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For developments including new services, practices, and professionals to better serve our clients as well as our contributions to the legal and business communities, check out our News & Events section.

27 Oct 2017
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Must Co-op and Condo Board Members be Residents?

How does a co-op or condo board run smoothly when there are certain board members who are not residents of the building? Typically (especially in new or small buildings), co-op shareholders and condo owners are the primary residents of their units. However, there are also many “hybrid” buildings that continue to have rental units, units that are owned by the developers, or even “investor units”, which are purchased for the sole purpose of profit.[1]

Buildings with rental units commonly occur when a co-op or condo is converted from a rental building and the residents do not choose to purchase their unit. Many of these tenants are protected under New York City’s rent stabilization regulations, who have the right to renew their leases and are “usually allowed to remain under a non-eviction plan”.[2] These regulations were implemented in 1969 due to the rent increases in post-war buildings and continue to protect roughly one million tenants, however, they can be burdensome for co-op and condo boards who do not want non-resident board members.

Every co-op and condo’s by-laws will determine who can sit on the board. By-laws do not generally stipulate a residency requirement, however, if they do it would be clearly written in the building’s by-laws. The Business Corporation Law (BCL) of New York State, which governs co-op boards, also does not allude to a residency requirement under Section 701, but it does give boards the flexibility to “prescribe other qualifications for directors.” [3] Therefore, by law there is nothing stopping non-resident board members unless the co-op or condo decide to implement a narrower provision in their governing documents.

So what are the logistics of having a non-resident board member? Thanks to technology, it is now much easier for non-resident board members to participate in meetings through telecommunications such as FaceTime and Skype. However, the interests of residents and non-residents usually differ and can cause arguments amongst board members. Residents are more invested in the building and the way in which it operates – they have a long-term invested interest. Non-residents however, especially those who purchase units as an investment, are focused on profit, low maintenance costs, and aesthetics (for potential future sales). The combinations of unit ownership will impact how the building spends its money. To mitigate tension, board members should communicate their concerns effectively in meetings and also be open to compromise. If that fails to work, the building’s by-laws can always be adapted to serve the co-op or condo’s best interest.

[1] Sidranksy, A.J. (Nov. 2017) “Non-Resident Board Members.” The Cooperator. Avaliable at: https://cooperator.com/article/non-resident-board-members/full#cut. Accessed on Oct. 27, 2017.

[2] New York City Rent Guidelines Board. (Sept. 23, 2016) “Rent Stabilization FAQ.” Available at: http://www.nycrgb.org/html/resources/faq/rentstab.html#difference. Accessed on Oct. 27, 2017.

[3] New York Business Corporation Law, section 701. Available at: http://codes.findlaw.com/ny/business-corporation-law/bsc-sect-701.html. Accessed on Oct. 27, 2017.

27 Oct 2017
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EU Regulations Impact Wall Street

On October 26, 2017 the Securities and Exchange Commission (SEC) announced that it would permit Wall Street thirty months to comply with new EU regulations regarding research rules.

MiFID, the Markets in Financial Instruments Directive (2004/39/EC), was enforced in the European Union in November 2007. “It is a cornerstone of the EU’s regulation of financial markets seeking to improve the competitiveness of EU financial markets by creating a single market for investment services and activities and to ensure a high degree of harmonised protection for investors in financial instruments.”[1] MiFID II was adopted as a new EU directive on June 12, 2014 to “improve the functioning of financial markets making them more efficient, resilient and transparent.”[2]

MiFID II, to be enforced by January 3, 2018, restructures the research requirements for all market participants, which also impacts U.S. brokers and investors. The SEC devised three “no-action letters” to give U.S. market participants guidelines on how to abide by both EU regulations and U.S. federal securities laws and help firms understand and implement the regulations.[3] The SEC’s plan enables U.S. firm’s with clients in EU states to continue operating in the U.S. and for EU investors to have access to U.S. data and research. The SEC’s guidelines include the following terms and conditions:

“(1) broker-dealers, on a temporary basis, may receive research payments from money managers in hard dollars or from advisory clients’ research payment accounts;

(2) money managers may continue to aggregate orders for mutual funds and other clients; and

(3) money managers may continue to rely on an existing safe harbor when paying broker-dealers for research and brokerage.”

