By Thomas Long, J.D.
Factual issues as to whether the first-sale and patent exhaustion doctrines applied to a manufacturing agreement between the parties precluded summary judgment on Ty’s equitable estoppel defense.
Chinese designers and manufacturers of plush toys were not equitably estopped, as a matter of law, from pursuing copyright and design patent infringement claims against U.S. toy distributor Ty, Inc., the federal district court in Chicago has decided. Ty allegedly infringed the plaintiffs’ rights in 15 toys when it contracted with another manufacturer to make the toys after a manufacturing agreement between the parties ended. The potential application of the first-sale and patent exhaustion doctrines precluded a finding on summary judgment that the plaintiffs were aware of infringing conduct by Ty during the relevant time period. In addition, it could not be determined on summary judgment that they abandoned their rights by affixing Ty’s copyright notice to the toys they manufactured for Ty because there were genuine factual questions as to their intent in doing so (Quan v. Ty, Inc., March 20, 2019, Kennelly, M.).
Plaintiff Kwan Joong Kim designed and manufactured plush toys in China through his company, Creatail HK Limited. In 2013, Ty, Inc., entered into an oral agreement with Kim to have Creatail make 15 models of toys. Creatail affixed hangtags and labels to the toys bearing Ty’s marks and copyright notice. Other than a factory identification number, the tags and labels did not make reference to Creatail or Kim or their alleged IP interest in the toys. The agreement ended in August 2015. In October 2015, after Kim learned that Ty had contracted with another company to produce the toys, he sued that company in Chinese court for IP infringement. Shortly after that suit was filed, the Chinese Customs Office seized a shipment of Ty’s goods. The Chinese court ultimately concluded that Ty was the rightful owner of the copyrights in the toys.
In 2017, Kim and his wife, Shanlian Quan, sued Ty, alleging that Ty infringed Kim’s copyrights as well as a design patent that Quan asserted that she held in one of the toys. Ty moved for summary judgment on the grounds of equitable estoppel and abandonment. The court denied Ty’s motion.
Copyright claims—equitable estoppel. Ty argued that Kim was equitably estopped from claiming that Ty infringed his copyrights because Creatail affixed Ty's copyright notice to the toys it manufactured. Ty contended that it had no knowledge of the plaintiffs’ asserted copyright interests in the toys, which the plaintiffs admitted they did not disclose. According to Ty, the plaintiffs’ conduct prevented Ty from negotiating a license agreement for the toys and caused it to enter into an allegedly unlawful manufacturing agreement with another company.
The court agreed with Ty that no reasonable jury could find that Ty knew about Kim’s alleged copyright interest in the toys. Ty’s vice president of information technology attested that Ty had no knowledge that Kim or Quan claimed to own any IP rights in the toys. In the court’s view, the vice president had a sufficient foundation to attest to Ty’s lack of knowledge in this respect. The plaintiffs provided nothing but speculative allegations in support of their contention that Ty must have known of their assertions of rights.
However, the court agreed with the plaintiffs’ argument that there was a genuine issue of material fact as to whether they knew of Ty’s alleged infringement. The plaintiffs argued that they could not have been aware of any copyright infringement by Ty during the time that Creatail was making the toys because Ty’s distribution was protected under the first-sale doctrine. According to the plaintiffs, Ty only engaged in infringement after it contracted with the new manufacturer. In the court’s view, the first-sale doctrine could apply to the business arrangement between the parties. The Copyright Act did not contain language limited the first-sale doctrine in cases where a manufacturer owned a copyright for goods that it created for distribution. The doctrine generally applied to sales between manufacturers and distributors, the court said. A jury could conclude that Ty was the owner of copies of the toys—material objects—for which Kim held copyrights. Ty had not presented evidence rebutting Kim’s allegation that he owned copyrights in the 15 toys, the court noted. In addition, the court rejected Ty’s arguments that its copyright notices—which Creatail affixed to the toys—constituted false copyright notices and therefore acts of infringement, of which the plaintiffs had notice. Section 106 of the Copyright Act did not prohibit false copyright assertions, according to the court. Although another section of the Act provided for criminal liability for such assertions, this provision did not confer a private cause of action.
The court explained that in order for Ty to prevail on its equitable estoppel defense, it must show that the plaintiffs were aware of Ty’s infringing conduct when they induced Ty’s detrimental reliance. It was insufficient to show that the plaintiffs were aware of Ty’s allegedly lawful distribution of toys made during the pendency of the agreement between the parties. Because there was a genuine factual dispute concerning whether Ty’s distribution of the toys that the plaintiffs manufactured was protected under the first sale doctrine, Ty could not support its motion for summary judgment merely by showing that the plaintiffs knew about that potentially lawful distribution. The court concluded that a reasonable jury could find that the first sale doctrine protected Ty's distribution of the toys manufactured by Creatail and that as a result there was a genuine dispute regarding whether Ty engaged in conduct constituting copyright infringement during the period in which Creatail manufactured the toys. Because Ty was not entitled to summary judgment on its equitable estoppel defense unless it could show that no reasonable jury could find that the plaintiffs were unaware of allegedly infringing conduct, the first-sale doctrine precluded granting the motion on the basis of equitable estoppel.
Copyright claims—abandonment. Ty argued that it was entitled to summary judgment because Kim abandoned his copyrights. According to Ty, it was undisputed that Kim intended to give up whatever copyrights he claimed in toys by manufacturing the toys and placing Ty’s copyright notice on them. The court disagreed, finding that there was a genuine dispute as to whether Kim intended to abandon his rights. Ty did not introduce probative evidence of Kim’s intent. There were reasonable explanations for Creatail’s conduct in affixing Ty’s copyright notices to the toys, including Kim’s limited fluency in English, and his belief that making this “concession” to Ty would not affect his own copyright interests. Accordingly, Ty was not entitled to summary judgment on its abandonment defense.
Design patent claim. Ty argued that it was entitled to summary judgment on the design patent claim based on its equitable estoppel defense. This argument was defeated, in the court’s view, by the potential application of the patent exhaustion doctrine, which was analogous to the first-sale doctrine in copyright law. For the same reasons that the court found that a genuine factual dispute regarding the applicability of the first-sale doctrine precluded summary judgment on the copyright claim, disputes of fact concerning the applicability of the patent exhaustion doctrine precluded summary judgment on the patent claim.
This case is No. 17 C 5683.
Attorneys: Edward L. Bishop (Bishop Diehl & Lee, Ltd.) for Shanlian Quan and Kwan Joong Kim. John Aron Carnahan (Husch Blackwell LLP) for Ty, Inc.
Companies: Ty, Inc.
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