Why Equity-Based Crowdfunding Is Not Flourishing? — A Comparison Between the US and the UK

April 12, 2017
Financial Law, Internet, Regulatory, Securities Law

Tianxiang Zhou, MJLST Editor

While donation-based crowdfunding (giving money to enterprises or organizations they want to support) is flourishing on online platforms in the US, the equity-based crowdfunding (funding startup enterprises or organizations in return for equity) under the JOBS Act is still staggering as the requirements are proving impractical for most entrepreneurs.

Donation-based crowdfunding is dominating the major crowdfunding websites like Indiegogo, Kickstarter, etc. In March, 2017, Facebook announced that it will introduce a crowdfunding feature that will help users back causes such as education, medical needs, pet medical, crisis relief, personal emergencies and funerals. However, this new crowdfunding feature from Facebook has nothing to do with equity-based crowdfunding; it is only used for donation-based crowdfunding. As for the platforms specialized in crowdfunding,  equity-based crowdfunding projects are difficult to find. If you visit Kickstarter or Indiegogo, most of the crowdfunding projects that appear on the webpages are donation-based crowdfunding project. As of April 2, 2017, there are only four active crowdfunding opportunities appearing on the Indiegogo website that are available for investors. The website stated that “more than 200 (equity-based) projects funded in the past.” (The writer cannot find an equity-based crowdfunding opportunity on Kickstarter or a section to search equity-based crowdfunding opportunities.)

The reason why equity-based crowdfunding is not flourishing is easily apparent. As one article points out, the statutory requirements for Crowdfunding under the JOBS Act “effectively weigh it down to the point of making the crowdfunding exemption utterly useless.” The problems associated with obtaining funding for small businesses that the JOBS Act aims to resolve are still there with crowdfunding: for example, the crowdfunding must be done through a registered broker-dealer and the issuer have to file various disclosure statement including financial statement and annual reports. For smaller businesses, the costs to prepare such reports could be heavily burdensome for the business at their early stage.

Compared to crowdfunding requirements in the US, the UK rules are much easier for issuers to comply with. Financial Conduct Authority (FCA) introduced a set of regulations for the peer-to-peer sector in 2014. Before this, the P2P sector did not fall under any regulatory regime. After 2014, the UK government requires platforms to be licensed or to have regulated activities managed by authorized parties. If an investor is deemed a “non-sophisticated” investor constraints are placed on how much they are permitted to invest, in that they must not invest more than 10% of their net investable assets in investments sold via what are called investment-based crowdfunding platforms. Though the rules require communication of the offers and the language and clarity of description used to describe these offers and the awareness of the risk associated with them, much fewer disclosure obligations are required for the issuers such as the filing requirements of annual reports and financial statement.

As a result, the crowdfunding market in the UK is characterized as “less by exchanges that resemble charity, gift giving, and retail, and more by those of financial market exchange” compared with the US. On the UK-based crowdfunding website Crowdcude, there are 14 opening opportunities for investors as of April 2, 17, and there were 494 projects funded. In comparison, the US-based crowdfunding giant Indiegogo’s statement that “more than 200 projects funded in the past” is not very impressive considering the difference between the sizes of the UK’s economy and the US’ economy.

While entrepreneurs in the US are facing many obstacles in funding through equity-based crowdfunding, the UK crowdfunding websites are now providing more equity-based opportunities to the investors, and sometimes even more effective than government-lead programs. The Crowd Data Center publicized a report stating that seed crowdfunding in the UK is more effective in delivering 40% more funding in 2016 than the UK government funded Startup Loans scheme.

As for the concern that the equity-based fraud funding involves too much risk for “unsophisticated investors,” articles pointed out that in countries like UK and Australia where lightly regulated equity crowdfunding platforms welcomed all investors, there is “hardly any instances of fraud.” While the equity-crowdfunding JOBS Act has not failed to prove its efficiency, state laws are devising more options for the issuers with restrictions of SEC Rule 147. (see more from 1000 Days Late & $1 Million Short: The Rise and Rise of Intrastate Equity Crowdfunding). At the same time, the FCA stated that it will also revisit the rules on crowdfunding. It would be interesting to see how the crowdfunding rules will evolve in the future.

As Clear as Milk: Misleading Milk Marketing?

April 11, 2017
FDA, Food and Agriculture, Litigation

MJLST Guest Blogger, Tommy Tobin

[Editor’s Note: This is the second in guest blogger Tommy Tobin’s latest series on Food and FDA law.  You can find his earlier post here.]

