Opinion
Case No. 2:01-CV-0554TC
September 8, 2003
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiffs Gary and Colleen Worthington brought this case to recover damages for alleged infringement of the trademark "Kneaders." They have asserted claims for federal and common law trademark infringement, deceptive trade practices, misrepresentation and false designation of origin under the Lanham Act, and conspiracy.
The Defendants (Robert Michael Anderson and Robert Henry Anderson are the primary Defendants) assert the defenses of unclean hands, acquiescence and waiver.
A bench trial in this matter was held April 14-16, 2003. The court now enters its Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
In 1997, Defendants Robert Michael Anderson and Robert Henry Anderson (the "Andersons") and Plaintiffs Gary and Colleen Worthington (the "Worthingtons") began operating several bakery/cafes under the name "Kneaders." The parties also operated "the Commissary," a facility that sold wholesale baked goods, primarily to the Kneaders bakery/cafes. Michael Anderson was in charge of protecting the Kneaders name for Kneaders, L.C. However, in 1999, Michael Anderson obtained federal trademark registration for "Kneaders" in his own name, not in the name of Kneaders, L.C. Michael Anderson did not disclose his action to the Worthingtons.
Beginning in 1999, the business relationship between the Worthingtons and the Andersons began to deteriorate. By June of that year, the Andersons and the Worthingtons were operating the various Kneaders establishments separately. Finally, they entered into arbitration (as required by their contract) to dissolve the Kneaders business and determine how to divide the assets and liabilities.
In December 2000, the parties participated in an initial arbitration hearing. The Arbitrator issued his award January I, 2000, and held that
[t]he name ["]Kneaders" is an asset of the [Kneaders] LLC. It was Mr. Anderson's duty to protect it for the LLC. It is not practical to split the use of the name. Therefore, Worthingtons will be awarded the use of the name in consideration for the reasonable value of their services referred to in paragraph 2 [of the Award].
(Ex. 11.)
The parties held a second arbitration in March 2001 to clarify various issues. On March 27, 2001, the Arbitrator issued a second award ordering the Andersons to "immediately execute documents relinquishing trade mark rights to the name `Kneaders.'" (Ex. 19.) On June 28, 2001, the Fourth District Court for the State of Utah entered an order confirming both arbitration awards. (Ex. 20.) On that date, Michael Anderson signed a document entitled "Relinquishment of Trademark Rights," relinquishing all right to the trademarks (there were actually two registered trademarks for "Kneaders"). (Ex. 21.) On July 13, 2001, Kneaders L.C. assigned the trademark to the Worthingtons. (Ex. 90.) On August 24, 2001, the United States Patent and Trademark Office issued federal trademark registrations for "Kneaders" to the Worthingtons. (Exs. 91, 92.)
The Arbitration Awards dealt with issues other than the right to the Kneaders trademark. The Arbitrator required the Worthingtons to pay certain loans on which the Andersons were guarantors. He awarded the Worthingtons the Kneaders bakery/cafe in Lindon, Utah. He awarded the Andersons the Commissary, which was located on the same property ("the property") as the Lindon Kneaders bakery/cafe. (Ex. 11.) To accomplish this division, the Arbitrator directed:
If the parties can work out a lease agreement, that would be good. If they cannot agree by March 1, 2001, the parties are to choose a neutral appraiser to value the parcel of land upon which the commissary is situated, along with the minimum space necessary to provide parking. The Andersons are to pay this amount and the Worthingtons are to deed the property by quit claim deed to the Andersons for this price by June 1, 2001. Until this is accomplished the lease will continue at $1000 per month.
(Id.)
Even after two arbitration hearings, the parties were unable to agree on how the assets and liabilities should be divided. Consequently, the Arbitrator held more hearings and issued additional awards. On July 11, 2002, during a third hearing, the Arbitrator concluded that "it is impractical for the parties to try to operate the bakery/commisssary business and the Kneaders-Lindon restaurant cooperatively. Therefore, Anderson[s] will have to sell the bakery/commissary to the Worthingtons." (Ex. 95.) On September 10, 2002, the Arbitrator held a fourth hearing "for the purpose of determining the sale price, offsets, and related issues." (Id.) On September 23, 2002, the Arbitrator issued an award in which he fixed the amount owed by the Worthingtons for the Commissary and directed the Andersons, when and if payment was made by the Worthingtons, to convey the Commissary to the Worthingtons by November 1, 2002. (Id.) Finally, in October 2002, the Arbitrator ordered the Worthingtons to give the Andersons a key to the Commissary/Bakery for a short period of time so the Andersons could remove their equipment. (Ex. 96.)
Some time during the first two months of 2001, the Andersons contacted Mark Greenwood, a civil engineer, to conduct a survey for the purpose of dividing the property. In June 2001, Gary Worthington called Greenwood. He told Greenwood that he was the owner of the property and that Greenwood was to stop all attempts to survey the property.
