A “SAD” New Reality in Trademark Legislation

Last year, I took an incredibly exciting class in the realm of intellectual property, called the “IP Colloquium.” It’s a class where Loyola University Chicago School of Law and Chicago-Kent School of Law professors come together to bring in world-renowned speakers from across the country to teach us, students, about issues in the IP world. These issues range from every topic in IP; including trade secrets, copyright, patents, and trademarks. One specific speaker piqued my interest – his name is Eric Goldman. He is a law professor at Santa Clara University School of Law and focuses his research and teachings on IP, Internet Law, and Advertising Law.

Professor Goldman gave us a first look at his article “A SAD New Category of Abusive Intellectual Property Litigation,” which shed light on a newly discovered IP problem mainly happening in my own backyard – the U.S. District Court for the Northern District of Illinois, the federal trial court in Chicago. The paper, along with his presentation, explained how famous brands and performers are overwhelming the court by suing hundreds of defendants for trademark infringement. Before we get into what the “SAD Scheme” actually is, let’s first go through what trademarks are, how a party infringes a trademark, and where the “SAD” name came from.

What is a Trademark and How Does One Infringe?

Trademarks are a type of intellectual property. A valid trademark is a symbol, word, or phrase that is used in commerce on goods or services to identify and distinguish the source. The source is usually the entity, company, or person producing the goods or services. Picture the Apple logo on your iPhone or laptop. The apple-shaped image with the bite is a trademark! Even if there are no words around it, you know immediately that it’s an Apple product! Even celebrities can have trademarks. The “Single Ladies” singer has a trademark in her own name – Beyonce!

Courtesy of Ana Makingon

To infringe on a trademark, a party uses someone else’s trademark without authorization in a manner that is likely to cause confusion as to the source of the goods and/or services. For example, if someone prints Beyonce on a bunch of t-shirts and sells them without her consent, that could be trademark infringement. Consumers (like you and me) would be likely to assume Beyonce was behind the production and sale of these shirts when she was not, causing confusion. Courts look at numerous factors to decide confusion, but for the purposes of this blog, keep this basic understanding in mind. If you would like to read more on likelihood of confusion factors, please look through some of my previous blogs here.

Background on Counterfeiting Issues Which Led to the Rise of “The SAD Scheme”

The last step before the “Scheme,” is understanding who the defendants in these cases are and why the cases arose. Online marketplaces (like Etsy, Amazon, etc.) have become notorious for selling counterfeit, allegedly infringing products. According to one Library of Congress, it is estimated that illegal domestic and international sales of counterfeits are between $1.7 to $4.5 trillion per year. This is why a solution had to be created to combat these issues for valid trademark owners.

The plaintiffs (trademark owners) struggle to obtain relief from these foreign counterfeiters. In a normal case (i.e. not Schedule A), a plaintiff files suit in the court system they choose, and must identify the defendants on the cover page and in the body of the complaint – which is the norm in the US. Schedule A cases are a bit different, as we get into below. Unfortunately, over the last decade counterfeiting cases have skyrocketed, and celebrities and organizations like Harry Styles and the NBA have filed thousands of lawsuits in the Northern District of Illinois to stop these alleged counterfeiters. Which is why the SAD Scheme was created.

To help combat the issue of unknown defendants selling allegedly infringing items in online marketplaces, Courts have allowed for a Schedule A filing. Professor Goldman creatively created the term “SAD Scheme.” “SAD” stands for “Schedule A Defendants” aka “SAD.” Clever right? Schedule A cases are named for the fact that defendants are identified in a “Schedule A,” or an attached form, rather than on the cover page or in the body of a complaint. The complaints, often filed under seal (or not available to the public) prevent defendants from learning about the actual complaint, instead stating a broad basis that many, sometimes hundreds, of defendants are infringing on the trademark at issue.

The ”SAD Scheme” – Finally

It is finally time to discuss the notorious “SAD Scheme” we’ve been talking so much about. Every one of these “schemes” typically follows the same step-by-step framework. First, a plaintiff who owns a valid trademark (doesn’t have to be registered for it to be a valid trademark) will sue hundreds of counterfeiters as undisclosed defendants listened in a “Schedule A” form. The plaintiff then files a Schedule A form (like we discussed above) identifying the defendants, separate from the actual complaint. They will then ask the judge to seal the list, so it’s not public information.

After the identities are sealed, the trademark owner requests an “ex parte TRO.” TRO stands for “Temporary Restraining Order” and it is a short-time injunction (or relief) entered by the court that prevents or requires action until the court can fully hear the issue and decide. An ex parte TRO means that one party files the motion and it can be granted the opposing party’s consent. In SAD suits, ex parte TROs are filed to stop alleged counterfeiters from selling products through online marketplaces.

So now that the TRO is granted, marketplaces are effectively shut down regardless of whether they are actually infringing. Think of places like Amazon, where thousands of different shops sell similar products. It’s almost impossible to track some of these shops down. Whatever cash these online marketplaces have is also locked in the online marketplace, along with the prevention of any sales by the alleged infringer.

Courtesy of Canonicalized

Typically, once these online shops get shut down, the alleged infringers/owners of the shops are put on “notice” (i.e. heads up) that they’re being sued. Remember how we discussed how the defendants’ lists are sealed? That shop owner basically figures it out once all his money is frozen and sales can’t be made anymore!

After the alleged infringer realizes this, the trademark owner will offer a “convenient settlement,” to drop the case and allow the alleged infringer to continue business. Typically, the more desperate the alleged infringer is to get rid of the suit, the faster they will agree to settle and not utilize the infringing mark again. A convenient settlement just means that the party bringing the lawsuit drops in at the right time to offer the defendants an easy way out. As you can imagine, this becomes litigation blackmail to an extent. Those defendants that pay then get dropped from the lawsuit, and can continue on their merry way (minus the infringing products).

Sometimes, the trademark owner chooses to drop defendants who don’t agree to pay a settlement or look like they’re fighting back in the suit. This ultimately allows the trademark owner to strategically decide who stays in the case, and who doesn’t (depending on how strong the trademark owner believes its case to be). By doing so, they can control which information reaches the judge, and create the illusion of a perfect case – after it was basically doctored by the trademark owner.

Finally, after all the settlements and dismissals, the remaining alleged infringers typically never even make it to court in the first place. It can be for a variety of reasons like the amount of money at stake isn’t worth it, they can’t afford to, the alleged infringer was never given proper notice about the case, the infringers live outside the U.S… The list is endless. The final nail in the coffin occurs when the trademark owner seeks a default judgment, which is granted if there are no-show defendants – for the reasons mentioned above. Default judgments are a plaintiff’s jackpot and a defendant’s worst nightmare. Basically, a plaintiff makes a required showing in court, and the defendant in his response doesn’t respond in a timely manner. The court then has no other choice but to rule in the plaintiff’s favor, and the defendant is stuck with that judgment. Clearly, it’s a problem if said defendants didn’t know they were being sued in the first place, and then find out they have default judgments against them!

This creates the “SAD Scheme” we’ve mentioned so many times. A system that overbroadly protects trademark owners and doesn’t give all alleged infringers any opportunity to defend themselves. This year, about 88% of the trademark cases filed in the Northern District of Illinois have been Schedule A cases. About a decade ago, Schedule A cases only made up about 25% of the docket. With an almost 900% increase from 2013, it’s clear that trademark owners have been taking advantage of this patterned scheme. Hopefully, judges will soon come up with solutions to prevent this from continuing to occur.

Alexandra Angyalosy
Associate Blogger
Loyola University Chicago School of Law, JD ‘24