The new regulations will create greater transparency and efficiency as broker-dealers will have to receive research payments separately, instead of being bundled with other services. This will ultimately provide a new standard of research as it will “incentivize brokers to produce better quality research” and it will create fair price competition.[4] However, Quinlan & Associates have reported that these new measures will cut up to $240 million in business for a number of international investment firms,[5] although it will establish a more fair and transparent market on a global scale. Due to the EU regulation’s initial conflict with U.S. securities laws, the SEC has granted a thirty month relief. During this time the SEC will continue to monitor how research on the market is conducted and whether the provisions need to be altered in any way. The SEC is accepting comments from the public on this matter on their webform.[6]

[1] European Securities and Markets Authority. “MiFID (11) and MiFIR.” Available at: https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir. Accessed on Oct. 27, 2017.

[2] Ib.

[3] U.S. Securities and Exchange Commission. Press Release. (Oct. 26, 2017) “SEC announces Measures to Facilitate Cross-Border Implementation of the European Union’s MiFID II’s Research Provisions.” Available at: https://www.sec.gov/news/press-release/2017-200-0. Accessed on Oct. 27, 2017.

[4] Price, M. (Oct. 26, 2017) “U.S. Securities Regulator Grants Wall Street EU Research Rules Reprieve.” Reuters. Available at: http://www.reuters.com/article/us-usa-sec-mifid/u-s-securities-regulator-grants-wall-street-eu-research-rules-reprieve-idUSKBN1CV1SK. Accessed on Oct. 27, 2017.

[5] Ib.

[6] https://www.sec.gov/cgi-bin/ruling-comments

25 Oct 2017
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New York’s Loft Laws

In the 1950s and 60s, mostly artists took advantage of New York’s abundance of commercial industrial and manufacturing buildings and transformed them into working/living spaces. Known for their high ceilings and spacious open floor plans, famous artists such as Andy Warhol moved into these buildings where the rent was low and they had the space to create. The problem? These spaces were not actually residential as they “lacked hot running water, and there was little in the way of local amenities.”[1] So what contributed to the loft boom in New York City and made artists’ lofts in industrial buildings so desirable?

“They were just commercial spaces but what happened in American art was that abstract expressionism came along. Artists such as Jackson Pollock and Willem de Kooning moved art away from easel-sized painting to a grand format, and needed the large spaces, the ceiling height and the light to not only create their works but also to often live and work in the same space – sometimes illegally.”[2]

These artists would rent their space to galleries who attracted affluent buyers who not only ended up purchasing the art, but also the spacious units. Soon the spaces artists loved became unaffordable due to the high demand. However, desirability is not the only factor that put these lofts out of reach for artists – new regulations implemented a series of obstacles for these tenants.

So what are New York’s loft laws and how have they developed? New York’s legislature implemented the New York City Loft Law in 1982, along with a Loft Board who regulate the conversions of industrial buildings to residences.  The Multiple Dwelling Law, Article 7-C § 281[3] set out a new classification, interim multiple dwellings (IMD), which are commercial spaces lacking a certificate of occupancy. IMD’s required at least three families to occupy the building from December 1, 1981 to April 1, 1981 for it to be legally converted into residential spaces. These Loft Laws were later amended in 2010 and 2013 whereby at least three families occupied a commercial space for 12 consecutive months from January 1, 2008 to December 21, 2009. The new amendments also require all lofts to have at least one window that is 400 square feet, looking out towards a street, legal yard or courtyard, and is not in a basement or cellar or in a non-designated industrial business zone. Furthermore, for coverage applications (to convert their lofts into legal residences), the building space cannot be used for “certain activities that are inherently incompatible with residential use.” [4]

