PA Federal Business Decisions Volume 14, No. 1

Court Rules Verbal Guarantees Not Subject to Statute of Frauds and Finds Consideration Sufficiently Pled in the Form of Intent to Induce Forbearance

In Packaging Engineering, LLC v. Werzalit of America, Inc., C.A. 08-170 (Erie), 2008 U.S. Dist. LEXIS 91609 (W.D. Pa. Nov. 12, 2008) (J. Cohill), defendant filed a motion to dismiss against plaintiff’s claim for breach of contract based upon the Pennsylvania statute of frauds and lack of consideration. The court denied the motion on both grounds.

Plaintiff entered into a contract with Werzalit of America (“Werzalit-America”), a wholly owned subsidiary of defendant Werzalit GmbH + Co. KG (“Werzalit-Germany”) for the tooling and manufacture of wood containers. Plaintiff needed the wood containers to fulfill a long-term contract with one of its customers. After Werzalit-America had begun designing and producing a tool die set to be used to manufacture the wood containers, Werzalit-Germany met with a plaintiff representative to discuss the project. According to plaintiff’s complaint, Werzalit-Germany representatives provided assurances and guarantees that plaintiff’s contract with Werzalit-America would be carried out and that Werzalit-Germany would stand behind and guarantee the performance of Werzalit-America. Approximately seven months later, the CEO of Werzalit-Germany met with plaintiff’s representative again. At this second meeting, Werzalit-Germany promised that it would stand behind and guarantee the performance of Werzalit-America, and if necessary carry out portions of the contract itself.

Shortly after this second meeting, Werzalit-America informed plaintiff that it was abandoning its efforts to complete its contractual obligations and that Werzalit-Germany had instructed Werzalit-America to cease all further efforts to fulfill its contract with plaintiff. Plaintiff then sued for breach of contract.

Werzalit-Germany argued that plaintiff’s claim was barred by the statute of frauds. Pennsylvania’s statute of fraud provides in relevant part that there can be no action against a person to answer for the debt of another unless the agreement upon which such action shall be brought shall be in writing and signed by the promisor. All of the Werzalit-Germany’s promises were verbal. Thus, it contended that these promises were unenforceable.

Plaintiff relied upon the “leading object” or the “main purpose rule” to argue that the statute of frauds did not apply. The “main purpose rule” provides that whenever the main purpose of the promisor is to serve its own interest, as opposed to guaranteeing another’s promise, the statute of fraud does not apply. The court explained that there is no bright line test for applying the main purpose rule. Whether or not it applies can only be determined by analyzing the complex objective manifestations surrounding the making of the promises.

The court held that the facts pled in the complaint supported the theory that the leading object and main purpose of Werzalit-Germany’s oral guarantee was to protect is own pecuniary and business interests. Therefore, plaintiff’s breach of contract claim was not barred by the statute of frauds.

Werzalit-Germany also argued that its promises to guarantee the obligations of Werzalit-America were not supported by consideration, and that under case law, a third party’s alleged guarantee of the debt of another is unenforceable unless supported by consideration. Sufficient consideration exists where the guaranty is a condition precedent to a contracting party’s agreement to enter into the underlying contract. Werzalit-Germany argued that this situation did not apply because its guarantees came after plaintiff entered into its contract with Werzalit-America.

Plaintiff opposed the motion by relying upon section 88 of the Restatement (Second) of Contracts which provides that a promise to be a surety for the performance of a contractual obligation, made to the obligee, is binding if the promisor should reasonably expect the promise to induce action or forbearance of a substantial character on the part of the promisee or a third person, and the promise does induce such action or forbearance.

Accordingly, the court held that plaintiff had adequately alleged Werzalit-Germany intended to induce plaintiff to continue with the project. The complaint alleged that Werzalit-Germany knew plaintiff needed assurances of performance and then proceeded to state through its employees that it would stand behind and guarantee the performance of Werzalit-America. Therefore, the court ruled that the alleged promises were binding upon Werzalit-Germany, and plaintiff had stated a claim for breach of contract.

–Contributed by Kelly A. Williams, Esquire, Houston Harbaugh, Pittsburgh, PA;

Court Treats Separate Agreements Involving Different Parties as One Integrated Contract

In De Lage Landen Financial Services, Inc. v. Barton Nelson, Inc., Civil Action No. 08-0530, 2008 U.S. Dist. LEXIS 91441 (E.D. Pa. Nov. 4, 2008) (J. Baylson), plaintiff De Lage Landen Financial Services (“DLL”) filed suit against defendant Barton Nelson, Inc. (“Nelson”) alleging breach of contract and unjust enrichment. The complaint alleged that DLL and Nelson had entered into a Rental Agreement for the lease of certain phone equipment to be provided to Nelson by a third party. The equipment was to be serviced by third party defendant Capital 4, Inc. (“Capital 4”) under a separate Customer Agreement.