Milk and cookies are one of the quintessential American comfort food combinations. Even so, considerable controversy has arisen out of products being labeled and sold as “milk.” I guess that’s just the way the cookie crumbles.

“Milk” has a precise regulatory definition under 21 C.F.R. § 131.110. Inter alia, “milk” is “the lacteal secretion, practically free from colostrum, obtained by the complete milking of one or more healthy cows.” Leave it to the C.F.R. to make food sound delicious.

The Eleventh Circuit recently decided that a “skim milk” product could be sold as such. The Circuit’s March 20, 2017 decision in Ocheesee Creamery LLC v. Putnam examined whether a Florida statute barred the business from labeling its product “skim milk” if it did not contain Vitamin A. The court below had upheld that law, and the dairy appealed claiming infringement of its free speech rights. Using dictionary definitions and common sense, the panel ruled that the dairy’s use of the words “skim milk” to describe its skim milk would not mislead consumers.

As consumers walk around the grocery store, they may see other products labeled “milk.” As the AP declared, “fake milk” is one of America’s latest food fights. In addition to milk from cows, consumers may see products labeled as “milk” that are derived from almonds, soy, coconuts, or rice. Would consumers actually get confused between these “milk” products and cow milk? The Northern District of California said no.

In a 2013 decision in Ang v. Whitewave Foods Co., consumers brought suit asserting, inter alia, that products like “soymilk,” “almond milk,” and “coconut milk” represented fraudulent business practices and false advertising as they did not come from cows. The court found the claim utterly ridiculous, finding that the descriptions accurately described the nature of the products. The opinion reasoned that “it is simply implausible that a reasonable consumer would mistake a product like soymilk or almond milk with dairy milk from a cow. The first words in the products’ names should be obvious enough to even the least discerning of consumers.”

In 2015, the Northern District of California revisited whether “soymilk” would mislead a reasonable consumer.  In Gitson v. Trader Joe’s, the federal court examined whether advertising a product as “soymilk” would violate the Federal Food, Drug and Cosmetic Act. The court first examined whether the use of “soymilk” was false or misleading, finding that the “reasonable consumer (indeed, even the least sophisticated consumer) does not think soymilk comes from a cow.” Second, the court analyzed whether “soymilk” ran afoul of the regulatory definition of “milk” discussed above. The court concluded that Trader Joe’s did not attempt to pass off its soymilk as “milk,” that is the soymilk was not purported to come from a cow.

While many might find the courtroom melee over milk to be melodrama, figuring out what’s in a name is more than making a mountain out of a molehill. It may matter to companies’ bottom lines.

From mayonnaise to margarine, food fights over standards of identity are likely to increase given the rate of innovation in the food industry and its creative marketers, according to the Food+Bev Law Blog. As noted there, “what you call a food clearly influences consumers’ opinions and purchasing decisions.” Time will tell how companies and consumers react to evolving identities and innovation throughout the food industry.

Should You Worry That ISPs Can Sell Your Browsing Data?

April 10, 2017
Internet, Privacy

Joshua Wold, Article Editor

Congress recently voted to overturn the FCC’s October 2016 rules Protecting the Privacy of Customers of Broadband and Other Telecommunications Services through the Congressional Review Act. As a result, those rules will likely never go into effect. Had the rules been implemented, they would have required Internet Service Providers (ISPs) to get customer permission before making certain uses of customer data.

Some commentators, looking the scope of the rules relative to the internet ecosystem as a whole, and the fact that the rules hadn’t yet taken effect, thought that this probably wouldn’t have a huge impact on privacy. Orin Kerr suggested that the overruling of the privacy regulations was unlikely to change what ISPs would do with data, because other laws constrain them. Others, however, were less sanguine. The Verge quoted Jeff Chester of the Center for Digital Democracy as saying “For the foreseeable future, we’re going to be living in a commercial surveillance state.”

While the specific context of these privacy regulations is new (the FCC couldn’t regulate ISPs until 2015, when it defined them as telecommunications providers instead of information services), debates over privacy are not. In 2013, MJLST published Adam Thierer’s Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle. In it, the author argues that privacy threats (as well as many other threats from technological advancement) are generally exaggerated. Thierer then lays out a four-part analytic framework for weighing regulation, calling on regulators and politicians to identify clear harms, engage in cost-benefit analysis, consider more permissive regulation, and then evaluate and measure the outcomes of their choices.

Given Minnesota’s response to Congress’s action, the debate over privacy and regulation of ISPs is unlikely to end soon. Other states may consider similar restrictions, or future political changes could lead to a swing back toward regulation. Or, the current movement toward less privacy regulation could continue. In any event, Thierer’s piece, and particularly his framework, may be useful to those wishing the evaluate regulatory policy as ISP regulation progresses.

