PA Federal Business Decisions Volume 13, No. 3

Business Litigation Update

Pennsylvania Federal Business Decisions
Bridget M. Gillespie and Henry M. Sneath, Business Decisions Editors [Originally published in the Fall 2008 edition of the Pennsylvania Bar Association's Civil Litigation Update]

Franchise Relationship Between Franchisee And Franchisor No Longer Existed To Support Franchisee's Petroleum Marketing Practices Act ("PMPA") Claim Against Former Franchisor

In Kehm Oil Co. v. Texaco, Inc., 2008 U.S. App. LEXIS 16237 (3d Cir. 2008), the Third Circuit affirmed the district court's dismissal of Kehm's claims against Texaco under the Petroleum Marketing Practices Act ("PMPA") finding that they were time-barred. The crux of the issue was whether Kehm's franchise relationship with Texaco continued through franchise agreements with separate companies who licensed Kehm to sell Texaco products. The Third Circuit also remanded to the district court the issue of whether Kehm's state law claims were preempted by the PMPA.

Kehm and another plaintiff company, both under the same ownership, sold Texaco gasoline for over 40 years at 28 different gas stations. Kehm, 2008 U.S. App. Lexis 16237, at *1. Throughout the years, Kehm entered into franchise agreements with several different entities owned by Texaco, but the last agreement with Texaco itself terminated in 1987. In 1998, Kehm entered into an agreement with Star Enterprises, an entity owned by Texaco for a five-year franchise agreement. Star later assigned the contract to Motiva Enterprises, LLC ("Motiva."), a joint venture between Texaco, Shell Oil Company and SRI. In 2001, Texaco merged with Chevron Corporation and as a condition to approve the merger, the Federal Trade Commission required Texaco to divest its interest in Motiva, but allow Motiva to license Texaco oil until June 30, 2006 if certain conditions were met. Id. at 2-3. Texaco transferred its interest in Motiva to Shell and SRI and licensed the Texaco brand to Motiva through June 30, 2006. Id. at 3.

In 2002, Motiva informed Kehm that it could no longer license the Texaco name to Kehm after June 2006. Id.After Motiva terminated the franchise in June of 2006, Kehm brought an action against Texaco, Motiva, Chevron, Star and other entities on June 15, 2006 seeking damages under the PMPA, a temporary restraining order and preliminary injunction. Id. at 4-5.

The district court denied the emergency relief because Kehm's franchise relationship was with Motiva, which had the right to terminate the relationship under the PMPA because it lost the right to use the Texaco trademark. Id. at 5. Texaco and others filed motions for summary judgment, which the court granted, finding that Kehm failed to bring its action within the one- year statute of limitations under the PMPA. Additionally, Kehm's franchise relationship was not with Texaco, but rather with Motiva, which properly terminated the relationship under the PMPA. Id. at 5-6.

The Third Circuit affirmed the holding that Kehm's claims were barred by the statute of limitations under the PMPA. Kehm's last agreement with Texaco expired in December of 1987, but Kehm did not file its lawsuit until June 15, 2006. The court rejected Kehm's contention that its franchise relationship with Texaco did not end until June 30, 2006 when Motiva terminated the relationship because Kehm was permitted to sell Texaco oil until that time. Id. Instead, the court found that the relationship between Kehm and Texaco ended in 1987 when the contract ended and the contract with Motiva was with a separate entity. Id. at 11.

In so holding, the Third Circuit noted that the legislative history of the PMPA distinguishes the terms "franchise relationship" and "franchise," but both require a current relationship. Id. A "franchise relationship" is defined under the PMPA as "the respective ... obligations and responsibilities of a franchisor and a franchisee which result from the marketing of motor fuel under a franchise." Id. This definition is distinguishable from that of a "franchise," which is merely "any contract ... between a distributor and a retailer." Id. (respectively citing 15 U.S.C. § 2801(2) and § 2801(1)(A)(iv)). Citing the Senate Report, the court stated that the PMPA includes both terms in order to require a franchisor to renew even if the franchise contract had expired and to allow the franchisor to alter the terms between franchise contracts.Id. at 13. The Kehm-Texaco relationship did not meet either definition in 2006 because Kehm's contract with Texaco ended in 1987, "eighteen and a half years and two contracts ago." Id.

