KB-IP Law Firm

Category: Litigation

  • Understanding the Coming Wave of Force Majeure Litigation

    Understanding the Coming Wave of Force Majeure Litigation

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    With the COVID-19 epidemic, it is expected that contracting parties will be invoking force majeure clauses more frequently than at any time in recent memory.  ”Force majeure” is the part of contract law devoted to “Act of God” events characterized by extreme rarity and severe impact.  The force majeure clause is a contractual provision that relieves the contracting parties from performance when certain extreme circumstances beyond their control occur, making performance literally impossible, commercially impracticable, illegal or highly inadvisable.  In California, Cal. Civ. Code Section 3526 expresses the principle succinctly: “no [wo]man is responsible for that which no [wo]man can control.”  In the absence of a force majeure provision, the parties are left to common law or state statutory law regarding impracticability, frustration of purpose and other doctrines to determine who bears the risk of non-performance.

    Force majeure clauses will play a vital role in sorting out the financial impact of the COVID-19 virus and related widespread shutdown of commercial activity.  The COVID-19 pandemic has wreaked havoc on commercial relationships and supply chains, caused the cancellation of concerts, and the closure of movie theaters, restaurants and all manner of other businesses.  In the modern world, written contracts often govern the complex inter-relationships between these businesses and allocate the risk of non-performance between the parties.  Force majeure clauses, which are often part of the overlooked contractual provision found in the boilerplate provisions at the end of a contract, will prove essential in determining whether a party will be found liable for breaching a contract during the COVID-19 crisis. 

    We have already been contacted by  clients seeking advice related to COVID-19, business interruption and force majeure clauses.  We expect that force majeure related cases will flood the courts as they begin to reopen in the coming weeks.  As discussed below, obtaining advice from experienced commercial counsel will be extremely important in assessing the impact of force majeure on your business and developing strategies to resolve force majeure issues.  In addition, we  advise that all businesses consider retaining counsel to evaluate the current risk majeure provisions in their agreements and recommend potential changes to ensure the clauses provide the maximum protection available under the law.

    The most important preliminary issue will be the venue for any litigation because contract is a matter of state law.  Litigating force majeure clauses in California raises unique issues and challenges, and California law takes a different approach to force majeure than other jurisdictions.

    The Need for Experienced Counsel

    Force majeure clauses are not frequently  a primary focus of negotiation or drafting in many commercial agreements.  Boilerplate force majeure language is often cut and pasted into the “standard” portion of a contract with little thought.  Humans tend to underestimate and under-plan for relatively rare events like pandemics or terrorist attacks, and many business lawyers focus most of their efforts on drafting the material “business terms” of a contract and rely on more-or-less standard language for the remaining terms.  As any litigator will tell you, however, the “standard” and often overlooked provisions are often the most essential and important provisions in litigation.  Because they excuse performance and thus liability for breach, the application of a force majeure clause can prove outcome determinative in a lawsuit or dispute.

    Commercial litigators have special expertise and experience interpreting and litigating contracts.  Seeking counsel from a qualified professional is essential to assessing a force majeure related claim.  Among other things, the litigator must: determine whether a contract has a force majeure provision; predict how a court would likely interpret that provision; design a litigation strategy and accurate estimate of expected fees and costs; and spot other issues that typically arise in commercial litigation and bear on force majeure, such as choice of law, venue, integration and proximate cause.  After evaluating the force majeure provision, the litigator will then design an overall strategy aimed at resolving disputes in a way consistent with the client’s business goals and resources.  Litigators can also be indispensable resources in designing and drafting force majeure provisions to better protect businesses, as well as examining and advising on the scope and application of existing force majeure provisions.

