In Asked and Answered #2, we address the most recent Supreme Court case on the effect of Trademark Trial and Appeal Board decisions, the SEC’s new crowdfunding-oriented Regulation A+, and we answer the question, “Should I file for a LLC?”
Transcript: Eric: Welcome to Asked and Answered. This is Revision Legal’s podcast where we update you on news and events in the legal industry in intellectual property and internet law from the past week or so. Today we’re going to be talking about the Supreme Court decision in Hargis and B&B about issue preclusion. We’re going to touch on some crowdfunding updates and answer some questions from readers about some common legal issues that come up. I’m Eric Misterovich. I want to welcome my partner, John DiGiacomo.
John: Happy Friday.
Eric: How are you doing?
John: Living the dream.
Eric: Yeah?
John: Got some trucks in the alley, so we may experience some noise, but otherwise good. It started snowing again, so happy spring break to everybody out there in Michigan.
Eric: Yeah, I woke up to snow on the ground here too. Not sure when this is going to end. We get tricked every year.
John: Yup.
Eric: Let’s get right into it. Let’s talk about this Supreme Court decision that affects trademark law and the TTAB and how these proceedings happen. Can you give a general overview of what happened here or why is this case important?
John: I think this case is important for 2 reasons. One is because it has a lot of really interesting components to it from a constitutional perspective, so the interplay between the judiciary branch and the administrative agency, the Trademark Trial and Appeal Board, which falls under the executive branch, is pretty interesting. The other issue that I think is probably more important for potential clients or anyone out there that runs a business is that it’s time to take trademark opposition proceedings seriously, because in the past, a lot of clients have not taken them seriously. Now they probably should because the US Supreme Court is saying, “Look, these things could have a preclusive effect on your rights later.” What do you think about it? [crosstalk 00:02:14]
Eric: Yeah, exactly. No. That’s, I think, an important point is this sheds a new light and gives new importance to the TTAB proceedings in opposition. Let’s talk about that. Let’s back up a second and just talk about TTAB oppositions and the facts of this case and how it made its way to the Supreme Court.
This was a dispute between 2 companies, Hargis, which is basically a construction company, and B&B, which is an aerospace … They manufacture products for the aerospace industry. This all came down to a dispute over this mark, SEALTITE. Hargis uses a mark that’s spelled S-E-A-L-T-I-T-E and B&B uses the more traditional tight spelling in its SEALTIGHT mark. Hargis applied for trademark registration. The application made its way through to the opposition period, and B&B filed a notice of opposition. Why don’t we just remind the listeners now, what is notice of opposition and what happens from that point forward in the TTAB?
John: Yeah, I think it’s important to discuss that process. First, you file an application with the US Patent and Trademark Office. The application is then both procedurally and substantively examined by an examining attorney. An examining attorney is the attorney on the other side that works for the US Patent and Trademark Office. Once that examining attorney has then determined that your application meets the requirements of the USPTO, the examining attorney will issue what’s called a notice of allowance, which basically says, “Look, I took a look at your trademark application. It looks pretty good. I’m going to set it up for opposition.”
Once you pass that period, the trademark is then published in the Gazette, the Official Trademark Gazette, which traditionally was this book that was huge that would go around to all these trademark attorneys in the country, and people with big portfolios would look at them and say, “Let’s go after that guy.” A lot of times it was the Tootsie Rolls or the [crosstalk 00:04:36].
Eric: The bigger brands, yeah.
John: Microsoft. Yeah, exactly. That’s what happened in this case. This mark was published for opposition, and this company, B&B, opposed. They opposed on the basis of a likelihood of confusion. It’s important, I think, and maybe you disagree with me, but I think it’s important to discuss the fact that you make these arguments in response to a likelihood of confusion opposition, such as the fact that the marks don’t look the same. In this case, you’ve got SEALTITE, T-I-T-E, and then you’ve got S-E-A-L-T-I-G-H-T. What other arguments would you make?
Eric: Yeah. They’re almost identical.
John: Yeah. The other arguments obviously would be they’re in different industries.
Eric: Right.
John: I’m assuming that’s what the attorney argued in response to an office action. Obviously, you and I haven’t looked at it, but one’s in construction. Hargis is in construction. B&B is in, what, aerospace?