For a different perspective on ISP regulation, see Paul Gaus’s student note, upcoming in Volume 19, Issue 1. That article will focus on presenting several arguments in favor of regulating ISPs’ privacy practices, and will be a thoughtful contribution to the discussion about privacy in today’s internet.

MJLST for Kids: How the ESSA Promotes K-12 Edtech

April 9, 2017
Administrative Law, Education, Regulatory

Nolan Hudalla, MJLST Staffer

The Minnesota Journal of Law, Science, and Technology is frequently at the forefront of current technological advances. The journal’s publications often address the emerging systems and devices that are changing society, as well as the legal constructs that can be employed to optimize technology’s use. But the next generation is not yet old enough to read MJLST and understand its implications. So how are today’s young students empowered to learn about and keep pace with technology that is advancing so quickly? Additionally, how is such cutting-edge technology being provided to teachers to help them maximize student potential?

Federal funding for K-12 education is largely provided by the Every Student Succeeds Act (“ESSA”). The ESSA is a major education reform bill that was passed with bipartisan support in December 2015. It is the immediate successor to the highly controversial No Child Left Behind Act (“NCLB”), and there is great anticipation for the ESSA to finally take full effect in the 2017-2018 school year. In fact, Lamar Alexander, chairman of the Senate Health, Education, Labor and Pensions Committee, recently remarked that the new law “will unleash a flood of innovation and student achievement across America.” One specific way that the ESSA is trying to “unleash innovation” is through educational technology (“edtech”).

There are two primary ESSA-provided mechanisms that will impact K-12 edtech. First, Title IV of the ESSA authorizes the Student Support and Academic Enrichment Grant program. The program empowers states and districts to pursue their own edtech initiatives. Second, Title I – the nation’s largest source of federal funding to K-12 education – now makes it easier for schools to use existing funds for edtech than it was under the NCLB.

The Title IV grant program authorizes $1.65 billion dollars for states to dedicate to local priorities. Such priorities could include, for example, counseling, Advanced Placement classes, and edtech. Nearly $900 million of the grant program is permitted to go toward innovative edtech strategies, demonstrating Congress’s commitment to advancing technology in schools. In fact, this authorization is approximately 4 percent of the ESSA’s total funding provision.

Title I of the ESSA gives states and localities greater flexibility and control over the benchmarks that must be met to receive the Title’s funding. The NCLB was heavily criticized because it set rigorous federally-determined standards, with harsh penalties for districts and schools that could not meet those standards. The ESSA allows school districts to now have a say in what they must do to meet the Title I requirements. For example, a state could demonstrate that they are making satisfactory progress in their school districts, and thus qualify for Title I funding, in part by providing a district-chosen level of edtech programs each year.

In addition, Title I now permits states to reserve certain Title I funding for specific learning activities such as edtech. In particular, 3 percent of their Title I funds can go toward “Direct Student Services,” which could include individualized edtech curriculum in districts that particularly require improvement. The ESSA also provides funds for an Education Innovation and Research program that can be similarly leveraged.

Through the ESSA, the federal government has provided the opportunities and tools to significantly advance edtech. The bill authorizes a lot of money for the states to put toward advancing education initiatives through both grants and Title I funding provisions. However, it remains up to the states and localities to implement the necessary tools to fully take advantage of the new opportunities created by Congress.

A Different Kind of Egg for Easter: Scientific Proof of Fetal Pain and the Legal Right to Choose Abortion

April 7, 2017
Ethics, Health, Reproductive Health

Angela Fralish, MJLST Invited Blogger

On January 3, 2017 Congressman Trent Franks from Arizona suggested a major change in the law which could overturn precedent of more than 30 years. He introduced the “Pain-Capable Unborn Child Protection Act” which generally prohibits abortions after 20 weeks. Fueling this highly controversial legislation is a complex scientific and legal debate as to whether or not the fetus can feel pain at 20 weeks, and if that proof should result in a change in the law.

Advocates on both sides of the Act include physicians, legislators, constitutional law experts, policy interest groups, philosophers and neuroscientists. Supporters of non-interference prior to viability advocate that proof of fetal pain is not substantiated. One the other side, fetal pain protestors argue that a fetus can in fact feel pain at 20 weeks, and abortions should be proscribed between after that time.