Under the Rental Agreement, the rental payments included the cost of maintenance. Thus, Nelson paid DLL, who then passed through a portion of the payment to Capital 4 for services provided under the Customer Agreement. The Rental Agreement also contained an integration clause. The complaint alleged that in 2007, Capital 4 failed to make payments to Nelson’s communications service providers. DLL then reduced Nelson’s monthly payments to reflect the reduction for Capital 4’s services, but DLL alleged that Nelson failed to make any further monthly payments to DLL. DLL then filed suit.

Nelson responded with an Answer and Counterclaim, alleging that it simultaneously entered into a set of contracts with DLL and Capital 4, including the Rental Agreement and a separate Customer Agreement for the provision of telecommunication equipment and services. Nelson alleged that DLL was liable for breach of contract based on Capital 4’s non-payment to Nelson’s communications services providers. Nelson’s counterclaim also alleged fraud, negligent misrepresentation and fraudulent inducement.

DLL filed a Motion to Dismiss Nelson’s counterclaim, asserting that Nelson’s tort claims were barred by the gist of the action doctrine and that Nelson had failed to assert a breach of contract as between DLL and Nelson. DLL specifically responded that Nelson’s breach of contract allegations were related to the actions of Capital 4 and not DLL.

Nelson responded that while DLL was not a party to the Customer Agreement between Nelson and Capital 4, the parties intended that their separate agreements be considered as one whole contract. The court agreed with Nelson, holding that previous caselaw had held that “when agreements are executed on the same day, address the same business transaction, and reference each other, they ‘should be construed together and interpreted as a whole.’”

Therefore, while the court dismissed Nelson’s tort claims based on the gist of the action doctrine, it refused to dismiss the contract claim, holding that Nelson had sufficiently pleaded that DLL and Capital 4 were engaged in a joint venture, that DLL had accepted payment on behalf of Capital 4, and that the two agreements could be considered as parts of one larger contract. While the court did not dismiss Nelson’s breach of contract counterclaim, it gave Nelson twenty-one days within which to add to or clarify its counterclaim.

Court Agrees That the Doctrines of Unconscionability and De Facto Merger Preclude Dismissal of Plaintiff’s Claims

In Al’s Auto Inc., v. Hollander, Inc., Civil Action No. 08-CV-731, 2008 U.S. Dist. LEXIS 91420 (E.D. Pa. Nov. 4, 2008) (J. Rufe), the court denied defendants’ motion to dismiss, where defendants asserted that plaintiff failed to state a claim for breach of contract and that all claims against two of the defendants should be dismissed because they were not parties to the contract.

Defendant Hollander previously sold plaintiff a software system that it developed to assist plaintiff with information management in plaintiff’s auto parts business. After plaintiff used the original business inventory system for over ten years, Hollander ceased using that system. In its place, Hollander developed, sold and installed a new computer system, which it claimed would perform the same functions as the former system, but in a superior manner. Plaintiff alleged that after the conversion to the new system, it sustained sixteen months of systematic failure because the system did not perform as promised. Specifically, plaintiff alleged that it lost the ability to create inventory reports, was denied access to inventory and customer data necessary for business operations, was unable to use its wireless network and lost employee productivity time. Plaintiff filed a complaint against Hollander, a corporation that acquired Hollander’s stock and the corporation’s subsidiary through which it acquired Hollander’s stock. The complaint included counts for breach of express warranty, breach of warranty of merchantability, breach of warranty of fitness for a particular purpose and various tort claims.

In response to the complaint, Defendants filed a motion to dismiss the breach of warranty counts arguing that plaintiff failed to state a claim because parties are free to contractually limit or modify remedies associated with express warranties and that the warranty clauses in the original contract were valid because they contained such provisions. Plaintiff countered that it specifically stated in its complaint that Hollander knew the extent to which plaintiff relied upon the former system. Therefore, Hollander deprived plaintiff of any meaningful choice in contracting to convert to the new system which accordingly negated the contract clauses as unconscionable.

The court stated that the test of unconscionability requires that one of the parties to the contract must lack a meaningful choice about whether to accept the provision in question and that the unreasonable provision must unreasonably favor the other party to the contract. In order for a clause to be determined unconscionable, the clause is to be considered in the light of the general commercial background and needs of the industry. Plaintiff claimed that both inventory and sales records are important within the field of automotive parts sales. Therefore, plaintiff’s counts pertaining to the breach of warranty of fitness for a particular purpose and warranty of merchantability survived the motion to dismiss because plaintiff specifically alleged defendant’s failure to reveal the possibility that conversion to the new system could result in the loss of inventory and sales records.

