Following conventional wisdom, many California employers have adopted the practice of requiring their employees to sign mandatory arbitration agreements. For such employers, the advantages of arbitration include (1) reduced publicity because arbitration is closed to the public and the press; (2) less exposure to punitive damages or runaway verdicts (juries tend to be more emotional and oftentimes award larger, punitive verdicts than do arbitrators); (3) more expeditious and streamlined discovery; (4) speedier resolution of the litigation as compared with the economically-challenged and overburdened court system; (5) ability to select an arbitrator with employment expertise; and (6) protection from potential class actions.

To benefit from such advantages, however, employers must diligently review their arbitration agreements with competent employment counsel to ensure that such agreements remain enforceable in light of the rapidly evolving body of law pertaining to arbitration agreements.

As recently as June 4, 2013, a California appellate court reviewed an employment arbitration agreement to determine its enforceability. Brown v. Superior Court (Morgan Tire & Auto, LLC), __ Cal. App. 4th __, 2013 WL 2449501. While the Brown case dealt with the narrow issue of whether representative claims under the California Private Attorneys General Act (“PAGA”) can be compelled to arbitration (apparently not), the key California Supreme Court case regarding enforceability of employment arbitration agreements is Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000).

In Armendariz, the Court held that employers can require employees to sign mandatory, pre-dispute arbitration agreements as a condition of employment so long as they are not unconscionable. To be conscionable, the agreement must be bilateral (meaning that it benefits and constrains both the employer and employee equally), fair, and employers must pay those costs unique to arbitration. If conscionable, an arbitration agreement can even contain a class action waiver.

In AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the United States Supreme Court held that arbitration agreements containing class action waivers are enforceable. However, since Concepcion was decided, California courts have grappled with the question of whether an employer may require employees to waive the right to file or participate in a class action. Significantly, California courts have attempted to circumvent Concepcion’s holding by concluding that various employment arbitration agreements were unconscionable for a myriad of reasons.

Recommendations for Employers

Given the ever-evolving case law and judicial resistance (in California state courts) to arbitration agreements that contain class action or representative action waivers, employers should be proactive in reviewing and revising their arbitration agreements to withstand judicial scrutiny. While employers can hope that a court will sever an unconscionable provision from an arbitration agreement, even one unconscionable provision could render the entire agreement invalid if the agreement is found to be permeated with unconscionability. Accordingly, it is strongly recommended that employers work with employment counsel to carefully review arbitration agreements to ensure they are conscionable and enforceable. Here are some “do’s” and “don’ts” to keep in mind when reviewing such agreements:

Marie represents employers in wage and hour class and representative actions. She also defends employers against wrongful termination, discrimination, harassment, retaliation and unfair competition claims in court, arbitration and administrative proceedings. Marie has extensive experience counseling employers regarding all aspects of the employment relationship and works with employers to develop strategies to prevent employment claims and create effective defenses to litigation. Marie counsels employers regarding performance management, termination, contracts, workplace investigations, medical issues, leaves of absence and employment policies and practices.

Jaclyn focuses her practice on representing employers in federal and state court litigation involving discrimination, harassment, retaliation, wrongful termination, unfair competition and wage and hour claims. She also counsels employers on a broad spectrum of day-to-day employment matters, including employee discipline, terminations, leaves of absence and wage and hour issues. In addition, she assists employers in drafting policies, employee handbooks and employment-related agreements to ensure compliance with California and federal laws while also serving the employer’s individual business needs. Jaclyn has experience drafting international employment agreements, equity compensation plans, student/staff interaction polices and has created employer training materials.

You have just negotiated a settlement between your client and a trademark infringer. The bad guy has admitted infringement, and you are drafting a settlement agreement when a dispute arises. The bad guy refuses to agree not to purchase AdWords containing your client’s trademark to advertise his products through various search engines, arguing that the purchase of AdWords containing your client’s trademark does not constitute infringement. You are skeptical, believing that the infringer is attempting to engage in further nefarious behavior. Your client wants to know: can a trademark owner prevent others from purchasing AdWords or “Sponsored links” containing his trademark?

To find your answer, it is important to first understand a few principles of U.S. trademark law. The legislative intent of the Lanham Act, 15 USC §1051 et seq, is to give trademark owners broad latitude to protect their trademarks from would-be infringers. A fundamental objective guiding this intent is to protect American consumers from fraud. Consumers readily identify particular brands with quality, based on a reputation built through a history of consistency, integrity and honesty. Consumers place their trust, and thus, their purchasing power, in certain brands. Simply put: the more famous the brand, the more likely it is that consumers will buy it. Consumers rely on the advertising and marketing of each brand to identify authentic goods from counterfeits. Accordingly, the touchstone of whether infringement has occurred is the determination of whether a consumer is “likely to be confused” between the trademarked product or service and the alleged infringing product or service, based on the infringer’s illicit use of a trademark or service mark, or of a confusingly similar mark, in commerce.1 Federal courts nationwide employ a multi-factor test to determine whether a likelihood of confusion exists, which generally include some iteration of the following: (1) the strength of the trademark; (2) the proximity of the trademarked products and the infringing products in the marketplace; (3) the similarity of the infringing mark to the registered trademark; (4) evidence of actual consumer confusion; (5) the marketing channels used; (6) the type of goods and the degree of care likely to be exercised by consumers when purchasing the goods; (7) the alleged infringer’s intent in selecting the mark; and (8) the likelihood of expansion of either the trademark owner’s product line or the alleged infringer’s product line.2