The Supreme Court ruled in watershed cases Roe v. Wade (1973), and Planned Parenthood v. Casey (1992), that a woman’s right to elect an abortion prior to viability, which is usually 23 to 24 weeks, is a constitutionally protected “fundamental right.” Time and time again, the Supreme Court has upheld that precedent, and prevented the right to interfere with a woman’s choice prior to viability. However, new medical technology advances call the old law into question. As Supreme Court Justice Sandra Day O’Connor noted in Roe, medical science will reduce the point of viability and “Roe is clearly on a collision course with itself.”

Scientifically speaking, both parties have referenced the anatomical makeup for fetal pain to support their arguments. Studies show that the thalamus and pain sensor receptors, usually developed by 20 weeks, are used to process pain. The counter argument is that the anatomical capability to feel pain does not equate to actually feeling pain: fetuses at 20 weeks lack the necessary pain pathways, or physiological ability to communicate pain, even if the thalamus and receptors are available. Legislative findings of the Pain-Capable Unborn Child Protection Act argue that fetuses at 20 weeks not only respond to touch, but also emit stress hormones and recoil at painful stimuli. Thus, some have concluded that fetuses are indeed “capable” of feeling pain and abortion should be proscribed at that time.

So where should the court draw the line? One past example of legislation related to medical uncertainty related to fetal pain was the Partial Birth Abortion Act of 2003. After much controversy, this act was upheld by Gonzalez v. Carhart  (2007) noting that “medical uncertainty does not foreclose the exercise of legislative power in the abortion context any more than it does in other contexts.” In this sense, Congressman Trent Franks’ bill could potentially pass, despite long held precedent, because the courts retain legislative power within the abortion context when there is medical uncertainty. However, much like the Partial Birth Abortion Act, if Congress passes this legislation, it will be up to the state courts and modern day legal advocates to reinforce or discredit it on a case-by-case basis.

Only time will tell how this intricately webbed science-law issue will play out. Judith Munson quoted as early as 1975 in her article Fetal Research: A View from Right to Life to Wrongful Birth, “The controversy has become a contest between the state of the art and the state of the law.” Constitutional lawyers, physicians and the general public certainly have their work cut out for them in understanding how medical science impacts the law. As O.D. Jones remarks, “Law and neuroscience seem strange bedfellows. But the engagement of law with neuroscientific evidence was inevitable.” This holds especially true in relation to mother chicks and decisions regarding their “eggs.”

Recalling History With the FDA’s Safety Alerts

April 4, 2017
FDA, Food and Agriculture, Pharmaceuticals

MJLST Guest Blogger, Tommy Tobin

[Editor’s Note: MJLST is pleased to welcome back Tommy Tobin for another series on Food and FDA law. This is #1 of 3 in April. You can find his earlier posts here.]

The FDA’s Safety Alerts for Human Medical Products provide insight on how the agency is protecting the American consumer. For example, through the agency’s online list of alerts, consumers are warned against using suppositories that claim that they can cure cancer. Such alerts harken back to the agency’s origins at the turn of the twentieth century.

While Dr. Harvey Washington Wiley is not a household name to most Americans today, his legacy is felt each day in our households. Dr. Wiley spent decades calling for increased protections for consumer safety. His “Poison Squad” experiments pitted healthy young volunteers against food additives to determine the effects on health. With the passage of federal legislation in 1906, the organization that was to become the FDA was on its way to its modern-day role.

One of Wiley’s remarkably prescient articles was his 1914 co-authored piece “Swindled Getting Slim,” which he wrote after leaving government service. Even at that time, Dr. Wiley found that “the whole list of obesity-cures would strain credulity to the breaking point.” Rallying against fakes, frauds, and fad diets, the piece warned the public about purveyors of weight-loss remedies that presented “simple old-time frauds under new names and new auspices, with marvelous scientific explanations of how they do the work.”

One of the products that Dr. Wiley had in his cross-hairs was the titular “Get Slim.” In his article, Wiley wrote that “Pink lemonade costs five cents a glass at the circus, but when you buy it in the form of ‘Get Slim,’ $1 is the price of a ‘twelve days’ dose.’” Not only was “Get Slim” expensive, it was also dangerous. A 1916 issue of Good Housekeeping updated readers about the story:

In the January, 1914 Good Housekeeping was published an article by Dr. Wiley and Anne Lewis Pierce entitled “Swindled Getting Slim.” In it the true character of several so-called obesity-cures was made plain, among them “Get Slim,” manufactured by Jean Downs, of New York City. The demand for “Get Slim” rapidly fell off, and the manufacturer, convinced that Good Housekeeping had caused it by calling her “cure” a fake, brought suit for $50,000. After various delays…the case was brought to trial…December 15th, 1915. Two days were spent in taking testimony, Jean Downs telling how she made the stuff and several chemists and biologists testifying that, if made as she said she made it, it was more dangerous than Dr. Wiley had said. In his charge to the jury Justice Lehman said that a magazine was within its rights in criticizing a preparation offered to the public and that unless they thought the publication of the article was inspired by malice they must find in favor of the defendant. The jury so found. Thus endeth “Get Slim.”