New Yorkers have been adamant for Mayor Bill de Blasio to address current loft laws that create more obstacles for loft residences. On June 15, 2017 the Loft Board held it will no longer “register buildings or accept new applications for coverage”[5] which advocates are eager to extend along with eradicating the bar on certain activities.[6] Lofts, which historically have been spaces for artists to live and work, are currently threatened under current regulations. Mayor de Blasio recently explained in a town hall meeting in Brooklyn that his administration will aim to protect “artists and cultural workers” along with providing adequate affordable housing.[7] However, for this to be true, the administration will have to play an active role when discussing and developing regulations to meet residences’ needs.

The next New York City Loft Board meeting will take place on October 26, 2017 at 2:00pm at 280 Broadway, 3rd floor.

[1] Brooker, N. (Sept. 3, 2011) “New York’s long love affair with loft living.” Financial Times. Available at: https://www.ft.com/content/03c469e6-dfad-11e0-8e15-00144feabdc0?mhq5j=e5. Accessed on Oct. 25, 2017.

[2] Ib. per Lida Drummond.

[3] Multiple Dwelling Law, Article 7-C available at: http://www.nyc.gov/html/loft/downloads/pdf/loft_law.pdf.

[4] New York City Loft Board. Available at: http://www.nyc.gov/html/loft/html/home/home.shtml. Accessed on Oct. 25, 2017.

[5] Ib.

[6] The Real Deal. (May 18, 2017) “Loft-law reformers say de Blasio is MIA.” The Real Deal. Available at: https://therealdeal.com/2017/05/18/loft-law-reformers-say-de-blasio-is-mia/. Accessed on Oct. 25, 2017.

[7] The Real Deal. (Oct. 23, 2017). “De Blasio promises “big changes” to state loft law.” The Real Deal. Available at: https://therealdeal.com/2017/10/23/de-blasio-promises-big-changes-to-state-loft-law/. Accessed on Oct. 25, 2017. Per Mayor Bill de Blasio.

20 Oct 2017
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Can Companies Trademark a Color?

“Trattore John Deere” by Dake, licensed under CC Attribution Share Alike 3.0 Unreported.

Trademarks can be an effective measure to protect a business or brand; they provide greater legal protection by granting ownership and exclusive rights to a mark. Traditionally these have been company names, symbols, designs, slogans and phrases, which are typically key for brand marketing. In recent years intellectual property lawyers have applied for trademarks for colors, shapes, sounds and scents, which are unsurprisingly not always successful. However, this week on October 13, 2017, District Judge Thomas B. Russell ruled that Deere & Co.’s symbolic green and yellow colored tractors are in fact a trademark.

Judge Russel held that FIMCO Inc.’s use of similar colors to Deer & Co.’s emblematic color scheme on their pesticide and other agricultural sprayers, infringed and diluted Deere & Co.’s trademark. Deere & Co.’s colors have three registered trademarks with the United States Patent and Trademark Office and has “expended considerable amounts of money and effort building consumer association between the [green and yellow colors] and its [equipment], while FIMCO has marketed its green and yellow less extensively and for a shorter period of time” (Deere & Co. v. FIMCO Inc. No. 5:15-CV-105-TBR, 2017 WL 4582805, (W.D. Ky. Oct. 13, 2017) para. 119). The Court ordered a permanent injunction barring FIMCO from using the colors. Judge Russel explained that “the relatedness of the goods, the similarity of the marks, evidence of actual confusion, the marketing channels used, and the likelihood of expansion factors all weigh in favor of Deere … [b]earing in mind that a successful Lanham Act plaintiff must only show a sufficient potential of confusion” (Ib. para.69).

Deere & Co.’s win is a rare instance. Defending a color as a trademark has been proven to be quiet difficult and even large companies have had trouble pulling it off. On August 23, 2017, the Trademark Trial and Appeal Board ruled that General Mills Inc. could not register a trademark for their yellow Cheerios boxes. Administrative Law Judge Anthony R. Masiello explained that customers “are more likely to view yellow packaging simply as eye-catching ornamentation customarily used for the packaging of breakfast cereals generally” and not specifically identify the yellow packaging with Cheerios.

