District of Connecticut Decision Highlights Confluence of Antitrust, IP Law

Attorneys and business people working remotely can learn some antitrust and intellectual property law from those little building blocks keeping some children occupied during stay-at-home orders.

In October of 2018, Hong Kong-based company Zuru launched a line of construction toy products, MAX Bricks, worldwide, including in the United States.¹ Lego issued cease-and-desist letters to Zuru in November and December of 2018. When Zuru continued to sell the products, Lego filed suit in the District Court of Connecticut on December 13, 2018, alleging infringement of various design patents, copyrights and trademarks,² and obtained an injunction a day later.³

Zuru appealed the injunction, which was partially later overturned by the U.S. Court of Appeals for the Federal Circuit,⁴ and in July of 2019 additionally filed a 15-count counterclaim alleging, among other things, that Lego had abused its intellectual property rights obtained through design patents, copyrights and trademarks in violation of § 2 of the Sherman Act.⁵

Count I of the counterclaim included a Walker Process claim alleging that Lego had fraudulently obtained the various asserted copyrights, trademarks and design patents and knowingly asserted the allegedly unenforceable intellectual property protections against competitors in violation of § 2 of the Sherman Act.⁶ With regard to the latter, Zuru specifically alleged Lego had achieved monopoly power in the construction toy market by improperly asserting the above putative intellectual property rights against competitors. Lego moved to dismiss Count I on three grounds: (1) failure to allege a relevant market, (2) failure to allege injury and (3) failure to plead fraud with particularity.⁷ While the District Court largely dismissed the first two grounds brought by Lego,⁸ the Court found the third ground asserted by Lego persuasive.

Successful Walker Process claims require a showing that the defendant obtained intellectual property rights “by knowing and willful fraud” and “maintained and enforced” the rights “with knowledge of the fraudulent procurement” along with the other elements required to establish a Sherman Act claim.⁹

Trademarks are registered marks that can be used to distinguish one’s goods or services from another. The Lanham Act governs the attainment and enforcement of trademarks, including establishing the guidelines under which a trademark can be issued. The Lanham Act prevents registration of a mark that “comprises any matter that, as a whole, is functional.”¹⁰ Count I alleged that the asserted trademarks were, in fact, functional, and that Lego misrepresented the functional elements to the U.S. Patent and Trademark Office (USPTO) during prosecution of the asserted marks, either via withholding of information or outright denial.¹¹ Zuru further asserted that the marks were functional “in the sense that they inform the consumer of the product inside” and that multiple elements of some marks were functional as toys.¹²

Notably, one of Zuru’s asserted functionalities is exactly the purpose a trademark is meant to fulfill — informing consumers of the product — and is therefore not grounds for committing fraud on the USPTO. The court also noted that the mere fact that the product for which protection is sought includes functional elements does not preclude protection.¹³ Because the functionality that Zuru asserted did not have any material effect on the protection afforded to the marks at issue, Lego could not have fraudulently obtained the marks, causing the Walker Process claim toward the asserted trademarks to fail.

Copyrights serve to protect creative works, which may include any of literary works; musical works; dramatic works; pantomimes and choreographic works; pictorial, graphic, and sculptural works; motion pictures and other audiovisual works; sound recordings; and architectural works.¹⁴ Copyrights protect the expression of the creative works in and of itself, without protecting any of the underlying ideas or functionalities of the creative work. Count I alleged that Lego mischaracterized the copyrighted figurines at-issue as sculptures, rather than “properly” characterizing the figurines as construction toys “with many functional elements,” which Zuru alleged “may not have been accepted by the Copyright Office as copyrightable….”¹⁵

The Court acknowledged that, when submitting the specimen for copyright, Lego “show[ed] the toy sculptures in the context in which they are to be used – including a reference in packaging….”¹⁶ Additionally, like trademarks, the mere existence of functional aspects of the copyrighted material does not render the material uncopyrightable, and, in any event, the Court concluded that the failure of Lego to disclose these functional aspects was not material to the validity of the intellectual property rights issued, and therefore did not rise to the level of fraud.¹⁷ Because Zuru failed to present any sufficient allegation of fraud, the Walker Process claim toward the asserted copyrights failed.

Design patents protect the ornamental design of an article of manufacture.¹⁸ By design, these patents are not intended to protect the function of the article of manufacture, but only the ornamental appearance. The patents include only one claim, accompanied by detailed figures which in themselves dictate the protected ornamentation.¹⁹ Ironically, Zuru did not attack the Lego design patents on grounds of functionality, but instead alleged that Lego failed to submit, and actively concealed, prior art to the USPTO during prosecution of the design patents-at-issue, specifically, their own products allegedly sold more than one year prior to filing of the applications.²⁰ The Court quickly dismissed Zuru’s allegations, stating that once the counterclaim was “[s]tripped of its conclusory allegations,” the only remaining allegation was that Lego withheld disclosure of prior art — which “‘will not suffice’ to support a finding of fraud.”²¹

Count I alleging violation of the Sherman Act was dismissed due to the Court’s finding that fraudulent attainment of the various intellectual property protections was not sufficiently alleged, and the Court used the failure of the Walker Process claims to dismiss Counts II and XV of the counterclaim, Intentional Interference with Prospective Economic Advantage and Violation of the Connecticut Unfair Trade Practices Act, respectively.²²