Internet Advertising With AdWords

With the advent of the internet age, brand owners increasingly employ digital means to advertise and market their products and services. Internet search engines have developed a method of digital advertising by permitting the purchase of AdWords. An AdWord is a keyword contained within a “Sponsored link,” a website link to a business owner’s website, offered for purchase. When purchasing an AdWord, an advertiser may specify the application of the keyword as a “broad match” (the advertiser’s Sponsored link will result anytime a consumer searches for “the keyword, its plural forms, its synonyms, or phrases similar to the word.”3); as a “phrase match”(the advertiser’s Sponsored link “will appear when a user searches for a particular phrase”4); as an “exact match” (the advertiser’s Sponsored link will appear “only when the exact phrase bid on is searched on [a search engine]”5 ); or as a “negative match” (the advertiser’s Sponsored link will “not appear when certain terms are searched”6 ). The same AdWord may be purchased by multiple buyers with no affiliation to each other. The prominence of an AdWord, i.e. its ranking in a results list, will be determined by the price a buyer is willing to pay.

Currently, no state or federal regulation defines the boundaries of the scope and substance of AdWords. Accordingly, over the last five years, a proliferation of litigation has resulted, driven by the commercial interests of trademark owners who fear the dilution and diminishment of their brands and an increase in consumer confusion between authentic and counterfeit goods, and the commercial interests of digital ad buyers seeking to capitalize on a highly lucrative revenue stream.

A tension between the First Amendment right to free speech and the right of Congress to protect trademarks as an element of interstate commerce lies at the heart of the debate as to whether the purchase and commercial use of a trademark as an AdWord by a buyer who is not the mark owner is licit. A few notable cases contributing to the outcome of this debate are described below.

Instructive Recent Cases

With its decision in Mary Kay, Inc. v. Weber, et al., the Northern District of Texas was one of the first courts to articulate the principle that it is not a foregone conclusion that the purchase of an AdWord by an entity other than the trademark holder for the online sale of goods is automatically an infringing use, but that it may rather be a nominative, non-infringing use.7 To qualify as a fair use, the mark must be used in a manner that does not “create a likelihood of confusion as to source, sponsorship, affiliation, or approval.”8 The relationship between search terms and Sponsored links in and of itself is not strong enough to create an impression of affiliation in a consumer’s mind.9

In Network Automation, Inc. v. Advanced Systems Concepts, Inc., the Ninth Circuit considered whether the use of another’s trademark as an AdWord linking a consumer to one’s own sponsored website or advertisement violates the Lanham Act.10 Importantly, the Network court recognized that a previous test to determine the likelihood of consumer confusion on the Internet, known as the “Internet troika,” is “appropriate for domain name disputes” but is not applicable to all Internet infringement disputes.11 In fact, the court concluded that the “Internet troika” test is inadequate for analyzing trademark infringement claims based on search engine keyword advertising.12 The Network court carved out an analysis using the Sleekcraft factors, enabling it to examine the sine qua non of trademark infringement, namely, whether a consumer would be confused, not merely diverted, by the use of the marks at issue. The Network court identified the following Sleekcraft as those worthy of the most consideration in the context of determining a likelihood of confusion in a keyword/Ad Word case: (1) the strength of the mark; (2) the evidence of actual confusion; (3) the type of goods and degree of care to be exercised by the purchaser; and (4) the labeling and appearance of the advertisements and the surrounding context on the screen displaying the results page.13 Placing heavy emphasis on the last of these four factors, the appearance of the advertisements and the context on the screen displaying the results of the keyword search, the Ninth Circuit overturned the district court’s finding of infringement and remanded the case. This Ninth Circuit decision places evaluation of the visual appearance of an AdWord or Sponsored link at the center of the determination whether a consumer will be confused, and ultimately, whether infringement has occurred.

The Tenth Circuit has arrived at a similar conclusion as the Ninth Circuit in Network, with adopted a different approach. In a recent case, 1-800 Contacts, Inc. v. Lens.com, Inc., the Tenth Circuit affirmed the District Court of Utah’s decision that the Defendant’s purchase of AdWords containing confusingly similar marks to Plaintiff’s “1800Contacts” mark did not constitute trademark infringement. The District Court held that “as a matter of law, a defendant’s purchase of a search-engine keyword cannot, by itself, create the likelihood of confusion that is necessary for infringement liability…keyword use can generate a likelihood of confusion only in combination with the specific language of the resulting impressions.” 1-800 Contacts, Inc. v. Lens.com, Inc., 722 F.3d 1229, 1241 (2013). The Court carefully articulated its reasoning for this determination, stating that consumers only view the results of their searches, having no idea which keywords a particular advertiser has purchased. Thus, a consumer might obtain the same list of advertisements by typing in a keyword containing a trademark, in this case, “1 800 contacts”, or by simply typing in a generic keyword, i.e. “contacts,” and among the list of advertisements, might be the Lens.com advertisement containing no reference to “1-800 Contacts.” The Court concluded that such a consumer is not likely to be confused into thinking that Lens.com has a business association with 1-800 Contacts merely because an ad for Lens.com appears in a results list for a search on the keyword “1-800 Contacts.”