Plaintiff’s claim for breach of express warranty also survived the motion to dismiss. The court noted that a remedy fails its essential purpose when it deprives either party of substantial value of the bargain. Therefore, plaintiff’s allegations that Hollander’s attempts to remedy the dysfunctions of the new system for sixteen months denied plaintiff the benefit of the original bargain and the ability to conduct business at the previous level were sufficient to state a claim for relief. Further, plaintiff’s incorporation of the details of its loss of employee productivity, sales, and profits also helped the claim survive the motion to dismiss. However, the court held that defendants may eventually be able to show that they fulfilled their end of the bargain by their effort to keep plaintiff’s losses at a minimum.

Defendants also sought the dismissal of all claims against the corporation that acquired Hollander’s stock and that corporation’s subsidiary arguing that they are only successors in interest to Hollander and were not parties to the contract. A company which purchases assets of another is generally not liable for the debt or liabilities of the purchased company unless one of four exceptions apply: “(1) the purchaser expressly or impliedly agrees to assume the obligation; (2) the transaction amounts to a consolidation or merger; (3) the purchasing company is merely a continuation of the selling corporation; or (4) the transaction was fraudulently entered into to escape liability.”

Plaintiff claimed that SEC filings evidencing the acquisition of Hollander’s stock demonstrated a de factomerger. Four factors are considered when determining whether a de facto merger occurred: (1) whether there was a continuation of management, personnel, physical location, assets and general business operation; (2) a continuity of shareholders resulting from the purchasing corporation paying for the acquired assets with share of its own stock and which will be held by the shareholders of the seller corporation; (3) the seller corporation ceases its ordinary business operations and liquidates and dissolves as soon as legally possible; and (4) the purchasing corporation assumes those obligations of the seller necessary for the uninterrupted normal business operations of the seller. The second factor is often considered the key element in determining a de facto merger because it demonstrates a continuity of ownership. The court found that plaintiff’s use of the SEC filings was sufficient to demonstrate continuity of ownership and a de facto merger because defendant never responded to plaintiff’s requests for documentation suggesting otherwise, nor did defendant argue to the contrary.

Contributed by Elaine J. Wizzard, Esquire, Houston Harbaugh, Pittsburgh, PA;

Attorneys’ Fees Provision in Indemnification Section of Agreement Not Limited to Third-Party Claims

In Waynesborough Country Club of Chester County v. Diedrich Niles Bolton Architects, Inc., Civil Action No. 07-155, 2008 U.S. Dist. LEXIS 93395 (E.D. Pa. Nov. 14, 2008) (J. Pratter), Defendant Diedrich Niles Bolten Architects, Inc., Niles Bolton Associates, Inc., and A. Ray Douglas, Jr. (collectively “DNB”) filed a motion for summary judgment seeking dismissal of Plaintiff Waynesborough Country Club of Chester County (“Waynesborough’s”) claims for attorney’s fees and litigation costs. DNB asserted that the provision in the contract between the parties which authorized recovery of attorney’s fees was contained within the indemnification section and therefore, only applied to third party claims.

Waynesborough had previously entered into an Architectural Services Contract with architects DNB to design a new clubhouse. After construction was completed, the clubhouse developed significant water leaks at various places throughout the interior of the clubhouse. Waynesborough brought an action against DNB alleging breach of contract and professional negligence. The portion of the agreement at issue stated as follows:

[DNB] agrees to indemnify, and hold harmless [Waynesborough] and their respective employees, officers and directors against all loss, claims and expenses including reasonable attorneys’ fees to the extent that they arise out of or are caused by a negligent act, error or omission of [DNB] arising out of the performance or failure to perform professional services under this Agreement.

DNB, relying on Jalapenos, LLC v. GRG General Contractor, Inc., 939 A.2d 925 (Pa. Super. 2007), argued that indemnity clauses such as the one at issue apply only to third-party claims and not to claims between parties to a contract. However, the Court distinguished Jalapenos because the indemnity clause at issue in that case specifically excluded indemnification for losses involving the work itself. Since the Architectural Services Contract did not contain such an exclusion, the Court disregarded Jalapenos.

DNB also cited Exelon Generation Co., LLC v. Tugboat Doris Hamlin, 2008 U.S. Dist. LEXIS 41340 (E.D. Pa. May 27, 2008) to support its arguments. Although Exelon held that a similar indemnity clause to the one at issue did not authorize attorneys’ fees between contracting parties, the court in that case relied upon a non-precedential Third Circuit opinion, Longport Ocean Plaza Condominium, Inc. v. Robert Cato & Associates, Inc., 137 Fed. Appx. 464 (3d Cir. 2005), for that ruling. As noted by the Court, a later opinion by the Third Circuit at SBA Network Services, Inc. v. Telecom Procurement Services, Inc., 250 Fed. Appx. 487, 492 (3d Cir. 2007) (non-precedential) rendered the Longport decision a dubitable source of guidance when the SBA Network court held that an indemnification clause was not limited strictly to third-party claims.