Judge Masiello distinguished the yellow Cheerio box with T-Mobile’s distinctive magenta coloring. Where General Mills has a myriad of competitors, many who use yellow packing, T-Mobile has less competition and none who use the same color for branding. There is a more likely chance of potential confusion in regards to T-Mobile. AT&T’s use of a dark plum would confuse consumers as the color has been branded with T-Mobile’s services. In contrast, General Mills’ brand is not yellow, only its box of Cheerios, yet many of its competitors also use yellow to package their cereals. Therefore, it seems to depend on whether a company’s identity or product is associated with a color. For Deere & Co. the company is famously known for its green and yellow, and the same for T-Mobile’s bright magenta.

20 Oct 2017
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Co-op and Condo Maintenance Payments

Co-op and condo shareholders and owners are obligated to pay monthly maintenance fees which contribute towards the building’s operating account, reserve, and any petty cash funds. The amount an individual pays depends on various variables such as luxury amenities and the unit’s sale price. For co-ops, the maintenance fee is determined by the percentage of shares the shareholder owns in addition to the building’s real estate tax. Condo owners own the title of their property separately so these fees are not added onto their maintenance fees (often referred to as “common charges”). However, do shareholders and owners have a right to withhold their maintenance fees if a conflict arises?

Disputes between shareholders or owners and the building’s managing board often lead to the threat or action of withholding maintenance payments. However, is this response permitted by law? Essentially, no. Co-ops are organized under and governed by the Business Corporation Law (BCL) of New York State, which requires shareholders to follow the proprietary lease and pay monthly fees. In co-ops, shareholders have a tenant-landlord relationship with the corporation and the proprietary lease gives them the right to live in their apartment. Shareholders are obligated to pay the monthly maintenance fee and if the shareholder fails to make a payment it would be a breach of the proprietary lease. Therefore, the corporation would have the option of terminating the lease, beginning the eviction process, and selling the shareholder’s shares at a fair market value. Once the board deducts the amount owed in maintenance fees, the rest would be returned to the shareholder.  To avoid such drastic measures, if a shareholder is to withhold the maintenance fee they could do so by “deposit[ing] the maintenance money in escrow.

Withholding co-op maintenance fees usually arises when there is a dispute regarding the Warranty of Habitability, which can be enforced against the corporation. Under New York Real Property Law §235-b, whereby the “premises shall not be subjected to any conditions which would be dangerous, hazardous or detrimental to their life, health or safety. When any such condition has been caused by the misconduct of the tenant or lessee … it shall not constitute a breach of such covenants and warranties.” Although the law does not permit withholding the maintenance fee, people often view the move as leverage and “might have a chance of resolving a long-term dispute by escrowing maintenance.” However, it is important for all shareholders to consult their attorney before as they can subsequently be liable to pay for the co-op’s legal costs in addition to any fines or penalties.

Defaulting on common charges in a condo works a little differently because condo owners do not have the same tenant-landlord relationship and therefore the Warranty of Habitability argument cannot be applied. When a condo owner withholds common charges it is a direct breach of the building’s by-laws. If a conflict arises between the owner and the board, it is best to consult an attorney to decide what steps need to be taken in order to comply with the law and avoid paying for the board’s costs and fees.

19 Oct 2017
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The Road to New Development in the South Bronx

All the boroughs of New York have seen rapid development over the past year, and finally the large vacant plot of land owned by the City in the Bronx will be transformed to benefit the borough. L+M Development Partners’ plan to turn the property on the waterfront into a 1,045 unit housing complex featuring the Universal Hip-Hop Museum was approved on Tuesday, October 17, 2017. L+M is partnering with Type A Projects, a certified woman-owned business enterprise, to “transform a long-vacant site into a dynamic mixed-sue development, and active connection to the waterfront and a world-class cultural destination.