Summary

In the context of these recent AdWord cases, it is clear that courts will carefully weigh an advertiser’s First Amendment right to free speech against a trademark owner’s right of ownership in a mark. The mere purchase of a trademark by a non-owner advertiser does not equate to an automatic finding of infringement. Trademark owners may still be successful in pursuing advertisers not sanctioned to use a given mark, but only after clearly demonstrating a likelihood of consumer confusion by meeting the burden of providing evidence to satisfy each factor in the multi-factor test adopted by whichever circuit the trademark owner brings suit.

In conclusion, trademark owners like your client should remain vigilant in efforts to monitor the use of their marks by third party advertisers. If any misuse or infringement is suspected, your client should conduct further investigation and pursue advertisers until resolution is reached — doing nothing will ensure the erosion of your client’s ability to mitigate the consequences of illicit activities by third party infringers, and will likely result in dilution of your client’s mark.

For the owners of most private companies, selling is a new and daunting process. Capitalizing on the value of the business in such a situation can be difficult for the unprepared. If you are considering selling your business, careful planning early in the process can help you ensure the process runs smoothly and ends with the best results.

1. Know Your Goals.

Before taking any steps, you should first have a clear understanding of why you are selling. A sophisticated buyer will question why they should buy your business if you no longer want to own it. It is important to be prepared to answer this question both for the buyer and for yourself. If your goal is to retire, you should have a firm understanding of how much money you will need to receive for your business to maintain the lifestyle you want during retirement. A qualified financial planner can assist you in making that determination. If your goal is not to retire, you should carefully consider how selling the business will affect you. Most buyers will require you to sign a non-competition agreement, prohibiting you from competing with the business for several years after the sale. If you cannot retire on the sale proceeds, can you afford to be out of work in the industry for several years? If not, you may need to negotiate an exit that provides for your continued involvement in the business after the sale or reconsider whether a sale to a third party is the proper exit for you. Other options include an installment sale to a key employee or succession planning to a family member.

2. Understand your company’s value.

A realistic expectation of your company’s value is needed to make these tough decisions. While business owners typically have a general idea of their company’s worth, they may not have a firm grasp of its actual current market value. Obtaining a valuation from a professional source can provide you with a realistic expectation for your exit and help you negotiate proper value for your business based upon defensible information.

3. Put your house in order.

Before proceeding to market, make sure your business is ready to go under a microscope. Potential buyers will typically conduct in-depth due diligence on your business before acquiring it. If their review uncovers any potential risks, they could be scared off or reduce the purchase price. By carefully reviewing your business in advance, you can identify potential weaknesses, eliminate red flags, alleviate a buyer’s potential concerns and maintain your bargaining position. Make sure your corporate records and financial statements are accurate and up-to-date, important arrangements are properly documented, your key employees are retained, lawsuits have been settled and there are no skeletons likely to pop out of your company’s closet.

4. Keep it quiet

News of a potential sale may cause suppliers, customers or employees to look for opportunities elsewhere due to the company’s uncertain future, which can decrease the company’s value. It is important to maintain confidentiality by restricting disclosure of the proposed sale to those individuals needed for the sales process and requiring nondisclosure agreements when prudent.

5. Stay focused on your business.

Selling your business can be a full-time job. Don’t forget that potential buyers will be scrutinizing the profitability of your business. If revenues falter or other concerns arise because you have not concentrated sufficiently on your business, buyers may seek to reduce your purchase price or back out of the deal entirely.

6. Learn and manage the process.

Commencing the sales process, identifying the right buyer, negotiating the terms of the sale and closing the transaction can take longer than expected. Depending on the risk adversity of the buyer, due diligence alone may take 30 to 60 days, or in some cases longer. Understanding the sales process will allow you to be prepared, plan accordingly and start the process at the right time to maximize the marketability of your business. You should also identify upcoming issues, such the expiration of critical licenses, leases or other agreements, and be ready to deal with them. Don’t let surprises derail your transaction.

7. Get the right help.

Most business owners have little, if any, experience selling a business and find themselves negotiating with experienced buyers. Engaging professional advisors that are experienced in mergers and acquisitions early in this process will level the playing field, help maximize the value you receive for your business and ensure you are protected in the process. The sale of your business is not the time to hire a family friend or relative that is not an experienced mergers and acquisitions professional. The right professionals will guide you through the entire sales process and help you avoid common mistakes and pitfalls that can be difficult and expensive to fix in order to get your deal back on track.

It is never too early to begin this process. By taking the steps to evaluate your options, understand your company’s value, put your business in order and obtain professional assistance, you are strategically planning for the successful exit you want.