The Court also looked to a previous case from the Eastern District of Pennsylvania, STS Holdings, Inc. v. CDI Corp., 2004 U.S. Dist. LEXIS 30984 (E.D. Pa. March 19, 2004), which held that an indemnification clause similar to the one at issue was not limited to third-party claims. The Court pointed out the statement inSTS Holdings where it was noted that “numerous courts have held that the term ‘indemnification’ simply means ‘compensation’ for loss – whether it is caused by a party to the agreement or by a third party.” In following with the guidelines set forth within SBA Network Services and STS Holdings, the Court found that the indemnification language in the Architectural Services Contract did not limit Waynesborough’s ability to collect attorney’s fees. Accordingly, the Court denied DNB’s motion for summary judgment.

Voluntary Dismissal of Infringement Claim Destroys Jurisdiction for Declaratory Judgment Counterclaim

In Dodge-Regupol, Inc. v. RB Rubber Products, Inc., No. 3:06-CV-0236, 2008 U.S. Dist. LEXIS 91620 (M.D. Pa., Nov. 12, 2008) (J. Jones), plaintiff Dodge-Regupol (“DRI”) filed a complaint against RB Rubber Products, Inc. (“RB”) for infringement of U.S. Patent No. 6,920,723 (“the ‘723 patent”). RB filed counterclaims, seeking,inter alia, a declaration of the invalidity of the ‘723 patent and a declaration of non-infringement. RB later amended its counterclaims to include a declaration of invalidity and unenforceability based on inequitable conduct and misrepresentation to the Patent and Trademark Office.

Following extended discovery and the outcome of a claim construction hearing, DRI sought to have its claim of infringement against RB voluntarily dismissed. Along with the dismissal of its infringement claim, DRI “covenant[ed] not to sue RB [Rubber] in the future for infringement of any claim of the ‘723 patent with respect to any of RB [Rubber]’s currently existing products or activities.”

In addition to dismissal of its claim of infringement, DRI sought dismissal of RB’s counterclaims for declaratory judgment based on lack of subject matter jurisdiction. RB countered that despite the fact that DRI sought to have its infringement claim dismissed, that RB’s counterclaim for declaratory judgment should survive.

RB argued that DRI’s withdrawal of its infringement claims was insufficient to eliminate subject matter jurisdiction because DRI did not state whether dismissal of its claims was with or without prejudice. RB also argued that DRI’s covenant not to sue was insufficient because it covered only RB’s currently existing products and not future products. The court rejected RB’s arguments, holding that it would dismiss DRI’s infringement claim with prejudice and that the covenant not to sue need not cover potential future activities, as long as it covered past and present activities.

The court further held that since it was proper to dismiss DRI’s claim for patent infringement, the court would lack jurisdiction over RB’s counterclaims for declaratory judgment. The court held that despite the fact that the parties had already proceeded through a Markman hearing, it was within the court’s discretion to dismiss DRI’s claims with prejudice and to also dismiss RB’s counterclaim.

RB also argued that even if DRI’s infringement claims were dismissed with prejudice and the covenant not to sue eliminated jurisdiction over its declaratory judgment counterclaims, the court should still retain jurisdiction to address inequitable conduct in evaluating a motion for attorney’s fees. The court agreed with RB on this point, citing the Federal Circuit’s recent decision in Monsanto, and stating that Monsanto had made it clear that a court’s jurisdiction under 35 U.S.C. § 285 to determine whether there was inequitable conduct in the prosecution of the patent continues, even after claims regarding that patent are no longer before the court. Therefore, the court allowed RB leave to file a motion for attorney’s fees under § 285 within fourteen days to be considered by the court.

–Contributed by Stephen S. Photopoulos, Esquire, Houston Harbaugh, Pittsburgh, PA

Self-Serving Affidavits and Inadequate Expert Report Fail to Establish Likelihood of Confusion of Mark

In ComponentOne, L.L.C. v. ComponentArt, Inc., Case No. 02: 05cv1122, 2008 U.S. Dist. LEXIS 87066 (W.D. Pa. Oct. 27, 2008) (J. McVerry) the Court granted summary judgment to Defendants ComponentArt, Inc. (“ComponentArt”), Steve G. Rolufs, Miljan Braticevic, Dusan Braticevic and Cyberakt, Inc. and dismissed the claims filed by Plaintiff ComponentOne, L.L.C. (“ComponentOne”) for various state and federal causes of action related to trademark infringement. In ruling on the motion for summary judgment, the sole issue decided by the Court was whether the Defendant’s use of the mark “ComponentArt” caused a “likelihood of confusion” with Plaintiff’s mark “ComponentOne.”