Finally, on June 25, 2001, Gary Worthington gave the Andersons a quit-claim deed to the property. However, when Mark Greenwood examined the quit-claim deed Mr. Worthington had given to the Andersons, he discovered that the deed purportedly conveyed a parcel of land owned by the city of Orem, not Mr. Worthington, as well as a parcel to the south of the property that Mr. Worthington also did not own. This was not an oversight or a mistake by Mr. Worthington.
The period of time following the January 2000 award by the Arbitrator was financially difficult for the Andersons. Their establishments were losing money, and because the property on which the Commissary was located had not been divided, the Andersons had to pay the Worthingtons $1,000 a month as lease payments. In addition, the Worthingtons had not paid the Andersons' outstanding loan from Wells Fargo, and this hampered the Andersons' ability to obtain financing.
Michael Anderson explained the financial problems of the Andersons:
The difficulties that we were facing is that we were behind on our payments. We were in debt on the payments to Wells Fargo. We had used up our assets as far as paying bills for the different stores. We needed to refinance and restructure the financial picture of that facility, so that we would have the funds necessary to take care of paying off the debtors we were behind, buying new signs, hire new contractors to get these signage things done. There were just a number of things that needed to be done that we could not do without refinancing.
(April 16, 2003 trial transcript at 59.)
The problems the parties were experiencing in complying with the Arbitrator's awards are reflected in the numerous letters between the parties' attorneys. For example, on April 5, 2001, the Worthingtons' attorney, Stephen Quesenberry, wrote a letter to John Ashton, the Andersons' attorney, in which Quesenberry disputed the Andersons' interpretation of the Arbitrator's directions concerning the Worthingtons' obligations. (Ex. Q.) On June 29, 2001, Ashton wrote Quesenberry expressing the Andersons' position regarding what the parties needed to do to comply with the awards. (Ex. DD.) Throughout this time, Quesenberry was communicating to Ashton that the Worthingtons had the sole right to the Kneaders trademark and the Andersons were to stop any use of the mark. (Ex. 42.)
The Andersons continued to use the Kneaders trademark following the Arbitrator's first award. In fact, it was not until the end of June 2001, following the state court's confirmation of the Arbitrator's award, that the Andersons made a concerted effort to discontinue their use of the mark. Their failure to timely comply with the Arbitrator's order was due, in large part, but not entirely, to the Worthingtons' delay in fulfilling financial obligations and cooperating in the division of the property. In June 2001, when Gary Worthington finally executed a quit-claim deed for the property, he knowingly included land he did not own.
The Worthingtons and various of their employees testified that following the January 1, 2000 Award, and while the Andersons continued to use the Kneaders trademark, there were instances of customer confusion between the Andersons' bakery/cafes and their own bakery/cafes. For example, during that period of time, customers came to the Worthingtons' bakery/cafe to redeem "bread cards" and gift certificates that were actually issued by the Andersons. Customers came into the Worthington establishment to pick up food orders that they had placed at the Andersons' stores. From time to time, vendors and creditors of the Andersons contacted the Worthingtons seeking payment for overdue bills owed by the Andersons.
In approximately February 2000, Michael Perm, who was interested in opening a Kneaders cafe, paid Michael Anderson $15,000 for the right to use the Kneaders trademark. Perm, opened a Kneaders cafe that lasted only a short time and closed in January 2001. In the spring of 2001, Perm told Anderson that he was going to open a "Kneaders Express" establishment on 800 North Street in Orem, Utah, near the mouth of Provo Canyon.
Perm was one of the original Defendants in this lawsuit but, before trial, he and the Worthingtons settled their dispute.
In April 2001, Anderson told Perm that he had lost the right to use the Kneaders trademark. He cautioned Perm to be cautious about continuing to use the mark. When Perm opened Kneaders Express, Perm knew that Anderson no longer had the right to use the Kneaders trademark. Some time before Perm was served with a summons in this lawsuit (July 2001), Anderson told him he should stop using the mark.
The Andersons helped Penn get the Kneaders Express started. The Andersons obtained the building permit for the construction of the Kneaders Express store and completed the build-out for the new store. The Andersons worked on the build-out from approximately February 2001 through April 2001. The Andersons also supplied a piece of equipment to Perm's new store and supplied the store with bread until mid-November 2001. The Worthingtons never gave Penn permission to use the Kneaders trademark.
CONCLUSIONS OF LAW
All the Worthingtons' claims, state and federal, rest on their contention that the Andersons infringed the Kneaders trademark by continuing to use it after the Arbitrator's January 11, 2000 award. The Worthingtons seek damages based on a theory of "reasonable royalty for the period January 1, 2000, through September 30, 2001.
Jurisdiction is proper based on the federal claims asserted. Venue is not disputed.