Eric: Yeah, yeah. Are consumers likely to come across these 2 products in the same trade channels or are the buyers of a level of sophistication where … Are they going to be making impulse decisions about aerospace tools? Probably not, so yeah, those are all important issues that would be raised in front of the TTAB. When B&B files its notice of opposition, it’s essentially starting an administrative proceeding that looks a lot like a federal lawsuit.
John: Yeah. Yeah, exactly. Yeah, it looks like a lawsuit. It costs as much as, almost as much as, a lawsuit. It has similar discovery procedures to a lawsuit, so it’s a very important proceeding.
Eric: In this case though, there was an actual federal lawsuit filed at the same time, so the parties were litigating in the TTAB and then there was also a federal lawsuit in District Court on trademark infringement, right?
John: Right. I think it’s important for people to understand that trademark infringement claims can only be brought in federal court. They can be brought in state court, but in this case, they were brought in federal court. They cannot be brought in front of the Trademark Trial and Appeal Board, so what happened here was B&B said, “Look, you’re not only filing for this registration. You’re also currently using this mark in commerce, so we’re going to sue you in federal court at the same time that we’re going to oppose this trademark with the Trademark Trial and Appeal Board.”
Eric: Exactly. B&B has taken essentially a 2 prong attack here and saying they’re going for potential money damages in court and they’re going for an administrative remedy in stopping Hargis’s application from proceeding to registration in the TTAB. Now these cases are going on at the same time and what ends up happening is the TTAB makes their decision first. They rule in favor of B&B.
They say, “Hargis, your mark, the SEALTITE mark, is confusingly similar to this registered mark of B&B, and we’re not going to allow you to achieve registration for your applied mark.” Now the impact here is B&B then takes that decision from an administrative body and goes to the court and says, “This case is over.” They say, “Federal court, you can’t decide the issue of likelihood of confusion anymore. It’s already been decided by the TTAB.”
John: Right. Issue preclusion, which is the traditional legal doctrine that the court addresses in the Supreme Court decision, is the idea that, if you have litigated a … I can read the standard. I’ve got it in front of me, but basically if you have litigated a piece of fact or law and there’s been a prior determination on that piece of fact or law, and the determination is essential to the judgment of the, in this case, administrative body, then in the subsequent action, that determination can be used to a preclusive effect, meaning that they can introduce it as evidence for the court to accept on that factual or legal issue.
Eric: Yeah. That makes sense, right?
John: Yeah.
Eric: There’s no reason to re-litigate issues. Attorneys are expensive and if you’re faced to defend yourself once and win, you certainly should not have to do it again on the same issue.
John: Right. The big concern from a philosophical perspective is really why are we going to allow you to forum shop. If you got a decision in 1 place, why are we going to allow you to go to another place and cause heartache for everybody else? That’s a real concern because litigation is expensive.
Eric: Yeah, and in this dual threat of trademark infringement lawsuits and administrative proceedings, this was pretty common though. It was common to have a case involved both in the TTAB and at District Court. This Hargis case, so the TTAB says no mark, no registration for Hargis. We rule in favor of B&B. B&B goes to the District Court and says, “This issue’s been decided by the TTAB. You don’t have any power to make a decision anymore.” The District Court disagrees. They say, “No, we’re an Article III court. We certainly have the authority to rule on this issue. We don’t really care if the TTAB already ruled on it.”
The case proceeds to trial and Hargis wins. Hargis gets the verdict. They say there is no likelihood of confusion. They reach an exact opposite conclusion as the TTAB. The case goes up to appeal. The Eighth Circuit affirms and says, “No, the District Court has the power to rule on this.” Then the case is appealed to the Supreme Court, grants cert, and it recently issued an opinion that reversed. It found that the TTAB’s decision can cause issue preclusion and prevent a federal court from ruling on the same issue.
John: Yeah, it is kind of interesting because the Supreme Court basically says, yeah, issue preclusion can apply, but only if the traditional elements of issue preclusion are met. It says, in this case, yeah, issue preclusion precludes you from arguing that there is no likelihood of confusion, because this issue was decided at the TTAB, but this might not apply for all cases. We’re going to leave the standard open for those cases in which issue preclusion might not need to apply or there might be some equitable reason to not apply that doctrine. They take a strong position, but the position is kind of militated by the fact that they left the standard open a little bit.