The court noted that this holding was also supported by cases holding that the PMPA required a direct contractual relationship for a franchise. Id. at 14 (citing Hutchens v. Eli Roberts Oil, Co., 838 F.2d 1138, 1144 (11th Cir. 1988). The court further held that Kehm must have sued within one year of the termination of the agreement that it claimed violated the PMPA and Kehm's only franchise relationship in 2006 was with Motiva. Thus, Kehm could not "reach back" to a contract which expired in 1987 to claim it had a current franchise with Texaco. Id. at 16-17 (relying on Consumers Petroleum Co. v. Texaco, Inc., 804 F.2d 907 (6th Cir. 1986)).

In determining whether to affirm the district court's decision with respect to pre-emption of Kehm's state common law causes of action, the Third Circuit reviewed its own decision in O'Shea v. Amoco Oil Co., 886 F.2d 584, 592-93 (3d Cir. 1989). In O'Shea¸ the Third Circuit found that the "PMPA only preempts state laws that limit the permissible substantive reasons that a petroleum franchisor can terminate a franchisee' because 'the goal of the framers of the PMPA was to create a uniform system of franchise termination." Id. at 22. Thus, "if the state law ... claims ... are intimately intertwined with the termination or nonrenewal of a franchise," the PMPA preempts those claims." Id. at 23 (citing Shukla v. BP Exploration & Oil, Inc., 115 F.3d 849 (11th Cir. 1997)). The court remanded Kehm's state law claims for the district court to determine whether to exercise supplemental jurisdiction over the state law claims, and if so, whether they are "so intimately intertwined with the termination or nonrenewal of its franchise that they are preempted by the PMPA." Id. at 24.

Third Circuit Affirms District Court On Mitigation Issue Of First Impression

In Prusky v. ReliaStar Life Insurance Company, 532 F.3d 252 (3rd Cir. 2008) (Cowen, J.), plaintiffs Paul and Steven Prusky appealed the decision of the district court that reduced their damage claim in their breach of contract action from $1,019,293.28 to $107,293.28, a reduction of $912,000.

In 1998, the Pruskys paid several million dollars to purchase seven variable life insurance policies from ReliaStar. The policies insured the lives of Paul Prusky and his wife and provided over $42 million in death benefits. The cash values of the policies were placed into various accounts, which the Pruskys then used to invest in a variety of mutual funds offered through ReliaStar.

The Pruskys were successful money managers who specialized in "market timing," an investment strategy that capitalizes on short-term changes in the prices of mutual funds. The Pruskys' market timing strategy required daily evaluations and trade orders, and required frequent asset reallocations.

The standard terms of the insurance policies allowed only four sub-account transfers per year. However, the Pruskys negotiated with ReliaStar to allow them to conduct as many trades as they liked for their accounts as often as once per day per account. ReliaStar further agreed to handle all of the transfers without any restriction as to the dollar amount of the transfer. This arrangement worked well from 1998 until the fall of 2003. On October 8, 2003, a representative of ING, ReliaStar's parent company, wrote to the Pruskys informing them that they would no longer be able to engage in daily transactions in one of their accounts, the Pioneer Mid Cap Fund and any other Pioneer Funds. Further, the Pruskys were informed that all trades or fund transfers for that particular account were to be submitted by U.S. Mail, as opposed to fax or phone, as the Pruskys had previously done. The Pruskys immediately responded to this letter, asserting that their contract with ReliaStar provided for additional trades and that if defendants refused to effectuate their trades, they would hold them responsible for any losses or foregone gains. The Pruskys' letter also informed ING that if it insisted on limiting the Pruskys' trades, the Pruskys would like all of their assets allocated 100% in money market funds.

Notwithstanding the ING letter, the Pruskys continued to trade in non-Pioneer mutual funds via fax. Less than a month later, ING again wrote to the Pruskys and informed them that going forward all of their trading for all of their accounts would have to be submitted via U.S. Mail. The Pruskys again objected and continued to send daily hypothetical trades via fax. ReliaStar placed the balance of all policies in money market accounts as directed.

The Pruskys initiated a breach of contract action against ReliaStar seeking legal and equitable remedies. The Pruskys eventually won summary judgment on their initial breach of contract claim and sought over $1 million in damages. The Pruskys' measure of damages consisted of the difference between the gains that the Pruskys would have earned less the amount they actually did earn in the money market fund. However, the district court disagreed with the Pruskys' calculation, finding: 1) that the Pruskys did not act reasonably to mitigate their damages by placing and keeping their entire cash balance in a money market fund for more than three years; and 2) a reasonable alternative mitigation strategy would have decreased their losses by $912,000. Accordingly, the court reduced the Pruskys' damages to $107,293.28.

