PA Federal Business Decisions Volume 12, No. 2

Business Litigation Update

Pennsylvania Federal Business Decisions
Bridget M. Gillespie and Henry M. Sneath, Business Decisions Editors [Originally published in the Summer 2007 edition of the Pennsylvania Bar Association's Civil Litigation Update]

The Lanham Act Permits Awards of Attorneys' Fees for Unfair Competition in Exceptional Circumstances Only

In Green v. Fornario, 2007 U.S. App. LEXIS 10873 (May 8, 2007), the Third Circuit was asked to decide whether or not the district court erred in failing to award plaintiff attorneys' fees under the Lanham Act after plaintiff prevailed on his unfair competition claims. The court affirmed the district court.

Plaintiff was a former pitcher for the Philadelphia Phillies from 1993 to 1996. After he retired from baseball he remained in the Philadelphia area and became a pitching coach for a local, nationally acclaimed private school, Germantown Academy. He also regularly appeared on regional television and radio baseball programs and also participated in a variety of Phillies-related charitable events. The Court concluded that he could have retained some name recognition in the Philadelphia area.

Defendant started an entertainment promotion company called Tyler Green Sports, which made money by coming up with event ideas, putting them together and selling them to venues. Defendant denied that he named the company after plaintiff, Tyler Green. He claimed that he originally used the name Tyler Green Sports for a handicapping business he ran for one day. He claimed that he chose to incorporate the color green into the name because it was a reference to money and that he chose Tyler because he was a fan of the band Aerosmith and its lead singer, Stephen Tyler. He denied ever hearing of plaintiff. Plaintiff also claims he performed a trademark search which revealed no trademark. Plaintiff sent defendant two cease and desist letters but he continued to use the Tyler Green name.

Plaintiff filed suit and within two weeks of filing an answer, defendant signed a consent decree in which he agreed to stop using the name Tyler Green. The action continued on the issues of damages, costs and attorneys' fees.

The Third Circuit explained that the Lanham Act provides for attorneys' fees in "exceptional" circumstances only. Determining whether a case is exceptional is a two-step process under the Lanham Act. First, the district court must decide whether the defendant engaged in any culpable conduct. Bad faith, fraud, malice and knowing infringement are non-exclusive examples of the sort of culpable conduct that could support a fee award. Additionally, the culpable conduct may relate not only to the conduct giving rise to the Lanham Act violation but may also include the way the losing party handled himself during the litigation. The second part of the process requires that if the district court finds culpable conduct, it must decide whether the circumstances are exceptional enough to warrant a fee award.

In this case, the Third Circuit, applying the clearly erroneous standard of review, found that the district court could have found that defendant did not commit a knowing infringement and that defendant's refusal to comply with the cease and desist letters did not give rise to bad faith. It was possible that defendant did not know who plaintiff was. Further, the Court found that defendant had a colorable defense to the plaintiff's claim for dilution because the facts failed to establish that plaintiff had a name widely recognized by the general consuming public of the United States. Defendant also had a colorable defense to plaintiff's cybersquatting claim because there was little evidence that defendant's use of Tyler Green for his websites had confused consumers. Thus, because defendant had colorable defenses, his conduct did not give rise to bad faith or "exceptional" circumstances requiring an award of attorneys' fees. The Court also noted that it was "loathe to discourage [quick settlements] by using them to support an inference of culpable conduct."

--Contributed by Kelly A. Williams, Esquire, Picadio Sneath Miller & Norton, P.C., Pittsburgh, PA; kwilliams@psmn.com

Fraud In The Inducement Claim Does Not Automatically Survive Gist Of The Action Doctrine

In Tier1 Innovation, LLC v. Expert Technology Group, L.P, et al.., 2007 U.S. Dist. LEXIS 34135 (E.D. Pa. May 8, 2007), the plaintiff, Tier1 Innovation, LLC ("Tier1") filed suit against Expert Technology Group, L.P. and Expert Technology Associates, LLC (together "ETA") in state court in Denver, Colorado. The action was removed to the federal district court for the District of Colorado and subsequently transferred to the Eastern District of Pennsylvania.

In its Complaint, Tier1 alleged that ETA had breached the parties' contract by failing to make payments required under the contract for services provided by Tier1 in the implementation and configuration of computer software for ETA. ETA filed an Answer with Affirmative Defenses and a Counterclaim, asserting causes of action for fraud, negligent misrepresentation and breach of contract. Tier1 filed a motion pursuant to Rule 12(b)(6) seeking to have ETA's fraud and misrepresentation counts dismissed based on the "gist of the action" doctrine.

Applying Pennsylvania law, the district court noted that although the Pennsylvania Supreme Court had not adopted the gist of the action doctrine, the Pennsylvania Superior Court and federal courts in Pennsylvania had predicted that it would, and have applied the doctrine. Under Pennsylvania's gist of the action doctrine, a plaintiff is prevented from recovering on a separate tort claim which simply restates a breach of contract claim.

In response to the motion to dismiss, ETA argued that its fraud and misrepresentation claims were collateral to the contract because they involved fraud in the inducement of the contract, and therefore predated the actual contract. The court noted that while the gist of the action doctrine will not bar all fraud in the inducement claims, "the particular theory of fraud - whether it lies in inducement or performance - is not dispositive." Tier1 at *9 (citing Guy Chem. Co. v. Romaco N.V., 2007 U.S. Dist. LEXIS 4278, 2007 WL 18472 (W.D. Pa. Jan 22, 2007)).

The court held that the proper test to be applied for fraud in the inducement claims remains the test that the Pennsylvania Superior Court set out in eToll, Inc. v. Elias/Savion Adver., Inc., 811 A.2d 10 (Pa. Super. 2002). Specifically, a tort claim is barred by the gist of the action doctrine if: (1) it arises solely from a contract between the parties; (2) the duties allegedly breached were created and grounded in the contract itself; (3) the liability stems from a contract; or (4) the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependant on the terms of the contract. (Citations omitted).

Among the allegations contained in ETA's counterclaim were that Tier1 "made representations regarding its ability and experience that were untrue at the time the representations were made," and that ETA had relied on these representations to its detriment. Specifically, ETA alleged that Tier1 did not have the requisite experience and knowledge to perform as required under the parties' contract.

In reviewing ETA's counterclaim using the test set forth above, the court found that the fraud and misrepresentation allegations were "inextricably intertwined" with Tier1's alleged failure to perform under the contract. The court held that, rather than being collateral, the contract was at the heart of the fraud and negligent misrepresentation claims. Therefore, the fraud and misrepresentation claims were barred by the gist of the action doctrine, despite the fact that they were asserted as having occurred in the inducement of the contract.