porsche, and that those consumers would be confused as to the origin of the product on which the mark appeared (e.g., the Crocs), then Porsche could make out a common law trademark suit.
Under the first alternative, although Porsche has this mark registered with the U.S.P.T.O. relating to "footwear," it would be difficult to maintain this action for past infringements, since the registration was only made on April 7 of last year (presumably around the same time that the "cease and desist" letter was sent). If Porsche looked to sue for common law trademark infringement, then, pursuant to the Lanham Act and the federal precedent on point, a cause of action will likely be very difficult to maintain. The Polaroid case set out the procedure by which a plaintiff can succeed in an action such as this one. First, Porsche would have to show that its unregistered name developed a meaning distinctive to Porsche. For example, if the name "Heinz" were unregistered, then because of the association that consumers have created between Heinz and ketchup, such a name would be deemed "distinctive." Proving this would likely be very difficult to do, considering the existence of several common usages of the word cayman (e.g., The Cayman Islands, or a species within the reptile family).
Second, Porsche would have to demonstrate that there is a "likelihood of consumer confusion" between the name "Cayman" on the Crocs and Porsche. Polaroid created an eight-factor balancing test to make such determinations, which includes strength of the mark, similarities of the marks, evidence of actual confusion, consumer sophistication, among other factors. Consumers need not believe that Porsche actually produced the shoe; rather, they need only believe that there was some affiliation, sponsorship, or approval, on the part of Porsche. Because of the drastic differences between the two products, their consumers, and the companies in general, a Polaroid balancing test would likely weigh heavily on the side of Crocs.
If Porsche had registered the "Cayman" name in the United States prior to Crocs’ use of the mark, then they would likely be suing here. Moreover, suing in Germany seems to demonstrate that the likelihood of succeeding on the merits under the "consumer confusion" theory is also quite low. It appears that staying close to home isn’t the only reason Porsche is suing in Germany.
Financial Regulatory Reform - "On the Right Track?"
Michael Papadakis - February 3, 2010A recent article in Forbes Magazine, "Grading Financial Reform," characterized the state of financial regulatory reform as "on the right track." While the media hasn’t jumped on many of the issues with the same fervor as executive compensation, there are several decisions that could have a dramatic effect on America’s future economic prosperity. The House recently passed The Wall Street Reform and Consumer Protection Act, HR4173, which touches a number of these key issues. Forbes Magazine discussed two of the more significant and contentious aspects of the proposed reform: (1) new regulations imposed on financial institutions which are "too big to fail," and (2) reform of trading in over-the counter derivatives.
HR4173 attempts to address the systematic risk created by institutions that are "too-big-to-fail," getting a positive review from Forbes. The proposed bill taxes firms for systematic risk, imposes more rigorous capital and liquidity requirements on financial institutions, restricts proprietary trading activities if they threaten systematic stability, and forces the issuance of contingent capital in order to prevent the entire burden from being shifted to taxpayers. The legislation also allows the government to break up firms if they pose a systematic risk or are on the verge of collapse. Notably, this is the first time that a tax explicitly tied to systemic risk has been proposed, and implementation will be difficult due to the many variables that go into measuring such risk.
Regarding the capital requirements and trading restrictions, the NYU/Stern Working Group on Financial Reform advocates narrowing the implicit government guarantee "to commercial banking and client driven invested banking," an approach also advocated by former Fed Chairman (and current Obama advisor) Paul Volcker. Typical investment banks and insurance companies would be excluded. The alternative plan only requires the government to regulate a narrow subset of financial institutions, rather than the wide variety in the market. In theory, this would simplify the task of setting capital requirements, as well as prescribing other restrictions. The inclusion of new bankruptcy provisions may allow these higher risk firms to fail without systematic collapse or waste.
The Forbes article found the House’s attempts to tackle OTC derivatives less satisfying. In order to reduce economic risk, the bill requires commonly traded standardized products to trade through a centralized clearinghouse. Unfortunately, as proposed, private actors have a great deal of discretion as to which products are required to go through the clearinghouse, which limits the effective scope of the proposal. Furthermore, the plan is subject to "regulatory arbitrage," as participants can keep their trades out of the central clearinghouse by slightly modifying their contracts from the standard form.