Both ComponentOne and ComponentArt are software companies that develop, sell and provide support for reusable software tools designed to be integrated into larger software applications. These reusable software tools are often referred to as “components,” “tools” or “controls.” Both companies developed software for use with Microsoft Windows, and the firms considered themselves to be direct competitors.

ComponentOne is a Pennsylvania limited liability company headquartered in Pittsburgh, Pennsylvania. ComponentOne was formed in July 2000 pursuant to the merger of VideoSoft, Inc. and Apex Software Corporation. ComponentOne filed a trademark application with the U.S. Patent and Trademark Office on July 24, 2000 for the mark “COMPONENTONE.” The mark was registered without opposition on January 7, 2003.

ComponentArt is a Canadian corporation based out of Toronto, Ontario, Canada. ComponentArt was originally founded by Defendant Miljan Braticevic in February 2000 under the name Cyberakt, Inc. (“Cyberakt”). Sometime around January 21, 2003, Cyberakt changed its name to ComponentArt and began using the new name on its products. Although Cyberakt’s counsel performed a search of the U.S. trademark register to determine the availability of the mark “ComponentArt,” Cyberakt did not use a trademark search company or obtain an opinion letter from outside counsel regarding the availability of the mark.

To determine whether a likelihood of confusion existed between “ComponentArt” and “ComponentOne,” the Court utilized the ten-factor test known as the “Lapp test” which was first set forth in Interpace Corp v. Lapp, Inc., 721 F.2d 460 (3d Cir. 1983). The Lapp test requires that each of the factors be weighed and balanced, with none of the factors being completely determinative. However, since the firms were in direct competition, the first factor, which compares the similarity of the marks, was given the most significance. The Court evaluated each factor for both “point of sale” confusion, which is the traditional form of confusion alleged in trademark infringement action, as well as for “initial interest confusion,” which exists whenever the confusion creates initial consumer interest in a product even though no actual sale is completed.

Under the first Lapp factor, the Court is required to determine the similarity of the marks. Although both marks contained a common term, “component,” the Court found that it was a generic term because “component” is a common term used to describe the reusable software designed to be integrated into larger software applications that both companies manufacture and sell. Recognizing that generic terms are to be given little weight in a likelihood of confusion analysis, the Court instead focused mainly on the non-common terms of the marks, “one” and “art.” The Court held that these two terms are substantially dissimilar in visual appearance, sound and meaning. Therefore, since the effect of the common term “component” was given minimal weight, the Court found that the first factor favored the Defendants.

The second factor of the Lapp test judges the strength of the mark of the party claiming infringement, which in this case was ComponentOne. The strength of a mark is divided into conceptual strength and commercial strength. To measure conceptual strength, marks are categorized according to their inherent distinctiveness and classified as generic, descriptive, suggestive and arbitrary. The arbitrary category is the strongest classification and given the greatest protection; generic is the weakest. ComponentOne argued that the mark was suggestive and submitted an affidavit of its president, Dr. Sun Wong, in support of this contention. Dr. Wong’s affidavit stated that the firm chose the mark after the merger of the two companies forming ComponentOne to signify one source for their products. However, the Court stated that a party’s intent for choosing a mark is irrelevant to classify the strength of a mark. Rather, the controlling inquiry is the impact of the mark on the minds of consumers. The Court found that the mark “ComponentOne” communicates “messages of primacy, preeminence, or perhaps haughtiness to consumers.” Because the Third Circuit has held that self-laudatory portions of a mark are generally held to be weak, the Court found that ComponentOne’s mark should be classified as descriptive.

Although ComponentOne’s mark did not have conceptual strength, ComponentOne could obtain an overall strength if it could demonstrate that the mark had obtained secondary meaning and therefore had commercial strength. ComponentOne had highlighted its advertising and sales figures in an attempt to show that its mark had obtained secondary meaning within the parties’ market. The Court noted, however, that although ComponentOne’s advertising and sales figures showed that ComponentOne hoped that the mark would acquire secondary meaning, the figures did not show that it had actually achieved that goal. Due to the lack of any direct evidence demonstrating consumer recognition of ComponentOne’s mark, the Court found that the mark did not have commercial strength. Therefore, the Court found in Defendants’ favor with regard to the second Lapp factor.