The Pruskys appealed to the Third Circuit regarding the reduction in damages. Applying the highly deferential, clear error standard, the Third Circuit affirmed the district court's findings that it was unreasonable for the Pruskys to allocate all of their assets to risk-free money market funds for the duration of the litigation and that there were mitigation alternatives available to the Pruskys which would have resulted in smaller losses.

The Third Circuit noted that what constitutes a reasonable substitute for mitigation purposes in the context of a breach of an investment contract is largely an issue of first impression. After reviewing case law from other circuits which found a high-risk investor should invest in alternatives with at least some risk rather than risk-free investments, the Third Circuit held that plaintiffs should have engaged in a comparable alternative investment strategy. Given that plaintiffs were intelligent individuals who invested money for a living, the Third Circuit further held that it was unreasonable for plaintiffs to position their $7 million of capital in a money market for a multi-year, and potentially indefinite, period.

The Third Circuit then examined the various alternative mitigation strategies available to the Pruskys as presented by ReliaStar in the district court. The Third Circuit determined that for purposes of clear error review, it was irrelevant that the strategy deemed to be most reasonable by the district court may not have been the most reasonable or the most persuasive one, or even the one that the Third Circuit would have made if sitting as the original trier of fact. Thus, the court upheld the trial court's findings on the availability of alternative mitigation strategies and on the amount of the mitigation offset.

Judge Hardiman concurred in the result but wrote separately to emphasize that the district court's mitigation decision could be affirmed only because of the deferential standard of review. He further stated that if he had been sitting as the trier of fact, he would have likely found the Pruskys' mitigation strategy to be reasonable.

Credit Card Issuers May Be Third-Party Beneficiaries Of Membership Agreements Between The Credit Card And The Acquirers

In Sovereign Bank v. BJ's Wholesale Club, Inc., 533 F.3d 162 (3d Cir. 2008), two issuers of Visa credit cards, Pennsylvania State Employees Credit Union ("PSECU") and Sovereign Bank, appealed orders dismissing their claims against an "acquirer" of Visa cards, Fifth Third Bank ("Fifth Third"), and a merchant that accepts Visa cards, BJ's Wholesale Club, Inc. ("BJ's"), for claims regarding the theft of credit card information from the merchant's computer files. An "issuer" contracts with cardholders for issuance of a Visa card. An "acquirer" contracts with merchants who agree to accept Visa cards as payment for the merchant's goods. While issuers and acquirers enter into contracts with Visa, merchants do not have a direct contractual relationship with Visa even though they are considered participants in the Visa network.Id. at 164. However, acquirers do enter into merchant agreements with the merchants. Id. Likewise, issuers and acquirers do not have a direct contractual relationship with each other.

Visa has an extensive list of "Operating Regulations" which are part of its contracts with issues and acquirers. Id. at 165. The regulations also require acquirers to enter into merchant agreements with each of its merchants in order to ensure that the merchant abides by the Operating Regulations. Id. at 166. The merchant agreements between the acquirer and merchant must contain the provisions of the Operating Regulations which prohibit a merchant from retaining or storing cardholder information after a transaction is authorized. Id.

In 2004, Visa found that cardholder information of certain cards issued by Sovereign and PSECU were potentially compromised. Id. The electronic data on cards used at BJ's stores had been copied and used to purchase goods. Id. Both issuers canceled approximately 20,000 Visa cards and reissued new cards to cardholders that used their cards to purchase items at BJ's. Id. at 166-167. Both Sovereign and PSECU contended that the reissuance of the cards cost them approximately $98,000 and both alleged that the potential fraud was possible because BJ's improperly retained and stored the cardholder information as opposed to deleting the information immediately after the sales transaction as required pursuant to the Operating Regulations. Id. at 166 and 178. Sovereign and PSECU also both alleged that Fifth Third failed to act pursuant to the Operating Regulations because it failed to ensure that BJ's adhered to the provision in the regulations requiring BJ's to delete the card information after the sale transaction was complete. Id.

Sovereign's action against BJ's and Fifth Third included claims for negligence, breach of contract and equitable indemnification. Id. at 167. Both defendants filed motions to dismiss all claims under Fed. R. Civ. P. 12(b)(6). Id. The district court ultimately dismissed all claims against BJ's and granted Fifth Third's motion to dismiss the negligence and equitable indemnification claims, but did not dismiss the breach of contract claim. Id. Fifth Third moved for reconsideration of the district court's refusal to dismiss the breach of contract claim. The court converted this motion to a motion for summary judgment and ordered the parties to first conduct discovery on the issue of whether Fifth Third's agreement with Visa to abide by the Visa Operating Regulations was intended to benefit third parties to the agreement, such as Sovereign. Id. at 167. After discovery, the district court entered summary judgment in favor of Fifth Third. Sovereign appealed the district court's entry of judgment on the breach of contract claim and dismissal of the equitable indemnification claim against Fifth Third and appealed the dismissal of the negligence and equitable indemnification claims against BJ's. Id. at 168.