Eric: Yeah, they certainly did not try to create a bright-line rule of every TTAB decision can preclude a federal court, but this was a fairly common fact pattern here.
John: Yeah, it’s definitely a dangerous piece of precedent for any potential individual in this situation. Absolutely.
Eric: Right. These are 2 very similar marks that were litigated in 2 separate forums and the court decided that this TTAB decision can have an ultimate effect of precluding a District Court from issuing a separate ruling. This removes the potential for a jury even to hear the case. It is a fundamental change and this is why … You referred to why TTAB proceedings need to be given respect they deserve, even more so now, because this could be it. This could be the decision that matters. You may not have a second bite at the apple.
John: Yeah, it’s pretty interesting. In a world in which we’ve got these companies, not like us, but obviously there are some companies out there who will do trademark registrations for $69 or whatever it might be. Great service, fine, very consumer-oriented. You can get a trademark for cheap. It’s not the type of person you’re going to want to handle a trademark opposition, because in this world in which there is a preclusive effect to decisions that are made at the Trademark Trial and Appeal Board, it’s important to have an actual attorney that knows what the hell they’re doing. It’s kind of interesting. I wonder if there’s any of that in the background going at the Supreme Court, them saying, “Look, we need to start pushing people to take this administrative procedure seriously.”
Eric: Right. Yeah. The USPTO and the TTAB proceedings, there’s a lot of competition in the marketplace, and there’s a lot of attorneys out there selling these services for very low price points. We see people just not responding to simple office actions or just simple errors being made in some of these applications that we run across. It is a problem because it really clogs up the system. If these marks then get through and are registered, they may impact on other people’s rights. When these have to be litigated in the TTAB, they really matter now. This really can have an impact and can potentially preclude someone from obtaining money damages in an infringement suit, if the attorneys don’t address this case correctly and the impact of this case and what’s best for their client.
John: Yeah, not to beat this to death, but the common scenario that we see is the person who owns a small mom and pop shop. They have a storefront, let’s say, in some remote town. They’ve been operating for 10 years. They come to us and they say, “Hey, we want to file for trademark registration.” We file the application. It gets opposed based on a prior user, but who has obtained registration.
The client says, “Eh, whatever. I’ve operated for 10 or 15 years without having a trademark registration. I’ll just continue doing this.” If you don’t take the position that there is no likelihood of confusion, potentially based on this precedent, if an issue arises later, you may be precluded from then saying that there is no likelihood of confusion. In those cases, attorneys are going to have to start getting more serious about how we handle those types of scenarios.
Eric: This has just came to mind, but what about the examining attorney’s opinion? If they have issued … Does an office action now have some kind of preclusive effect?
John: It’s pretty interesting, right? The real issue that you’re getting at is, okay, the court ruled that the administrative agency has this ability to preclude a future litigation of a likelihood of confusion issue. There are separation of powers in the Constitution. Article III courts, and this is what Thomas gets to in his dissent in this case, traditionally Article III courts, Article III meaning the Article III of the Constitution which vests power in the Supreme Court and lower courts to decide issues within the United States, those are the traditional courts that have the ability to make decisions on issues and facts.
With this decision, and Thomas argues this, it almost appears that the court is saying, “Even in the absence of Congress explicitly stating that we can preclude these issues later through delegating our power to an administrative agency, we’re going to presume that we can.” You’re right. There is a definite danger that even a simple office action in the future could be seen to preclude a later issue, if you don’t have a reasonable response to the office action. It’s a pretty interesting problem to have. It’ll be interesting to see how it plays out.
Eric: Yeah. It is surprising to see that … I guess it’s surprising from my view just because of the common practice of how these issues were litigated in 2 forums, that the administrative proceeding can trump the court and a jury. It’s just you don’t see that very often. I understand that the rationale of the issues are almost identical, they’re materially similar, and Congress authorized this administrative body to make this decision. Why are we giving 2 shots at this? But at the same time, it is somewhat striking that the TTAB decisions now have this impact.