    Any business evaluating the impact of a force majeure provision on a contract governed by California law will need advice tailored specifically to California law.  California has unique interpretive principles applicable to force majeure, and generally takes a less restrictive approach to the clauses than other jurisdictions.  In many other jurisdictions, the failure of a force majeure clause to expressly name the specific force majeure at issue can prevent recovery.  In such jurisdictions, for example, if the contract does not include language stating that a pandemic is a force majeure event, the clause would not be triggered by a pandemic.  See, e.g., Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 903 (1987) (force majeure clause inapplicable where it did not “specifically include” party’s inability to procure and maintain liability insurance on a roller skating rink).  (Of course, there may be creative ways to argue the application of the clause in these jurisdictions.)   This does not mean that California courts will apply force majeure clauses as a matter of course.  The California Supreme Court has recognized that, even where a force majeure clause applies, the mere fact that performance has become more expensive or involves greater hardship than anticipated at the time of contract does not excuse a contractual obligation.  Rather, the party obligated to perform must show “extreme and unreasonable difficulty, expense, injury or loss involved.”  San Mateo Community College Dist. v. Half Moon Bay Ltd. Partnership, 65 Cal.App.4th 401, 415 (1998).  As well, California law requires that the party seeking to excuse performance via force majeure must show “sufficient” or “reasonable” efforts to avoid the consequences of the “Act of God” event.  See, e.g., Butler v. Nepple, 54 Cal.2d 589, 598-599 (1960) (drilling company not excused by force majeure clause where it could not obtain tools from a supplier due to a strike because it could have sourced the tools from another supplier).  For this reason, a business seeking to rely on a force majeure clause should work with counsel to create an appropriate record of the things it did to try to perform the contract.

    California also has specialized statutes that codify equitable principles relevant to force majeure clauses, and a large body of decisional law interpreting those statutes.  See, e.g., Board of Supervisors v. McMahon, 219 Cal.App.3d 286, 300 (1990) (interpreting Cal. Civ. Code § 3531 on impossibility); FPI Development, Inc. v. Nakashima, 231 Cal.App.3d 367 (1991) (examining the frustration of purpose defense).  The doctrines of frustration of purpose and impossibility are closely related to force majeure and may also excuse performance.  Any force majeure analysis will likely consider the applicability of these doctrines.  Making matters even less certain, California does not yet have a substantial body of case law (or even a single published case) that interprets force majeure and related concepts in the context of a virus or global pandemic.  This is another reason to retain experienced counsel.

    Karish & Bjorgum Has Broad Experience Litigating Commercial Contracts

    At Karish & Bjorgum, we have deep experience drafting, interpreting and litigating commercial agreements.  The breadth of our experience brings familiarity with the common types of issues and arguments in commercial litigation.  We combine that deep experience with creative approaches to commercial litigation, and a competitive pricing structure that allows us to represent a wide variety of business types and sizes.  You will be hard-pressed to find more qualified and talented lawyers at a lower price anywhere, and certainly in California.  Please contact us immediately if you would like to consult over potential force majeure or other contractual issues.

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  • KB Client Prevails at Ninth Circuit on Fair Use Defense

    KB Client Prevails at Ninth Circuit on Fair Use Defense

    On March 24, 2020, the Ninth Circuit Court of Appeals issued a decision finding that a licensor of copyrights must pay attorneys’ fees to KB’s client, the Burbank High School Vocal Music Association, a boosters club, and its parent volunteer board members.  Along with the choir director, the boosters club had been sued for allegedly infringing copyrighted music in creating a show choir piece that involved the song “Magic” by Olivia Newton John.  The District Court  had granted summary judgment on behalf of KB’s clients, but had denied fees. The choir director had prevailed on a theory of qualified immunity.  Cross appeals were filed, and the Ninth Circuit unanimously found that not only should KB’s client be awarded fees, but that the case should be affirmed on the fair use defense, which had not been expressly ruled upon by the trial court.  The case provides valuable precedent for other schools and choir groups around the country facing similar issues.  The opinion in the case, Tresona Multimedia, LLC vs. Burbank High School Vocal Music Association, et al., Case No. 17-56006, can be found here: https://cdn.ca9.uscourts.gov/datastore/opinions/2020/03/24/17-56006.pdf.  Commentary from the Stanford Copyright and Fair Use Center can be found here: https://fairuse.stanford.edu/case/tresona-multimedia-llc-v-burbank-high-school-vocal-music-assn/.

  • Beware – False Marking May Cost You Big

    Beware – False Marking May Cost You Big

    In its decision on December 28, 2009 in The Forest Group, Inc. v. Bon Tool Company, the Federal Circuit clearly set forth the standards and possible penalties for false marking (placing a patent number on a product when the product is not covered by that patent).