One of the ways the modern-day FDA carries on the work of Dr. Wiley is to warn the public against dangers lurking in their household products. For example, the FDA has issued numerous Safety Alerts against products with undisclosed drug ingredients—including several weight loss products—in recent years.

“Pink Bikini” and “Shorts on the Beach” were capsules marketed by Texas-based Lucy’s Weight Loss System. These weight loss products were the subject of a nationwide recall in 2016 when the FDA found that their ingredients included several active, undisclosed pharmaceutical ingredients. These included Sibutramine, an appetite suppressant withdrawn from the American market years earlier because it created cardiovascular risks, and Phenolphthalein, a known carcinogen which also had been disallowed due to serious health concerns. In its safety alert, the FDA noted that the offending pills should “not be consumed.”

In 2014 alone, the FDA noted over 35 public notices and recalls for products with undeclared drug ingredients. This is in addition to warnings and recalls related to consumer dangers with bacterial contaminations, glass particles, and other issues with dozens of nutritional, drug, and medical device products.

To date this year, the FDA has warned the public that certain injectable products labeled “latex free” contained latex, which could be life-threatening for those with allergies. In addition, the FDA issued a Safety Alert for certain male sexual enhancement supplements, including one with the name XtraHRD, for containing active drug ingredients. Without proper identification, consumers may take such products without knowing they contained drugs.  As such, consumers are advised not to take these capsules and to return any in their possession to the company for a refund. In considering the danger to the public, the Safety Alert noted “Consumers with diabetes, high blood pressure, high cholesterol, or heart disease often take nitrates. [Erectile dysfunction] is a common problem in men with these conditions, and consumers may seek these types of products to enhance sexual performance.”

Public health and safety is at the core of the FDA’s mission. The FDA’s modern-day efforts toward this mission honor its roots as well as the work of Dr. Wiley and others.

No Divorce Just Yet, but Clearly This Couple Has Issues: Medicaid and the Future of Federal-State Health Policy

March 28, 2017
Health, Healthcare, Healthcare Reform, Insurance

Jordan Rude, MJLST Staffer

With the recent demise of the American Health Care Act (AHCA), the Affordable Care Act (ACA) will remain in effect, at least for now. One of the crucial issues that divided the Republican caucus was Medicaid—specifically, whether the ACA’s expansion of Medicaid should remain in place or be rolled back (or eliminated entirely). Moderate or centrist Republicans, and particularly some Republican governors, wanted to retain the expansion, while the House Freedom Caucus and other conservatives wanted to eliminate it, either immediately or in the near future.

Sara Rosenbaum, in her article Can This Marriage Be Saved? Federalism and the Future of U.S. Health Policy Under the Affordable Care Act examined the changing relationship between federal and state health policy under the ACA. Two areas in which this relationship was most affected were the ACA’s health insurance marketplaces and expansion of Medicaid: In both, the ACA significantly increased the federal government’s role at the expense of state control. The Supreme Court’s ruling in National Federation of Independent Business v. Sebelius held that the federal government could not require states to expand their Medicaid coverage, pushing back against increased federal power in this area. As of today, approximately 20 states have taken advantage of this ruling and chosen not to expand their programs. Rosenbaum argued that the tension between the ACA’s promise of universal coverage and some states’ refusal to expand Medicaid would defeat the purpose of the ACA, and she proposed a federal “Medicaid fallback” to replace lost coverage in those states.

The AHCA proposed a different, and simpler, solution to this problem—phase out the Medicaid expansion over time until it is completely gone. As noted above, this did not have much of a positive reception. Now that the AHCA’s proposal has been shelved, if only momentarily, some states that had not previously expanded Medicaid (such as Kansas) are moving forward with plans to expand it now. Such plans still face stiff opposition from conservatives, but the failure of the AHCA, along with the ACA’s growing popularity, may shift the argument in favor of expansion.

The end result of this recent healthcare debate, however, was retention of the status quo: The ACA is still in effect, and a significant number of states have still not expanded Medicaid coverage. The underlying issue that Rosenbaum discussed in her article has still not been addressed. The clash between federal and state policy continues: The marriage is not over, but it is not clear whether it can be saved.