John: It is. I rarely find myself interested in what Thomas or Scalia has to say, but it is pretty interesting and in this case, I think they have a reasonably compelling argument that there may be an Article III or a base constitutional issue here, but it’s not for me to say. I just argue the cases.
Eric: Sure. Yeah. That’s right. Now let’s just say someone finds [themself 00:18:14] in a position where they own a registered mark. There is what they believe to be a confusingly similar mark in an opposition period. Should they proceed in the TTAB or should they file an infringement suit in District Court? What factors go into that decision, do you think?
John: Cost. TTAB opposition is certainly going to be cheaper. Yeah, it might be best, depending on the statute of limitations issues, not statute of limitations, but laches issues, but that’s a technical issue, but it might be best to file in opposition first and get a ruling if you think that you have a high likelihood of success on that, and then introduce it in a later infringement lawsuit. Obviously that depends on the client, but it’s certainly an attractive option because the opposition’s cheaper. If you can get a ruling with preclusive effect through a cheaper means and then later introduce that into an infringement lawsuit, that’s pretty attractive.
Eric: Sure. Of course, dependent on whether or not you can prevail in the TTAB.
John: Yeah, of course.
Eric: If it is a close call …
John: That’s really the issue, right? [crosstalk 00:19:27]
Eric: If it’s a close call and maybe there are significant monetary damages at stake, then I would think the person may turn to the court, which then what do you think the defendant’s going to do? Immediately file in the TTAB and try to move that quickly. I’m guessing the motions to stay TTAB proceedings are going to be on a sharp rise …
John: Yeah, I’m sure. Absolutely.
Eric: … to avoid this dual track, and essentially a race to a decision.
John: It’s interesting too, because there’s going to be a strategic question of whether or not, do we want to tell a compelling narrative to the judge, because that’s really going to drive the decision whether to go to the TTAB or to the trial court, because in the trial court, you’re going to have a better opportunity to tell your story. It’ll be interesting to see whether people choose litigation for that reason.
Eric: What else? Do you have any other final points on trademark decision from the Supreme Court?
John: Yeah. Don’t hire your brother-in-law to file your response to an opposition. Actually hire a real attorney.
Eric: I think that’s wise advice for almost every issue a business is involved in. Make the investment. Make it someone else’s problem. Get it off your plate and have an attorney handle it for you. Certainly applicable to more than just trademark.
All right. Now we’re going to shift gears and we’re going to get into some crowdfunding issues. We’ve been anxiously awaiting actions from the SEC on approving new rules for the JOBS Act that was passed back in 2012. Here we are in almost April of 2015, still waiting, and we finally got some news. What did we hear from the SEC?
John: Yeah. The SEC has now made its final rulemaking and passed the rules for what are called Regulation A+. Regulation A+ is kind of a, for lack of a better word, a mini IPO. The real benefit for people who want to raise capital is that issuers can [now 00:22:04], issuers meaning people who want to obtain investment and issue securities, they can raise up to $20,000,000 under Tier 1 and up to $50,000,000 under Tier 2, Tier 1 and Tier 2 being 2 different paths that you can take under this statute. The really important part is that it allows you to raise a lot of money, and it allows you to raise a lot of money from non-accredited investors, meaning me, the average guy.
It also gets rid of this problem that a lot of attorneys had with compliance, which is that, because each state has its own blue sky laws, blue sky laws meaning the securities laws applicable within each of the 50 jurisdictions, we, as attorneys, had to go out there and find out is this proper within each one of these 50 jurisdictions. Regulation A allows us to get around that now.
Eric: Yeah. Yeah, and that’s [crosstalk 00:22:58] the big change for Regulation A, is previously the limits on the … Let’s talk about securities in general. Usually if you’re going to sell security, if you’re going to sell equity, you have to register it with the federal government, and there are a lot of regulations. [crosstalk 00:23:17] Extremely burdensome, extremely expensive, very difficult to do, but there are exceptions.
One of those exceptions to the registration process is this Registration A. Traditionally, Regulation A was almost never used, because the limits on how much you could raise were relatively low, $5,000,000, and the costs were really high, because of what you just said, that you have to clear your registration, not just with the federal government, but with every single state that you’re going to raise money from. That administrative burden made Regulation A almost useless. I think I read there was a few years where no one applied for an exemption based on Regulation A.