    False marking is covered under 35 U.S.C. §292.  Pursuant to §292, a false marking claim consists of (1) marking an unpatented article with (2) intent to deceive the public.  See Clontech Labs. Inc. v. Invitrogen Corp., 406 F.3d 1347, 1352 (Fed. Cir. 2005). “Intent to deceive is a state of mind arising when a party acts with sufficient knowledge that what it is saying is not so and consequently that the recipient of its saying will be misled into thinking that the statement is true.” ld.(citing Seven Cases of Eckman’s Alterative v. United States, 239 U.S. 510, 517–18 (1916)).  A party asserting false marking must show by a preponderance of the evidence that the accused party did not have a reasonable belief that the articles were properly marked. Id. at 1352–53. An assertion by a party that it did not intend to deceive, standing alone, “is worthless as proof of no intent to deceive where there is knowledge of falsehood.” Id. at 1352.

    Once it is clear that a product is not properly marked, the analysis comes down to whether the defendant had intent to deceive.  The court looks to such Factors as: how obvious it was that the product was outside the patent claims, whether the defendant was advised by patent counsel to mark the product and the educational level and sophistication of the defendant.  Proving intent to deceive may be difficult in situations where the scope of the claims has not been interpreted and the product is close to the claimed language.  However, in circumstances where knowledge of falsehood is clear, defendants may be face hefty fines in suits that can be brought by any member of the public.

    In The Forest Group, Inc. v. Bon Tool Company, the Federal Circuit was asked to opine on whether §292 intended a fine for the entire act of false marking not to exceed $500 regardless of the number of falsely marked products or whether each falsely marked product could be assessed a fine of up to $500.  The Federal Circuit held that each falsely marked product could be assessed a fine of up to $500 even though prior courts had reached a contrary result, mostly because the wording of the statue was changed over time.  The Court pointed out that the statute clearly intended this measure of damages, that a fine not to exceed $500 regardless of the number of falsely marked products would clearly eviscerate the statute, and that policy considerations support the per article interpretation of §292.

    The policy considerations pointed out by the Federal Circuit include: “that acts of false marking deter innovation and stifle competition in the marketplace”; that “[i]f an article that is within the public domain is falsely marked, potential competitors may be dissuaded from entering the same market”; that “[f]alse marks may also deter scientific research when an inventor sees a mark and decides to forego continued research to avoid possible infringement”; and that “false marking can also cause unnecessary investment in design around or costs incurred to analyze the validity or enforceability of a patent whose number has been marked upon a product with which a competitor would like to compete.”  The Court noted that the injuries occur each time an article is falsely marked, and that the more articles that are falsely marked the greater the chance that competitors will see the falsely marked article and be deterred from competing.

    The Forest Group argued that interpreting the fine of §292 to apply on a per article basis would encourage a rash of false marking litigation by plaintiffs in qui tam suits who had not suffered any direct harm.  The Federal Circuit held that such suits were explicitly provided for and encouraged by 35 U.S.C. §292 so that individuals can help control false marking.  The language of 35 U.S.C. §292(b) states that “Any person may sue for the penalty, in which event one-half shall go to the person suing and the other to the use of the United States.”  The Court noted that a maximum fine of $500 for the entire act of false marking regardless of the number of falsely marked products would not provide sufficient financial motivation for plaintiffs in qui tam suits.

    However, before you run out and bring a bunch of qui tam suits for false marking you should note that a court does not have to fine at a rate of $500 per article marked.  The Federal Circuit held that 35 U.S.C. §292 provides for a maximum of “not more than $500 for each such offense” thereby allowing for a range of fines.  The district courts should “balance encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities.”  The Federal Circuit did not provide a list of factors for district courts to use in determining the appropriate fine per article falsely marked.  However, the Federal Circuit noted that in case of inexpensive mass-produced articles, a court has the discretion to determine that a fraction of a penny per article is a proper penalty.
    In The Forest Group, Inc. v. Bon Tool Company, the false marking claim was brought as a counterclaim by a defendant accused of patent infringement.  Clients accused of patent infringement should carefully evaluate whether a counterclaim for false marking is warranted.

    Additionally, clients who believe a product in the marketplace is falsely marked should consider action to put the producer and seller of the article on notice of the false marking.  In situations where the producer and seller are clearly aware that the article is falsely marked, then a qui tam suit may be justified.

    Karish & Bjorgum, PC is a full service intellectual property law firm specializing in intellectual property litigation in the federal and state courts.  We help our clients protect the names of their businesses and their products and the ideas behind them.