The development, called Bronx Point, is located on the Harlem River in the South Bronx next to the Mill Pond Park. The development will not only benefit the community with more housing units, 600 which will be affordable housing for tenants who meet the income threshold, but it will also provide public spaces for the borough. The space will include the long awaited “Universal Hip-Hop Museum, a state-of-the-art movie theater, a food hall incubator for local business, and educational spaces and programming for BronxWorks, CityScience and the Billion Oyster Project [an ecosystem restoration project].”

The project is split up into two phases. Phase I is set to be completed by 2022, which will consist of the affordable housing units and public amenities. Phase II will include the rest of the housing and more public and commercial spaces. The Universal Hip-Hop Museum is the most anticipated development at Bronx Point. The museum sets to preserve the history and culture of hip-hop in its birthplace – the Bronx – and be an attraction for locals and tourists around the globe. The museum was initially going to be set up in the General Post Office, but after plans fell through L+M Development successfully bid on the project as they looked for a “cultural anchor” on their new site.

The area of Bronx Point is vastly changing. The General Post Office is set to undergo redevelopment by new owners Young Woo & Associates who purchased the building in 2014 for $19 million. They will be transforming the Post Office into a large venue for retail and dining, similar to the Chelsea Market. The building’s “13 iconic Depression-era murals” are interior landmarks which the development company will have to incorporate into their new vision. The murals were created by Ben and Bernarda Bryson Shahn in the 1930s and are set to be restored and preserved. The developers and construction company, Hollister Construction Services, have been careful of protecting the building’s historical presence. The area will eventually see enormous growth and therefore the City Council has approved to implement a new school and to do work on current public spaces such as the Franz Siegel Park.

13 Oct 2017
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U.S. Regulators and the Fintech Industry: Unity for Innovation

The U.S. needs a “sandbox for regulators” that would encourage government agencies to explore blockchain and related technological innovations to avoid falling behind forces that are reshaping the markets they govern”.

Jeff Bandman, the owner of the advisory firm Bandman Advisors and former fintech advisor for the CFTC, presented a plan for U.S. regulators to help drive innovation for the fintech industry on October 12, 2017 at the U.S. Securities and Exchange Commission panel. Since the rise of blockchain technology there has been an increasing tension between the fintech industry and regulators; the foundation of the issue being that regulators have not agreed on a way to regulate the industry. Why? Because they both grow at different rates. This is evident through the growth of bitcoin (the most common use for blockchain technology so far). Bitcoin’s value in the past year has jumped from $400 per bitcoin to over $5,600. For the past year there has been a period of adjustment for regulators, but now they must decide how to react to an advancing industry. Blockchain technology has the potential to revolutionize clearing and settlement, in addition to other sectors such as decentralizing healthcare data. The fintech industry is revamping the way companies conduct business, how information is stored and exchanged, and the way in which people invest.

Regulators move at a much slower pace than the technology because they must ask the essential questions to safeguard the market and protect investors’ interests. Bandman poses the important question: “what is the proper role of the regulator?” Bandman explains that, yes regulators need to “ask the tough questions” and ensure “customer protection, market integrity, [and] financial stability”, yet they must also “engage with these new technologies and innovators, to learn about their capabilities, and make themselves accessible to innovators.” Essentially, for blockchain technology and fintech to progress, government agencies, particularly the SEC, need to become familiar with the application of these innovations when drawing up regulations. There needs to be active engagement on both ends.

As cybersecurity breaches for large companies and institutions, including the SEC, become a common occurrence, it is paramount that regulators play an active role with the fintech industry to safeguard sensitive data. Bandman explains that blockchain technology’s advance cryptography and decentralized nature “may make information stored in distributed ledgers safer than traditional methods”. However, this poses a new obstacle for regulators. The decentralized nature of blockchain technology means that regulators need to shift their focus from central actors to activities. For investor related activities this would actually be beneficial for regulators as they would be able to detect fraudulent and illicit activities quicker than by going through an intermediary party such as a broker or bank. Bandman asserts that if regulators integrate blockchain technology, it will give them access to “real-time regulation” on the markets instead of waiting for end of day reports. This in effect will greatly benefit regulators so that they can “see through the windshield instead of the rear-view mirror. They may be able to detect wrongdoing, or predator or deceptive practices, at a much earlier stage.”