Under the third Lapp factor, the price of goods and other factors indicative of the care and attention expected of consumers when making a purchase, the Court looked not only at the price of the parties’ products but also the level of sophistication of the purchasers of the products. The Court found that the parties’ products, which sold at a range between $99 and $1,799, were more expensive than other products that the Third Circuit has found for sophisticated buyers. In addition, the Court found that buyers of the parties’ products were careful and conducted due diligence before making a purchase. In so finding, the Court dismissed the contrary assertions contained in Dr. Wong’s affidavit as bald, self-serving contentions. Therefore, the Court determined that the third Lapp factor favored Defendants.

The Court evaluated the fourth and sixth Lapp factors together because they “significantly overlap.” The fourth Lapp factor analyzes the length of time that a mark is used without confusion; the sixth Lapp factor considers evidence of actual confusion. ComponentOne attempted to demonstrate actual confusion by submitting affidavits of employees and former employees which described interactions with and contained statements allegedly made by individuals at trade shows and conferences. ComponentOne also submitted emails from potential customers referencing ComponentArt that were mistakenly sent to ComponentOne. The Court refused to consider the statements contained within the affidavits that constituted inadmissible hearsay because “evidence proffered to defeat a motion for summary judgment must be capable for admission at trial.” The Court considered the remaining evidence of confusion in conjunction with the number of customer inquiries that ComponentOne received since the date that Cyberakt changed its name to ComponentArt and determined that “twenty-seven confusion events in more than 490,000 interactions with third parties, customers and otherwise . . . is a de minimis showing of confusion.” The Court also found that the evidence submitted by ComponentOne was further weakened because the misdirected e-mails were often a result of inadvertent mistakes rather than confusion between the parties’ marks, and because the remaining evidence was mostly presented within affidavits by current and former employees of ComponentOne, thus making them inherently suspect.

ComponentOne also submitted an expert report in support of actual confusion, which utilized a market research survey to determine the extent of likely confusion in the marketplace. The Court held that a survey can provide circumstantial evidence of actual confusion, “but only to the extent that the survey replicates the real world setting in which instance of actual confusion can occur.” ComponentOne’s expert asked survey participants to identify the companies after showing them various images containing the names of the companies. According to the Court, the stimuli used by the expert were nothing similar to the conditions experienced by purchasers in the parties’ marketplace. Since the survey failed to replicate market conditions, the Court did not afford it any weight. Accordingly, the Court found for the Defendants with respect to the fourth and sixth Lapp factors.

The Court did find that the fifth Lapp factor, the intent of the Defendants in adopting the “ComponentArt” mark, weighed in favor of ComponentOne. ComponentArt had changed its naming conventions so that is used the identical conventions as ComponentOne. In viewing the facts most favorably for ComponentOne, the Court found that a reasonable juror could determine that Defendants acted recklessly or carelessly with respect to potential trademark infringement when they selected the ComponentArt mark. However, the Court also found that the fifth Lapp factor was not helpful in determining a likelihood of confusion in this case, because even if the Defendants acted with the most improper motive, “[a]n intent to willfully infringe cannot create confusion when confusion does not otherwise exist.”

The remaining Lapp factors were determined to be irrelevant to the analysis and therefore, were not considered by the Court. The seventh, ninth and tenth Lapp factors (whether the goods are marketed through the same channels of trade and advertised through the same media, the relationship of the goods in the minds of consumers, and other facts suggesting that the consuming public might expect the prior owner to manufacture both products) were not considered, because the Third Circuit has held that they do not apply in cases that involve directly competing goods. The eighth factor, the extent to which the targets of the parties’ sales efforts are the same, was also not apposite because, as the Court stated, “[i]f a party is a direct competitor of another party the target of each parties’ sales efforts are the same, ipso facto.”

In summation, the Court found that ComponentOne failed to demonstrate a genuine issue of material fact as to the likelihood of confusion between the parties’ marks. The Court therefore granted summary judgment on the trademark claims asserted by ComponentOne.

No Insurance Coverage For Claims Under FACTA

In a case of first impression, the United States District Court for the Western District of Pennsylvania issued a Memorandum Opinion on September 29, 2008, holding that alleged violations of the Fair and Accurate Credit Transactions Act (“FACTA”) are not within the coverage of commercial general liability policies issued by Travelers. Whole Enchilada, Inc. v. Travelers Property Cas. Co. of Am., No. 07-1533, 2008 U.S. Dist. LEXIS 77186 (W.D. Pa. Sept. 29, 2008) (J. Fischer). Whole Enchilada, a group of restaurants, was sued in a class action for failing to truncate the last five digits and/or the expiration date of a customer’s credit card on the receipt provided to the customer at the point of sale as required under FACTA, 15 U.S.C. § 1681. Whole Enchilada demanded a defense and indemnification from Travelers, which had issued two commercial general liability policies. Travelers declined coverage.

