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By Bill MacMinn
A client Googled the name of his own retail store. When he saw the results he was alarmed to learn that the result returned his store name with the name and telephone number of his biggest competitor, and a link to the competitor’s website, appeared in the top three search results and before the link to his own site. My client’s business name included a trademarked national brand. Surely, this must be unlawful?
Google searches return a natural or organic list of results produced by the keywords entered by the user. In addition, Google’s search engine also displays paid advertisements known as “Sponsored Links”. Google’s AdWords advertising platform permits a sponsor to purchase keywords that trigger the appearance of the sponsor’s advertisement and link when the keyword is entered as a search term. My client’s crafty competitor purchased the name of my client’s business as a “keyword” so that when a user searched on my client’s business name his competitor’s name was displayed as a “Sponsored Link” within the top three results and before the information and link to my client’s website. Google, which earns significant revenue from the AdWords platform, permits the use of trademarks as keywords.
There have been a multitude of lawsuits alleging trademark infringement over this practice. Few result in published decisions and of these; nearly all were losses for the trademark owner. Typical of these is 1–800 CONTACTS, INC. vs. LENS.COM, INC., a 2013 case from the Tenth Circuit, involving two internet sellers of contact lenses and related merchandise. At the time the case was filed, 1–800 Contacts, Inc. was the world’s leading retailer of replacement contact lenses, selling them by telephone, by mail order, and over the Internet. It was the owner of the service mark “1800CONTACTS”. Lens.com is one of 1–800’s competitors in the replacement-lens retail market, selling its products almost exclusively on line. Lens.com purchased the keyword 1800 CONTACTS which caused its “Sponsored Links” to appear when a Google user searched for that phrase. The Court ruled that Lens.com did not violate trademark laws. As with most such cases, the legal analysis turned on whether the alleged infringer’s use of the mark was likely to cause confusion to consumers. In ruling that such confusion was unlikely, the Court examined several factors, including the relatively few users who used the Lens.com link generated by the keyword “1800CONTACTS” to click through to the Lens.com site and the dissimilarity between the two companies websites which the Court concluded would minimize the likelihood of confusion. In other cases Courts have held that such factors as the sophistication of the Google users and the fact that the sponsored links generated by the keyword search appeared in boxes and were visually dissimilar from the organic links were sufficient to avoid user confusion.
Efforts to curtail this practice using state trademark common law and laws regulating unfair competition have also failed as these legal theories rely heavily on Federal trademark law requiring plaintiffs to meet the same likelihood of confusion requirement.
One commentator has observed that in many of the cases the sponsored links generated very few visits to the competitors’ site from users “clicking through” on keyword generated links. The economic value of those visits was small. For example, in the 1 800 Contacts case, the most optimistic estimate of damages was in the range of $40,000, much less than the cost of prosecuting the case.
Although the advice was counter-intuitive, I had to inform my client that any action based on his competitor’s use of his trademarked name as a keyword was not likely to succeed. The silver lining, if there is one, is that the strategy doesn’t appear to result in significant loss of revenue.
Scammers targeting Pennsylvania businesses have been hard at work this summer. The Pennsylvania Department of State reports that three separate direct mail campaigns have sought to get unsuspecting Pennsylvania business owners to pay unnecessary fees:
• A mailing from a company calling itself “Division of Corporate Services – Compliance Division” urges companies to complete a form with officer and director information and return the form with a $150 payment.
• A postcard from a company calling itself “Business Compliance Division” urges owners to call a toll-free number “to avoid potential fees and penalties.” When that number is called, the owner is instructed to pay $100 by credit card to obtain a “certificate of existence” in order to comply with state regulations. The address for this company is the same as the address for the “Division of Corporate Services – Compliance Division” above. According to the Pennsylvania Department of State, this is the address of a UPS store in Harrisburg.
• A letter from a company calling itself “Pennsylvania Council for Corporations” instructs business owners to complete a form with names of shareholders, directors and officers and return it with a $125 fee.
These solicitations include citations to Pennsylvania statutes and look official, but they are not: they were neither prepared nor authorized by the Commonwealth. Essentially, these notices represent a business-generating effort from the sender to prepare generic annual minutes for unwitting companies.