The Future of Zero-Calorie Soft Drink Trademarks After the TTAB’s Coke Zero™ Ruling and Dr. Pepper Snapple’s Pending Federal Circuit Appeal

March 22, 2017
Intellectual Property, Litigation, Trademark Law

Joseph Novak, MJLST Staffer

For the past 13 years, Coca-Cola has been trying to trademark nothing. Well not actually nothing. Zero. As in zero calories. During this time, the Trademark Trial and Appeal Board (TTAB) has denied trademarking Zero for soft drinks, as the term was either generic (Referring to the genus of the good, i.e. Coke Zero as a zero calorie sports drink) or merely descriptive (Describing what the good is, i.e. “Zero” describing “Coke” as a zero-calorie version of the drink); neither of which is distinctive enough upon the Abercrombie spectrum to warrant trademark protection.

Not surprisingly, other large soft drink companies have opposed allowing Coke to register “Zero”, as no other company would be able to use “Zero” on their own mark subsequent to Coke obtaining such a trademark. This past May, the TTAB issued a ruling in favor of Coke (over the opposition of Dr. Pepper Snapple Group) allowing Coke to register numerous trademarks containing “Zero” for their soft drinks. The TTAB held that “Zero” had “acquired distinctiveness through a showing of secondary meaning”, which is a fancy way of saying that Coke had proven that the millions of dollars they had spent on marketing “Zero” meant that consumers of soft drinks were now likely to associate the term “Zero” with the Coca-Cola brand.

The TTAB ruling also contemplates Coke’s trademark infringement claim against Dr. Pepper’s “Diet Rite Pure Zero” mark for likelihood of confusion. For a mark to infringe upon another, the potentially infringing mark must cause confusion to the consuming public as to source, i.e. a showing that consumers of soft drinks would confuse the source of “Diet Rite Pure Zero” with “Coke Zero” given the distinctiveness of the “Coke Zero” mark. The TTAB essentially punts the infringement issue, dismissing Coke’s infringement claim for a failure to prove priority (because Coke could not show that they had acquired distinctiveness through before Dr. Pepper’s use of the term “Zero”, there was no infringement cause of action).

Dr. Pepper Snapple has appealed the issue of distinctiveness to the Federal Circuit, asking the court to find “Zero” as generic for zero-calorie soft drinks. That appeal is still pending. Assuming the TTAB’s finding of acquired distinctiveness for “Coke Zero” holds, the question becomes whether future uses of “[Soft Drink X] Zero” will be barred by the Patent and Trademark Office (PTO) for likelihood of confusion with “Coke Zero”? Or does this TTAB ruling only prevent future use of “Zero” on its own as a mark for soft drinks?

As outlined in this previous MJLST article, both the PTO (in deciding whether or not to register a trademark) and the Federal Circuit (who hears appeals from TTAB decisions) use the Dupont factors to determine whether there is a confusing similarity between a pending mark and an existing mark. These 13 factors, analyzed together as a whole, include:

  1. The similarity or dissimilarity of the marks in their entireties as to appearance, sound, connotation, and commercial impression.
  2. The similarity or dissimilarity and nature of the goods described in an application or registration or in connection with which a prior mark is in use.
  3. The similarity or dissimilarity of established, likely-to-continue trade channels.
  4. The conditions under which and buyers to whom sales are made, i.e. “impulse” vs. careful, sophisticated purchasing.
  5. The fame of the prior mark.
  6. The number and nature of similar marks in use on similar goods.
  7. The nature and extent of any actual confusion.
  8. The length of time during and the conditions under which there has been concurrent use without evidence of actual confusion.
  9. The variety of goods on which a mark is or is not used.
  10. The market interface between the applicant and the owner of a prior mark.
  11. The extent to which applicant has a right to exclude others from use of its mark on its goods.
  12. The extent of potential confusion.
  13. Any other established fact probative of the effect of use.

Like many likelihood of confusion cases, the analysis would likely come down to (1) similarity between the marks in terms of sight, sound, and meaning, and (2) whether or not either side could show actual confusion or a lack of such. For example, Coke would argue that any subsequent use of “Zero” in connection with a soft drink would be likely to confuse consumers that (according to the TTAB ruling) have come to associate “Zero” and soft drinks with Coca-Cola products. On the other hand, any subsequent user of “Zero” for soft drinks would likely have to rely upon a dissimilarity in appearance of the mark (as “Zero” would be the same in terms of sound and meaning), or show a lack of actual confusion between the two marks. Otherwise, the potential subsequent user could attempt to argue that “Coke Zero” is the mark in its entirety, and that “[Soft Drink X] Zero” is inherently dissimilar in its nature and thus, unlikely to cause consumer confusion.