A. Trademark Infringement
To prevail on their claims for statutory and common law trademark infringement, and related claims, the Worthingtons must show that the Andersons' use of the trademark was likely to cause confusion. In determining whether a likelihood of confusion exists, the Tenth Circuit looks at six factors:
(1) the degree of similarity between the marks;
(2) the intent of the alleged infringer;
(3) evidence of actual confusion;
(4) the relation in use and marketing between the goods and services of the competing parties;
(5) the degree of care likely to be exercised by purchasers; and
(6) the strength or weakness of the marks. King of the Mountain Sports, Inc. v. Chrysler Corp., 185 F.3d 1084, 1089-90 (10th Cir. 1999). The above list is not exhaustive and no one factor is determinative. All the factors are interrelated. Id.
Defendants concede that the only two factors seriously in dispute are those of intent and actual confusion.
1. Intent
The question of intent focuses on `"whether defendant had the intent to derive benefit from the reputation or goodwill of plaintiff.'" King of the Mountain, 185 F.3d at 1091 (quoting Jordache Enters., Inc. v. Hogg Wyld. Ltd., 828 F.2d 1482, 1485 (10th Cir. 1987)). Clearly the Andersons' intent when they used the Kneaders trademark was to benefit from the reputation and goodwill of the Kneaders name and to signal to customers their affiliation with Kneaders.
2. Actual Confusion
The evidence offered by the Worthingtons, while not extensive, was sufficient to establish actual confusion, particularly when the other factors listed above are considered. The names of the establishments (Kneaders) were identical, the products (food items with an emphasis on baked goods) were identical, the services (bakeries/cafes) were identical, and the geographical locations (neighboring Utah cities) were close to each other. "Typically, `[t]he greater the similarity between the products and services, the greater the likelihood of confusion.'"King of the Mountain, 185 F.3d at 1092 (quoting Universal Money Ctrs., Inc. v. American Tel. Tel. Co., 22 F.3d 1527, 1532 (10th Cir. 1994)). The Worthingtons and various of their employees testified that following the January 1, 2000 Award, and while the Andersons continued to use the Kneaders trademark, there were instances of customer confusion between the Andersons' bakery/cafes and their own. For example, during that period of time, customers came to the Worthingtons' bakery/cafe to redeem "bread cards" and gift certificates actually issued by the Andersons. Customers came into the Worthington establishment to pick up food orders they had placed at the Andersons' stores. From time to time, vendors and creditors of the Andersons contacted the Worthingtons seeking payment for overdue bills owed by the Andersons.
Contrary to the Andersons' objection to the testimony of the Worthingtons and their employees concerning customers who came into the Worthingtons' Kneaders bakery/cafe to redeem coupons issued by the Andersons' bakery/cafes or to pick up orders placed with the Andersons, this testimony was not hearsay. Rather, this testimony was a necessary prelude for the witnesses to explain their own actions, that is, honoring the Andersons' coupons or filling the Andersons' customers' orders.
In light of the above, the court concludes that the Worthingtons have established actual confusion resulting from the Andersons' use of the Kneaders trademark.
B. The Defense of Unclean Hands
The Andersons assert that the Worthingtons are barred from recovery because of the Worthingtons' inequitable conduct in complying with the Arbitrator's awards.
"There is no doubt that in an appropriate case, unclean hands can constitute a bar to some or all of the relief sought for trademark infringement or unfair competition." 5 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 31.44 (4th ed. 2003). The Supreme Court has made clear that the misconduct need not be criminal conduct, or even conduct that would justify civil legal proceedings, but rather it may be "[a]ny willful act concerning the cause of action which rightfully can be said to transgress equitable standards of conduct. . . ." Precision Instrument Mfg. Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806, 815 (1945).
"The doctrine of unclean hands . . . is clearly applicable if the plaintiff is chargeable with the same inequitable conduct which he charges to the defendant. If it can be established that the plaintiff `set the forces of tumult in motion,' . . . the doctrine [of unclean hands] may be properly invoked." 4 Rudolf Callmann, Callmann Unfair Competition, Trademarks and Monopolies § 23.17 (4th ed. 2003) (internal citations omitted). "One who seeks equity must do equity. This is a doctrine of special importance in an unfair competition case." Federal Folding Wall Corp. v. National Folding Wall Corp., 340 F. Supp. 141, 146 (S.D.N.Y. 1971) (citations omitted) (dismissing complaint because plaintiff corporation was controlled by former employee of defendant, who had breached his employment contract with defendant and induced trademark owner to cancel defendant's license to use the trademark).
The entire history of this case, beginning with the first arbitration award, is marked by the parties' inability to come to an agreement about ending their business relationship. Even after several arbitration hearings and awards, major issues remained and the parties were unwilling to work together to resolve them.
Neither the Worthingtons nor the Andersons complied in good faith with their obligations under the arbitration awards. The Andersons contend, and the evidence supports their contention, that they continued to use the Kneaders trademark because of their deteriorating financial situation. Gary Worthington's failure to fully and timely comply with his obligations under the arbitration awards was a major cause of the Andersons' financial problems. The Andersons could not buy new signs, change their advertising, or generally begin their new business until they owned the property and Gary Worthington paid the Wells Fargo loan.
The court concludes that the Worthingtons are barred by the doctrine of unclean hands from receiving any form of relief in this case. Accordingly, the complaint is DISMISSED.