The Department of State cautions that any official notices sent to businesses by the Pennsylvania Department of State or the Secretary of the Commonwealth’s office will contain letterhead and/or contact information for the Bureau of Corporations and Charitable Organizations. If you receive one of these notices or a similar solicitation, contact the Bureau at 717-787-1057, or feel free to call Sue Maslow, Joanne Murray or Michael Mills at 215-230-7500.
On July 1, 2015, the Pennsylvania Association Transactions Act (also known as the Entity Transactions Act) (the “Act”) went into effect. The primary purpose of the Act is to simplify the architecture of Title 15 of the Pennsylvania Consolidated Statutes by moving the provisions applicable to names, fundamental transactions and registration of foreign entities into a new Chapter 3. Presently, those provisions are spread out in numerous subsections applicable to each entity type (e.g., corporations, limited liability companies, etc.). The thinking was that since identical or nearly identical provisions already applied to most or all entity types, they should be moved to a new chapter to streamline the statute and hopefully simplify the process for undertaking fundamental changes. The Act adopts new terms to refer to various entity concepts, so practitioners will have to learn a new vocabulary. For example:
No one (not even us legal corporate types) would ever suggest that bylaws are interesting. But recent Third Circuit and Delaware Court of Chancery decisions have highlighted the complexity of issues regarding a company’s fee advancement bylaws and policies. Some corporate indemnification provisions are mandated and other provisions are simply permitted under Delaware state law. In practice, adopted corporate bylaws refer to the right (or absence of a right) of officers and directors of a company to be reimbursed by the company for losses, including legal fees, incurred in legal proceedings that name individual officers or directors if those proceedings relate to their employment or activities on behalf of that company. Mandated indemnification obligations under Delaware statutory requirements attach only to an “officer or director” but many companies nevertheless have bylaws and policies that permit indemnification to “any person” (including officers, directors, employees and agents) who act in good faith and in a manner they reasonably believed to not be opposed to the best interests of the entity. The Third Circuit, however, recently held that the definition of “officer” was ambiguous; an executive title like “Vice President” alone does not automatically prove eligibility for indemnification. And the Court of Chancery held that officers and directors need not prove that they will be indemnified to obtain fee advancement where bylaws tie fee advancement to indemnification. In other words, entitlement to advancement of fees under corporate bylaws is to be considered independently of indemnification entitlement. Examining the requirement that the conduct in question of any person seeking indemnification must be “by reason of the fact” of his or her officer/employment status, the same court determined that bylaws may not exclude entire categories of alleged wrongdoing for the purpose of fee advancement denial. If the alleged wrongdoing relates to an officer’s duties owed to the company (such as breaches of fiduciary duty), fee advancement may be required (even where the same bylaws require a clawback if the officer is ultimately found to have engaged in such wrongdoing).
By William T. MacMinn, Esquire Reprinted with permission from the July 27, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.
The Superior Court confirmed in the recent decision of Drake Manufacturing Company, Inc. v. Polyflow, Inc., 109 A.3d 250 (Pa. Super. 2015), that a foreign corporation doing business in Pennsylvania must be registered pursuant to 15 Pa.C.S.A. §4141(a) in order to maintain any litigation or recover any damages in the Commonwealth (15 Pa.C.S.A. §4141(a) is now enacted at 15 Pa.C.S.A. §411(a)). The Drake case is an instructive and cautionary tale because the Defendant in that case admitted contractual liability for non-payment, but defended the case solely on the lack of capacity issue. There was no doubt that the Plaintiff was a foreign corporation doing business in Pennsylvania and had not registered as required by Pennsylvania’s Business Corporation Law. Nevertheless, even after many years and several opportunities to obtain the Certificate of Registration, Plaintiff failed to do so until three weeks after winning a verdict in the case.