In any regard, evidence of actual consumer confusion often comes down to which side has better survey design and results, which often correlates with which side has more resources to conduct such a survey. Thus, if the Federal Circuit upholds the TTAB decision to allow the “Zero” trademark, you better believe that Coca-Cola will put in a hero-like effort to protect their long sought-after victory over “Zero.”

The Future of Zero-Calorie Soft Drink Trademarks After the TTAB’s Coke Zero™ Ruling and Dr. Pepper Snapple’s Pending Federal Circuit Appeal

March 22, 2017
Intellectual Property, Litigation, Trademark Law

Joseph Novak, MJLST Staffer

For the past 13 years, Coca-Cola has been trying to trademark nothing. Well not actually nothing. Zero. As in zero calories. During this time, the Trademark Trial and Appeal Board (TTAB) has denied trademarking Zero for soft drinks, as the term was either generic (Referring to the genus of the good, i.e. Coke Zero as a zero calorie sports drink) or merely descriptive (Describing what the good is, i.e. “Zero” describing “Coke” as a zero-calorie version of the drink); neither of which is distinctive enough upon the Abercrombie spectrum to warrant trademark protection.

Not surprisingly, other large soft drink companies have opposed allowing Coke to register “Zero”, as no other company would be able to use “Zero” on their own mark subsequent to Coke obtaining such a trademark. This past May, the TTAB issued a ruling in favor of Coke (over the opposition of Dr. Pepper Snapple Group) allowing Coke to register numerous trademarks containing “Zero” for their soft drinks. The TTAB held that “Zero” had “acquired distinctiveness through a showing of secondary meaning”, which is a fancy way of saying that Coke had proven that the millions of dollars they had spent on marketing “Zero” meant that consumers of soft drinks were now likely to associate the term “Zero” with the Coca-Cola brand.

The TTAB ruling also contemplates Coke’s trademark infringement claim against Dr. Pepper’s “Diet Rite Pure Zero” mark for likelihood of confusion. For a mark to infringe upon another, the potentially infringing mark must cause confusion to the consuming public as to source, i.e. a showing that consumers of soft drinks would confuse the source of “Diet Rite Pure Zero” with “Coke Zero” given the distinctiveness of the “Coke Zero” mark. The TTAB essentially punts the infringement issue, dismissing Coke’s infringement claim for a failure to prove priority (because Coke could not show that they had acquired distinctiveness through before Dr. Pepper’s use of the term “Zero”, there was no infringement cause of action).

Dr. Pepper Snapple has appealed the issue of distinctiveness to the Federal Circuit, asking the court to find “Zero” as generic for zero-calorie soft drinks. That appeal is still pending. Assuming the TTAB’s finding of acquired distinctiveness for “Coke Zero” holds, the question becomes whether future uses of “[Soft Drink X] Zero” will be barred by the Patent and Trademark Office (PTO) for likelihood of confusion with “Coke Zero”? Or does this TTAB ruling only prevent future use of “Zero” on its own as a mark for soft drinks?

As outlined in this previous MJLST article, both the PTO (in deciding whether or not to register a trademark) and the Federal Circuit (who hears appeals from TTAB decisions) use the Dupont factors to determine whether there is a confusing similarity between a pending mark and an existing mark. These 13 factors, analyzed together as a whole, include:

  1. The similarity or dissimilarity of the marks in their entireties as to appearance, sound, connotation, and commercial impression.
  2. The similarity or dissimilarity and nature of the goods described in an application or registration or in connection with which a prior mark is in use.
  3. The similarity or dissimilarity of established, likely-to-continue trade channels.
  4. The conditions under which and buyers to whom sales are made, i.e. “impulse” vs. careful, sophisticated purchasing.
  5. The fame of the prior mark.
  6. The number and nature of similar marks in use on similar goods.
  7. The nature and extent of any actual confusion.
  8. The length of time during and the conditions under which there has been concurrent use without evidence of actual confusion.
  9. The variety of goods on which a mark is or is not used.
  10. The market interface between the applicant and the owner of a prior mark.
  11. The extent to which applicant has a right to exclude others from use of its mark on its goods.
  12. The extent of potential confusion.
  13. Any other established fact probative of the effect of use.