The technology is new and continues to change day to day, however, U.S. regulations must reflect the nature of the fintech industry and ensure that new guidelines and laws integrate these innovations.

13 Oct 2017
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Selling Co-ops and Condos Today

Selling your New York co-op or condo is not always a simple task. Buyers have the luxury of being particular and selective due to the influx of apartments available on the market. The competition however, makes the art of selling tedious. The City has seen a trend in relisting apartments at a lower price in hopes of attracting buyers however, high prices are not the only factor getting in the way. The New York Times asked Realtor.com to ask New York real estate agents what the greatest obstacles are when selling a unit.

So what are the six biggest issues sellers come across? In first and second place for being the worst features an apartment can have (unfortunately a very prevalent features in the city) are bad views and a lack of natural light. These usually come hand-in-hand with one another as many buildings have units where the windows are opposite brick walls and therefore do not get natural sunlight into the room. Co-ops and condos that were converted from studios and factories also face this problem as there are typically units with rooms below the ground floor, which unfortunately do not get decent light exposure.  Third, noisy streets. For anyone who lives on 1st Avenue or near lively areas with bars and restaurants, noisy streets are inevitable, but again not everyone wants to live in a quiet neighborhood.

Fourth place goes to walk-up apartments. If a co-op or condo sees this as a prevalent issue in the building, the board could always install an elevator. The building will have to strictly follow city codes (the Department of Buildings requires professionals to inspect the elevator per annum) and ensure adequate contractors and consultants are hired and that there are funds to keep up the maintenance of the elevator. Fifth, construction. Buyers are hesitant to invest in a property when there is active construction sites around the building. Sellers can offset this issue by getting timeline’s for completion. And last but not least, “eccentric design”, but this is a personal preference and buyers can always alter (to an extent) un-aesthetically pleasing designs.

Besides these main factors, units usually linger on the market due to their price. The vast competition for apartments in New York means that buyers are not willing to pay high prices in certain areas anymore. Buildings on the Upper East Side used to be the most desired because they are large, abundant with natural light and in a “good” neighborhood. However, now these buildings are competing with the array of luxury co-ops and condos downtown that are modern, spacious and in trendier neighborhoods.

Despite all these obstacles, the New York Times aptly explains that “most flaws can be mitigated with the right mix of perks.” And these perks are usually slashing the listing price. Douglas Elliman had a prewar co-op on the Upper West side for $1.425 million, but the large windows faced brick walls. The listing price reflected the poor view and was roughly $100,000 below market rate for similar apartments, however this low price attracted buyers. Other apartments have dropped their listing prices significantly more, which gives buyers the benefit of using the rest of their budget to renovate the unit and fix issues such as eccentric designs.

11 Oct 2017
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Designing Office Buildings to Increase Productivity

The New York Times reports that employers and employees in the U.S. spend an average of 45 hours a week at their office (a number which is probably infinitely higher in New York City), 16 of which are unproductive. Studies argue that workers, like athletes, work better in “spurts where we work hard on a few focus activities and then take a brief respite”. The Draugiem Group in a study found that the most productive individuals took a 17 minute break per every 52 minutes of work. However, for many professions, workers do not have the luxury of taking 17 minute breaks throughout the day.

So how can the re-design of office buildings (specifically skyscrapers) improve workers’ productivity throughout the day? As athletes perform better in certain environments, such as higher altitude for increased oxygen levels, so do workers in office buildings. One of the main factors that causes a decrease in workers’ productivity is high levels of carbon dioxide in the environment. A 2015 study exemplified how increased carbon dioxide levels have a direct relationship with lowered cognitive function. “The findings suggest that the indoor environments in which many people work daily could be adversely affecting cognitive function – and that, conversely, improved air quality could greatly increase the cognitive function performance of workers.”