Defendant properly pled the lack of capacity defense in its Answer, renewed the argument in a motion for non-suit at the close of Plaintiff’s case, and filed post-trial motions requesting judgment n.o.v. Three and a half years passed from the time of Plaintiff’s complaint until verdict, during which time Plaintiff did not make any effort to obtain the required Certificate. Plaintiff presented no evidence on the capacity issue at trial, nor could it since it did not comply with the statute until three weeks later. Further, at the conclusion of the trial Plaintiff allowed the record to close instead of requesting that it be kept open to allow time to obtain and offer into evidence its Certificate of Registration. Plaintiff only submitted its registration as a part of its rebuttal to Defendant’s Motion for Judgment N.O.V. The trial court denied Defendant’s Motion finding that submitting the certificate during post-trial proceedings was permissible. It entered judgment against Defendant in the amount of nearly $300,000.00.
On appeal, the Superior Court reversed the lower court and remanded for entry of Judgment N.O.V. in favor of the Defendant. Holding that registration is an absolute pre-requisite for a foreign Plaintiff doing business in Pennsylvania to maintain a suit and recover damages, the Court further reasoned that the after-acquired certificate could not be accepted during post-trial proceedings, nor could the record be re-opened to accept it because it was evidence that could and should have been presented during trial. The Court further noted that the issue of lack of capacity to sue may be raised either by Preliminary Objection or, as was done here, by Answer and New Matter and cautioned that failure to do either waives the defense.
However, the question remains, is there an earlier time period at which waiver may attach? Notwithstanding Pa.R.C.P. 1028, there may be. In International Inventors Incorporated, East v. Berger, 363 A.2d 1262 (Pa. Super. 1976) the Plaintiff sought a preliminary injunction and damages. There the Defendant properly raised the issue of Plaintiff’s incapacity at the preliminary injunction hearing but the preliminary injunction was nevertheless granted. On appeal, the Superior Court held this was error. The Court explained that the trial court should have denied Plaintiff’s request for an injunction, but should also have stayed the proceedings to give Plaintiff an opportunity to register and thereby cure its lack of capacity. Instead, the Court granted the injunction and is so doing decided “an issue” (i.e. injunctive relief) in the case and thereby allowed Plaintiff to “maintain a suit” in violation of the statute. The Court reversed the grant of the injunction. Although Berger analyzed the issue of timeliness in the context of the Plaintiff’s compliance with registration requirements, the Court’s reasoning also supports the argument that a Defendant, who does not raise the capacity issue prior to preliminary injunctive relief being granted, similarly may have waived the issue for the life of the suit even though the time for responsive pleadings under the Rules of Civil Procedure had not expired. Thus, while the question of the Plaintiff’s capacity may not be at the forefront of case strategy analysis, Berger and Drake are a caution to counsel that the issue cannot be ignored.
Commercial lenders in Pennsylvania await action by the legislature to fix what appears to be an unintended byproduct of recent amendments to the Pennsylvania Probate, Estate and Fiduciaries (PEF) Code that went into effect earlier this year. You may be wondering what a statute that generally applies to trust and estate matters has to do with commercial lending transactions. The answer is that the recent changes applicable to powers of attorney generally could be interpreted to apply to powers of attorney granted in commercial loan documents, leases and other contracts (such as those granted in connection with confession of judgment clauses and certain other remedies). Historically, these statutory provisions did not apply to commercial agreements. It appears that the legislature was focusing on trust and estate documents when enacting this legislation and didn’t understand the impact of these amendments on commercial transactions.
These amendments are troubling from a lender’s perspective because they require that an agent must “act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interest.” In a commercial loan transaction, the agent is the lender and the principal is the borrower, so the tension is obvious: a lender that is foreclosing on property, confessing judgment, collecting rents, or exercising Article 9 remedies is not likely to be acting in the best interest of the borrower.
Pennsylvania House Bill #665 would amend the PEF Code to clarify that the power of attorney requirements do not apply to commercial transactions. This bill is presently in the Senate Judiciary Committee. Until this bill becomes law, lenders should consider making the following adjustments to commercial loan documents containing powers of attorney (typically these include documents with confessions of judgment, security agreements, assignments of rent, and mortgages):
• Include an acknowledgement by the borrower that its reasonable expectations include confession of judgment, foreclosure and other actions typically taken by a lender under the power of attorney;
• Include a waiver of the duties imposed by the PEF Code; and
• Add a notary page.