Like many likelihood of confusion cases, the analysis would likely come down to (1) similarity between the marks in terms of sight, sound, and meaning, and (2) whether or not either side could show actual confusion or a lack of such. For example, Coke would argue that any subsequent use of “Zero” in connection with a soft drink would be likely to confuse consumers that (according to the TTAB ruling) have come to associate “Zero” and soft drinks with Coca-Cola products. On the other hand, any subsequent user of “Zero” for soft drinks would likely have to rely upon a dissimilarity in appearance of the mark (as “Zero” would be the same in terms of sound and meaning), or show a lack of actual confusion between the two marks. Otherwise, the potential subsequent user could attempt to argue that “Coke Zero” is the mark in its entirety, and that “[Soft Drink X] Zero” is inherently dissimilar in its nature and thus, unlikely to cause consumer confusion.

In any regard, evidence of actual consumer confusion often comes down to which side has better survey design and results, which often correlates with which side has more resources to conduct such a survey. Thus, if the Federal Circuit upholds the TTAB decision to allow the “Zero” trademark, you better believe that Coca-Cola will put in a hero-like effort to protect their long sought-after victory over “Zero.”

The Excitement and Danger of Autonomous Vehicles

March 21, 2017
Autonomous Vehicles, Litigation, Regulatory

Tyler Hartney, MJLST Staffer

“Roads? Where we’re going we don’t need roads.”

Ok. Sorry Doc. Brown, but vehicular technology is not quite to where Back to the Future thought it would be in 2017; but, there are a substantial amount of companies making investments into autonomous vehicles. Ford invested $1 billion to acquire an artificial intelligence startup company that had been founded by engineers previously employed by Google and Uber with the intent to develop self-driving vehicles. Tesla already has an autopilot feature in all of its vehicles. Tesla includes a warning on its website that the use of the Self-Driving functionality maybe limited depending on regulations that vary by jurisdiction.

To grasp an understanding of what many of the experts are saying in this field, one must be familiar with the six levels of autonomy:

  1. No autonomy
  2. Driver assistance level – most functions still controlled by human driver
  3. At least one driver assistance system – cruise control or lane monitoring
  4. Critical safety features – shifts emergency safety features such as accident awareness from vehicle to human
  5. Fully autonomous – designed for the vehicle to perform all critical safety features and monitor road and traffic conditions
  6. Human like autonomy – fully capable of autonomy even in extreme environments such as off-road driving

The societal benefits could be vast. With level 4 autonomy on household vehicles, parents and siblings need not worry about driving the kids to soccer practice because the car is fully capable of doing it for them. Additionally, the ridesharing economy, which has grown incredibly fast over the past few years, would likely see a drastic shift away from human drivers. Companies have already begun to make vehicles for the purpose of clean energy ride sharing using autonomous vehicles such as Ollie. Ollie is an electric and 3D printed bus that can be summoned by those in need of a ride in a similar fashion to Uber.

While this self-driving vehicle technology is exciting, are we really there yet? Last June, a fatal car accident occurred involving a Tesla using its autopilot function. The driver in this case had previously touted his car saving him from an accident; he was very confident in the ability of his vehicle. It was later reported by a witness that there was a portable DVD player in the car that was found playing Harry Potter at the time of the accident. If this witness is correct, the driver of the vehicle violated the Tesla disclaimer that reads the autopilot feature “is an assist feature that requires you to keep your hands on the steering wheel at all times.” Some experts argue these manufacturers have to be more upfront about the limitations of their autopilot feature and how drivers should be cautious in the use of this advanced technology. It is no question that the driver of the Tesla (if you can call him that?) was reckless in the use of this technology. But what about the liability of the vehicle manufacturer?

The deceased’s family hired a product defect litigation law firm to conduct an investigation in conjunction with the federal government’s investigation. The goal of these investigations was to determine if Tesla is at fault for the vehicle’s autopilot feature failing to stop. Recently, news broke that the government investigation concluded that no recall must be made for the Tesla vehicles nor did the government levy any fines to the automaker. The government reported that the autopilot feature was not defective at the time of the crash because it was built to protect the driver from rear-end collisions (the man’s car rear-ended a truck) and also gave notice to consumers that the driver must remain fully attentive to the operation of the vehicle.

Legally, it appears that plaintiffs won’t likely have much luck in suits against Tesla in cases like this. The company requires purchasers to sign a contract stating the autopilot function is not to be considered self-driving and that they are aware they will have to remain attentive and keep their hands on the wheel at all times. However, Tesla operates on an interesting structure where purchasers buy directly from the manufacturer which may give them more of the ability to engage in these types of contracts with their consumers. Other automobile manufacturers may have a more difficult time maneuvering around liability for accidents that occur when the vehicle is driving itself. Car companies are going to have to ensure they provide repeated reminders to consumers that, until technology is tested and confidence in the feature is significantly higher, that the autopilot features are in the beta-testing mode and driver attention and intervention is still required.

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