Whole Enchilada sought coverage under the personal injury or advertising injury liability offense of an “oral, written or electronic publication of material that appropriates a person’s likeness, unreasonably places a person in a false light or gives unreasonable publicity to a person’s private life.” This definition was contained in Travelers’ WEB XTEND Liability Endorsement.

Whole Enchilada first argued that the WEB XTEND Liability Endorsement did not effectively negate the standard provision in the base policy which defined “personal and advertising injury” to mean injury arising out of “oral or written publication, in any manner, of material that violates a person’s right of privacy.” Whole Enchilada argued that the conflicting provisions should be interpreted in accordance with the policyholder’s reasonable expectations resulting in the base policy language being enforced. The Court disagreed, finding that the clear and unambiguous provisions of the endorsement expressly replaced the base coverage language. The Court also rejected Whole Enchilada’s attempt to invoke the reasonable expectations doctrine, noting that alleged reasonable expectations for coverage cannot overcome clear and unambiguous policy language.

Whole Enchilada next argued that the printing of the information prohibited under FACTA on a receipt handed to the customer at the point of sale constituted a “publication” under the policy. Travelers argued that the term “publication” could not mean handing a receipt to a single person, nor handing it to someone who already knew the information printed on it. Interpreting words of the policy in their “natural, plain and ordinary sense” as required under Pennsylvania law, the Court noted that the dictionary defines “publication” as “to generally make known” or “to disseminate to the public.” As such, the Court found that the underlying complaint alleged only that the information printed on the receipt was handed to a class member at the point of sale and did not allege that the cardholder’s information was in any way made generally known, announced publicly, disseminated to the public, or released for distribution. Thus, the Court found there was no coverage for the FACTA claims under the “publication of material that appropriates a person’s likeness . . . or gives a reasonable publicity to a person’s private life” offense.

Although it decided there was no publication, the Court went further and addressed several other arguments raised by Whole Enchilada. Whole Enchilada contended that the credit card number and expiration date constitute private financial information that is part of a person’s “identity” and therefore is an interest in the exclusive use of a person’s own “likeness.” Thus, Whole Enchilada argued that such information “appropriates a person’s likeness.” The Court was unimpressed, finding that the argument not only stretched the provision beyond the plain language of the policy, but also stretched beyond any reasonable expectation of coverage. Following Pennsylvania law, the Court held that appropriation of a person’s likeness is the use of a person’s actual physical likeness to the benefit of the defendant without permission. The FACTA claim did not allege that Whole Enchilada appropriated the semblance or likeness of class members.

The Court also rejected the notion that printing the customer’s credit card number or expiration date on their receipt gave “unreasonable publicity to a person’s private life.” “Publicity” in that clause required the matter to be made public “by communicating it to the public at large, or to so many persons that the matter must be regarded as substantially certain to become public knowledge.” The underlying complaint did not allege that Whole Enchilada displayed plaintiffs’ credit card information to the public or took any act designed to disseminate that information to the public at large.

Finally, the Court held that the statutory damages of not less than $100.00 and not more than $1,000.00 for a willful violation sought by the underlying plaintiffs under 15 U.S.C. § 1681n did not constitute “damages” under the Travelers policies. The Court found that the term “damages” in the policy is a technical term involving awards of compensation for legal injuries sustained. The Court distinguished “statutory” damages from the legal meaning of “damages,” which are damages provided under the common law. The Court held that in order for coverage to exist under the policy, the underlying complaint must allege that the damages sought are compensation for injury. Since the complaint only alleged potential harm, and therefore no damage, the statutory damage was not within the coverage of the policy. Additionally, the Court followed well-settled Pennsylvania law that coverage for punitive damages is against public policy, and thus would not fall within the coverage of the policy.

Having found no duty to defend, the Court held that there could not be any duty to indemnify as a matter of law.

–Contributed by Alan S. Miller, Esquire, Houston Harbaugh, Pittsburgh, PA;

Patent Owner Had Standing to Bring Patent Infringement Action as no Other Co-owners Existed

In In re: VTran Media Technologies, LLC v. Atlantic Broadband Finance, LLC, Civil Action No. 08-3050, 2008 U.S. Dist. LEXIS 91440 (E.D. Pa. Nov. 3, 2008) (J. Kauffman), the district court denied defendant’s motion to dismiss for lack of subject matter jurisdiction, which was based upon the theory that plaintiff lacked standing to bring a patent infringement action because not all of the patents’ owners were plaintiffs to the suit. Even though the facts in this case reveal that the ownership interest of the plaintiff’s two patents at issue were transferred between several parties before they were finally assigned to plaintiff, the court ultimately found that the plaintiff presented sufficient evidence to show that there were no gaps in the transfer of title from the original co-owners of the patents to the plaintiff. Therefore, plaintiff was the sole owner of the patents and had standing to bring the infringement action.