HR4173 takes a good first step in requiring increased transparency, which is probably the most important component of derivatives trading reform. A government created and regulated clearinghouse may be wholly unnecessary, especially given the advantages of customizable contracts, the potential for loopholes, and the costs added by requiring clearing.
Antitrust Immunity: The U.S.-Japan Travel Market Heats Up
Yuliya Neyman - February 1, 2010Continental, United, and All Nippon airlines are awaiting the U.S. Department of Transportation’s ("DOT") approval of an antitrust immunity deal that would let the airlines cooperate on flights to Japan. The deal would allow the carriers, all of which are members of the Star Alliance, to coordinate prices and routes, and would be the first deal of its kind between Asian and American carriers.
As the U.S.-Japan travel market heats up, airlines are jockeying to get in on the action. Last December, the U.S. and Japan signed an "open-skies agreement," which aimed to increase competition on trans-Pacific routes. Additionally, Japan is opening a new runway at Tokyo's Haneda Airport in late 2010, partly to service U.S. carriers. In fact, the market is so lucrative that that, even after Japan Airlines’ January 19th bankruptcy filing, Delta and American continue to battle for a stake in the company.
Continental, United, and All Nippon filed their immunity application with the U.S. DOT just before Christmas in an effort to "compete more effectively" with other global airline alliances, who are working to expand service to Asia: just last year, Delta-Northwest merger added several trans-Pacific routes underthe SkyTeam alliance.
Airlines say immunity lets them lower rates and offer better scheduling, and it serves as an alternative to mergers. In light of the Obama administration’s push to crack down on antitrust violations, applying for immunity may be a worthwhile precaution.
"Once you have antitrust immunity in place, you can talk to your competitors and focus on improving the product for the consumer rather than worrying whether every communication you have will get scrutinized and slapped with a lawsuit," said Leo D. Caseria, a Sheppard Mullin antitrust attorney who has also written about the subject.
Airlines don’t need antitrust immunity to join an alliance; for example, the 25-member Star Alliance does not extend immunity to all of its members. However, a select few of the members, including United and Continental, are part of Star ATI Alliance, which has antitrust immunity and allows the members to coordinate on prices, scheduling and other activities.
Recently, requests for antitrust immunity have been widely opposed in Washington. For the last several years, U.S. legislators have opposed new grants of antitrust immunity. During the Bush-Obama administration change, leaders of the Senate Committee on the Judiciary wrote to the outgoing Secretary of Transportation and Attorney General urging the DOT to "grant further antitrust immunity sparingly" and only "where parties show that competition must be supplanted to serve the public interest." Last year, the Department of Justice urged the DOT not to approve Continental’s antitrust immunity with respect to other Star Alliance members, instead recommending a limited antitrust immunity with several carve outs.
Still, the DOT is the ultimate authority on whether to approve antitrust immunity. Under applicable federal law, the DOT is required to approve an agreement if it is not adverse to the public interest and is not in violation of federal aviation statutes. The DOT uses the Clayton Act test to grant immunity if (1) the agreements would not substantially reduce or eliminate competition, (2) the parties would not proceed with the transaction without immunity, and (3) antitrust immunity is required in the public interest.
But recent treatment of antitrust immunity applications makes the outcome in this case uncertain. In 2008, the DOT granted antitrust immunity to Delta, Northwest, and the SkyTeam alliance, but only for transatlantic flights. American Airlines and British Airways are currently waiting for the green light on a similar immunity deal. But the DOJ recommended that the DOT impose substantial conditions on any grant of immunity, claiming that full immunity could increase some transatlantic fares by up to 15 percent.
The airlines are also facing problems abroad. Last April, the European Commission opened formal antitrust investigations against four Star Alliance members – Air Canada, Continental, Lufthansa and United – for their cooperation on trans-Atlantic flights; and a second investigation related to proposed cooperation between three members of the Oneworld Alliance – American Airlines, British Airways and Iberia. Japan, for its part, said it won’t even look at the Continental-United-Al Nippon deal until the airlines get immunity from U.S. regulators.
Welcome to CBLR Online!
Deryn Darcy - January 31, 2010For over twenty years, Columbia Business Law Review has been proud to serve the business law community through its print edition. The editors and staff of CBLR have worked hard to produce a high-quality product that both interests and informs our readers—scholars and practitioners alike. Since the beginning, we have strived to keep you apprised of the most important and novel developments at the forefront of business law. This remains our goal.
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