This change in the SEC lifts those limits. It raises them, like you said, up to $50,000,000, and it gets rid of this state compliance, at least for some of the larger requests. I think [we’re 00:24:28] funding up to $20-50,000,000 doesn’t have to go through the state by state approval.
John: Right. It was a little bit of almost statutory wrangling in order to get that done, because the enabling language associated with this Regulation A+ is one of the only ways in which the SEC could supervene state blue sky laws. What the SEC did here was this kind of, for lack of a better word, masterstroke of policymaking where they said, not only are we going to allow for these non-accredited investors to invest up to a substantial amount of money, but we’re also going to supervene all of these state laws and this is the way that we’re going to do it. It’s actually a pretty unique perspective to see from the SEC so it’ll be interesting to see how it plays out.
Eric: Yeah. This opens up huge, huge possibilities for certain types of companies. They can now go to the general public and seek capital investment and sell equities to almost everyone, which is unheard of. To me, one of the big impacts of crowdfunding in general that’s often overlooked is the potential impact locally. I think, when you think crowdfunding, you think, “I’m going to invest in the next Twitter, in the next Instagram,” but the impact to invest your money locally is a huge, huge change.
Right now, if one of the large companies, large privately held companies, in my area wanted to raise $50,000,000 to expand, I would not be able to invest in it. It would be impossible for me to invest in a successful local business, because I’m not an accredited investor. Now I can. I think that ability to not only invest in things you think are going to make you money, but keep your money local, has huge, huge possibilities that I’m really excited for.
John: Yeah. It’s kind of interesting because states have taken the initiative to adopt their own crowdfunding laws, but they’ve been limited in what they can do because of interstate commerce. They’re limited to their own jurisdiction. This certainly opens the door to that. There’s a lot of problems with it as well. The idea that a non-accredited investor can self-certify their income, so they can invest up to 10% of their net or gross income, whichever is greater, but they can do so based on their own self-certification of their income. If they have income of $100,000 and they self-certify that they have income of $500,000, there’s probably not going to be a major check on that.
There’s certainly some room for fraud here, and it’s something that should be taken pretty seriously, but the SEC has also added requirements to, in a way, ensure that there isn’t fraud. For example, they’re requiring audited financial statements. If you’re an issuer who wants to get $20,000,000 or $50,000,000 under the statute, you will have to provide what is the equivalent of an S-1, which is the rigorous financial disclosure document that the SEC requires in an IPO. It’s expensive too. It’s going to be expensive for companies to do that.
Eric: That’s the big hook here is it’s expensive. The companies that are considering doing this mini IPO under the new Regulation A+, it’s expensive. It’s a brand new vehicle. It’s going to come with risk any time you don’t have a clear path of how things work and the problems that can come up. It’s risky. I think some companies will jump on it. I think a lot will let others do it first and sit back and see how it goes. What do you think in terms of … Who is this new Regulation A targeted for? What kind of companies do you think would use this new law?
John: It’s difficult to say. I don’t know. Of course, we’re in the tech industry, so maybe it’s a mid-tier tech company that doesn’t have the money to go public and doesn’t want to undertake the burden of doing the road show and filing for registered securities, et cetera, but yet they need money now and they want to have high growth pretty quickly. That might be a good company to take advantage of this. It’s not going to be a startup.
Eric: Right. Yeah, I think …
John: It’s going to be an established company with financials.
Eric: Yeah. I agree. It’s going to have to be a company that’s already proven itself a bit, that may be wary of the investment to truly go public, but thinks that raising a significant amount of money through the crowd will get them to a next phase and where they want to be. It’s certainly not for the new startups, but I think that somewhat makes it a more attractive investment option for the public, because it’s going to be likely companies that you know of or at least you can research and see their track record. It’s not going to be a wish or a prayer like a lot of the startups that have grand ideas of how much money they could make one day, but have not made a single dollar yet.
John: Absolutely. The ’90s are over. The SEC is recognizing that the ’90s are over, which is a very, very good thing.