The solution: green office building. The costs of the conversion or design for green office buildings will be offset by the high performance and productivity levels of employees. The 2015 study showed that participants working in green environments (buildings with low volatile organic compounds) had a 61 percent higher cognitive function, and those in green + environments (buildings with “enhanced ventilation”) had double the cognitive function. The increased cognitive functions were specific to:

  • Crisis response (green environments 97 percent; green + 131% percent higher)
  • Strategy (green 183 percent; green + 288 percent)
  • Information usage (green 172 percent; green + 299 percent)

Engineers, architects, and scientists, have conducted studies to improve air quality for space ships to go to mars, however, the same studies have been applied to increasing productivity in the work place as buildings and space ships are both sealed off areas (although obviously to different extents). So how can buildings create better air quality to improve employee productivity? Benjamin Kott, chief-executive of EnergyDeck, explains that installing modern heating, ventilation and air conditioning (HVAC) systems into office spaces will reduce carbon dioxide levels and pump through enhanced and filtered air back into the space. We have previously discussed the different types of technology buildings can implement to create a greener, more energy efficient environments, such as using solar panels and wind turbines to produce energy. Studies verify that using solar power, “high performance heat pumps” and renewable resources are essential, especially when designing the exterior and interior architecture of a building. For future developments, especially in congested cities such as New York, it is paramount that developers use innovative and environmentally sustainable methods not only to reduce our carbon footprint but also create better working environments for workers.

06 Oct 2017
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Preventing Stale Cookies: A Patent?

Can something as simple as a resealable cookie package be protected under U.S. patent law? Unfortunately for Kraft Foods Group, Inc. (“Kraft”) the answer seems to be no. On Wednesday, October 4, 2017, Kraft asked the Federal Circuit to rehear their argument regarding patent infringement of Kraft’s cookie containers. The court has previously held that Kellogg’s use of the resealable cookie packages (used for its popular products such as Chips Ahoy! and Oreos) cannot be infringement since Kraft’s patent is invalid due to its obviousness.

In 2015, U.S. District Judge Matthew F. Kennelly invalidated Kraft Foods Global Brands LLC’s patent for resealable cookie packaging because the “invention” was obvious, and granted Kellogg North America Co. summary judgment. However, Judge Kennelly denied Kellogg’s motion for noninfringement because the company had clearly made changes to its products so that they were not identical to Kraft’s patent (U.S. Patent No.:6,918,532 B2).

The issue was revisited by the Federal Circuit in September 2017 and the court upheld the previous 2015 decision that the patent is invalid due to its obvious nature. The idea of keeping a product sealed for freshness is not new; it has become an industry standard from cookies to wet wipes. Kraft argued that the court failed to look at the big picture and all the evidence before considering objective indicia. Kraft prides itself on its innovative packaging arguing that “it quickly took the market by storm and won the industry’s highest award for packaging innovation.” Judge Jimmie Reyna in his dissent explained that:

For too long, this court has turned a blind eye to what I consider to be a grave concern: the application of a prima facie test that necessarily achieves a legal determination of obviousness prior to fill and fair consideration of evidence of object indicia of non-obviousness.

The court has reiterated and supported Kelloggg’s argument that the resealable cookie packaging is obvious. However, Kraft is insisting the court of appeals to rehear the case and particularly focus on other evidence, such as Kraft’s success in the market due to its packaging. Kraft explains that the objective indicia was an “afterthought” of the court’s opinion, yet the Federal Circuit assured Kraft that the “district court drew its conclusion of obviousness only after, not before, considering objective indicia.” The outcome of Kraft’s third attempt to validate their patent could have important implications for future patent disputes, however, it is unlikely that the court will disagree Kellogg’s obviousness argument due to the growing industry standard of resealable packages.

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