Almost twenty years prior to plaintiff’s ownership of the two patents in dispute, two individuals, Mr. Monslow and Mr. Dickey developed two patents with identical titles relating to a television broadcast system for viewers to select certain programs at specific times. The inventors both entered into a patent ownership agreement to divide the proceeds derived from the sale of the patents, so that Monslow would receive 85 percent of the proceeds while Dickey received the remaining 15 percent. Dickey died intestate in 1999 and his ownership interest in the patents passed to his wife. In 2005, Monslow assigned 15 percent of his ownership interest in the patents to his friend, Mr. Armatas, which was recorded with the patent office. Therefore, after the assignment, Monslow retained a 70% ownership interest and Dickey retained a 15% interest. The following year, Monslow, Dickey’s wife and Armatas executed an assignment agreement to Concert Media Technology Corporation (“Concert”), which was also recorded with the patent office. Finally, in 2007, Concert assigned “all right, title and interest” in the patents to the plaintiff, and the assignment was recorded with the patent office. After plaintiff brought the patent infringement action, defendant filed the motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction asserting that not all of the patents’ owners were plaintiffs to the action because there were gaps in the chain of title from Monslow, Ms. Dickey and Armatas (the “Original Owners”) to the plaintiff. To support its claims that there was no subject matter jurisdiction, defendant attacked the factual allegations of the complaint.

The court stated that to establish standing in a patent infringement suit, all of the co-owners of the patent must be joined as plaintiffs. Barring two exceptions, which were not applicable in this case, the court must dismiss an action if all of the co-owners are not joined to the action. In addition to reviewing the pleadings to determine whether defendant’s 12(b)(1) motion for lack of subject matter should be granted, the court considered affidavits and testimony outside the pleadings because defendant factually challenged the complaint.

Defendant asserted three arguments alleging plaintiff’s failure to obtain exclusive ownership of the patents, thereby requiring dismissal. Defendant first argued that Monslow testified at a divorce proceeding that he assigned his interest in the patents to an intellectual property search firm prior to the assignment to Concert, which precluded Concert’s ability to assign the patents to plaintiff. Even though the court found that Monslow, in fact, did testify in his divorce proceeding that he assigned the patents to the search firm, the court rejected defendant’s argument because Monslow’s attorney testified that Concert threatened to rescind the sale if Monslow did not retrieve the patents, and Concert never did rescind the sale. Further, the assignment to the search firm was conditional upon the search firm’s ability and willingness to enforce the patents. When the search firm determined that it could not pursue licensing and enforce the patents, the conditional interest reverted back to the Original Owners, which was formalized in a written assignment. The court also determined that the written assignment confirmed that the search firm never assigned or licensed the patents during its brief ownership of the patents since the language of the assignment stated that the search firm transferred the “entire right, title and interest in and to the patents” and therefore, assigned the entirety of the patents to the Original Owners. Accordingly, the court held that the affidavits and written assignment documenting the assignment and reversion to the Original Owners was sufficient to satisfy plaintiff’s burden of proving subject matter jurisdiction by a preponderance of the evidence.

Defendant also argued that the manner in which Dickey’s ownership interests in the patents were transferred to his wife was not sufficiently recorded and was therefore unclear. On the contrary, the court found that the transfer to Ms. Dickey was sufficient based upon Ms. Dickey’s affidavit stating her husband did not license, sell, transfer, assign, or encumber or convey his portion of his right, title or interest in the patents. In addition, even though Mr. Dickey died intestate with three adult children, his three children all executed disclaimers releasing any and all interest in Mr. Dickey’s property and resulting in Ms. Dickey as the sole remaining heir. Further, even though both the decree of descent and the children’s waivers only referenced one patent instead of both, the court held that the transfer to Ms. Dickey was clear as the decree of descent contained a residual clause passing all other property to Ms. Dickey, and the waivers were valid under state law. Further, Monslow’s affidavit also stated that Ms. Dickey became the sole heir to her husband’s interests in the patents and that Mr. Dickey never sought Monslow’s approval to transfer ownership of his interest in the patents as required in their ownership agreement.

Finally, defendant argued that plaintiff did not establish how an ownership interest was transferred from Monslow’s father to the Original Owners in order to assign the patents to Concert. The court rejected this argument and instead accepted plaintiff’s attached declaration from Monslow’s father stating that he only received an eighteen percent economical interest in the proceeds from the patents because he invested money toward the fees and/or expenses related to the patents and that he never expected to have a direct ownership interest in the patents. A former interest in income from a patent does not give standing to bring suit as a patent owner. Although the court ultimately denied the defendant’s motion to dismiss, it did however, grant the defendant the opportunity to conduct limited discovery to examine whether there were gaps in an ownership chain of patents involved in the subject of the lawsuit.

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