Eric: Yeah, exactly. Crowdfunding in general, it holds a whole lot of possibilities. To me, the pluses are easy to see. You can get rid of banks. Banks don’t have to be the exclusive way you raise money. Banks or VC, you have this new option. At the same time, should people be … People may have less rigorous standards to give their money away than a VC or a bank, and maybe that’s not always a good thing, because those rigorous standards that professional investors and accredited investors hold these companies to serve a purpose. They don’t want to lose money and most businesses fail. A lot of businesses fail. It’s hard to make money. I think there is risk that people will invest, will disagree with business decisions, will attempt to try to file derivative suits, will try to panic and get out once they realize they made a risky investment.
John: Yeah, that’s definitely a risk. Speaking of making money, we should probably move on to the question of the week, which is really a way for us to get legal tips out there.
Eric: Sure.
John: You want to address that?
Eric: Yeah, definitely. We receive questions and comments all the time through our website, revisionlegal.com. Some of these are very complex. Some are very simple. I thought today we’d talk about one that’s, I think, simple, but I think a lot of people ignore it for no reason, and that’s why should I form an LLC? Even if I just own a website and a small e-commerce site and make a few hundred bucks a month on it, what’s the purpose of having an LLC own that?
John: Every attorney will say, “File an LLC.” Doesn’t matter. File an LLC. The purpose is that you protect your own personal assets from liability. The key case is where there is somebody asserting what’s called piercing the corporate veil. Piercing the corporate veil is the idea that, as a business, if you own a website for example, and you’ve harmed somebody, if you have a unity of interest between your business interest and your personal interest, the individual who is suing you should be able to get at your personal finances. There’s really 2 steps. The first step is file an LLC and then treat it like an LLC, meaning get a business bank account and ensure that your personal finances and your business finances are separate.
Eric: Right. Yeah, but 2 separate entities. You got to treat them like that. Like you said, by doing that, you’re protecting your personal assets. The way to think about this is, even if you’re … Say you’re a restaurant. You may have an LLC that owns the actual business, that runs the restaurant. You may have an LLC that owns the building. The reason why you do that is if something happens, you want to limit the reach of any creditor. If there’s assets that are in the real estate, you want that owned by a separate company that had nothing to do with whatever maybe happened in the restaurant that brought about the suit.
The idea of separating your assets and keeping them separate from any potential liability is the main point now. In most cases, like you said, it’s personal assets. If you run a business in your name and something happens, your house, your car, your savings, your investments, those are all at risk. What are the odds something’s going to happen? Probably small, but the investment to start an LLC is a few hundred dollars. You don’t even need an attorney. Every state’s website basically walks you through the process of how to do it, and the amount of protection you get for that couple hundred bucks, it can be a lifesaver, literally. It can save your assets.
John: Absolutely. From a practical perspective, you want to establish an LLC because you want to establish a credit history. If you are a business and later you need to buy a building, or you need to get a line of credit, then the established credit history of that LLC will help you do that. Now, in the post-crash world, a lot of those types of loans are going to be personally guaranteed, but if you continue to grow and if you have a longstanding credit history, maybe they won’t be personally guaranteed, but you have to [get on 00:35:25] that road to get to that end result. It’s just another important practical thing to think about why you should form a business entity.
Eric: Yeah. Yeah, I completely agree. It’s really a no-brainer. If you are operating a business right now without one, research into how to form one or call an attorney. The prices are very low to get these set up and the amount of protection it gives you is just … There’s no excuse not to have it at all.
John: Absolutely.
Eric: Everyone out there, no matter what you do, do it in an LLC. If you have your hands in a lot of different things, set up multiples.
John: Yeah, cover your assets.
Eric: Exactly. Good one. [Psh 00:36:14]. We encourage listeners to go on our website and use any of our comment forms to submit questions that you may have. We’ll try to get to them on the podcast. Of course, we’re not providing anyone any specific legal advice, but we can speak in general about why things are important and try to answer some kind of general questions. It’s Friday. We got a busy day left to finish up the week here. Do you got anything else to add, John?
John: Yeah, it’s Friday. I’ve got shit to do and I’m out.
Eric: Thanks guys. We’ll catch up next week. (singing)