PSECU's action against BJ's and Fifth Third contained allegations of breach of contract, negligence, equitable indemnification and unjust enrichment. Id. at 178. The court also ultimately dismissed all of PSECU's claims against BJ's and all claims against Fifth Third, except the breach of contract claim. Id.Similar to Sovereign's claims against Fifth Third for breach of contract, the court granted Fifth Third's summary judgment motion after limited discovery, finding that PSECU was not an intended beneficiary of Fifth Third's member agreement with Visa. Id. PSECU then appealed the district court's grant of summary judgment on the breach of contract claim in favor of Fifth Third and the dismissal of the negligence and unjust enrichment claims against Fifth Third and BJ's. Id. at 179.

During the summary judgment argument on the breach of contract claims against Fifth Third at the district court level, both Sovereign and PSECU relied upon the same theory and evidence for their contention that genuine issues of material fact existed to support their breach of contract claims. Id. at 168 and 179. They based their claims upon the theory that they were third-party beneficiaries of Fifth Third's Membership Agreement with Visa, which Fifth Third allegedly breached by failing to ensure that BJ's complied with the Operating Regulations. Id. at 168. Sovereign and PSECU relied upon the deposition testimony of a Visa designated representative, a 1993 Visa memorandum and a 2003 Visa online article to show that Visa intended to give Sovereign the benefit of Fifth Third's promise to ensure that BJ's complied with the Membership Agreement which prohibited merchants from retaining the cardholder information. Id. at 168-172.

The Third Circuit stated that a party is a third-party beneficiary to a contract entitling it to bring a breach of contract claim if both contracting parties "expressed an intention that the third-party be a beneficiary, and that the intention must have affirmatively appeared in the contract itself." Sovereign, 533 F.3d at 168 (citingScarpitti v. Weborg, 609 A.2d 147, 149 (Pa. 1992)). The court noted that Scarpitti also adopted § 302 of the Restatement (Second) of Contracts which permits an "intended beneficiary" to recover on a breach of contract claim even when the parties to the contract did not express the intent to benefit the third party.Sovereign, 533 F.3d at 168 (citing Scarpitti, 609 A.2d at 149.) Under the reasoning of Scarpitti and § 302, the Third Circuit held that even though Sovereign and PSECU were not express parties to the contract, they could be intended beneficiaries if "the 'recognition of a right to performance' in Sovereign 'is appropriate to effectuate the intentions of' both Visa and Fifth Third in entering into their member agreement and whether 'the circumstances indicate that' Visa (the promisee) 'intended' to give Sovereign 'the benefit of the promised performance.'" Id.

Based upon the evidence presented by Sovereign and PSECU at the district court level, the Third Circuit found that Sovereign and PSECU met their burden of producing sufficient evidence to preclude a finding of summary judgment against them based upon a 1993 Visa memorandum entitled "Retention of Magnetic-Stripe Data Prohibited" and a Visa representative's deposition testimony. Id. at 172. The 1993 memorandum provided that its purpose was to protect the Visa system and issuers from potential fraud exposure created by databases of magnetic-stripe information and that acquirers were obligated to ensure that their merchants did not store the card information. Id. at 170. Further, the Visa representative testified that the "core purpose of the Operating Regulations was to benefit the Visa system and 'the members that participate in it,'" which the court found clearly suggested Visa's intent to benefit issuers. Id. at 172. Accordingly, the court reversed the district court's grant of summary judgment in favor of Fifth Third on both Sovereign and PSECU's breach of contract claims. Id. at 173 and 179.

The court also affirmed the dismissal of the negligence, equitable indemnification and unjust enrichment claims. The negligence claims were barred by the economic loss doctrine. Sovereign's claim that the Truth In Lending Act made it only secondarily liable had no basis in the statute; thus, its claim for equitable indemnification failed. PSECU's unjust enrichment claims failed because such a claim "may not be based on the performance of an obligation that is independently owed to third parties." Id. at 181. Because PSECU alleged it had an obligation to its cardholders to replace the compromised cards, its unjust enrichment claim failed and the court would not determine the merit of PSECU arguments that were not made below.

General Secrets Of The Trade Not Protectable As Trade Secrets

In Fishkin v. Susquehanna Partners, G.P., Civil Action No. 03-3766, 2008 U.S. Dist LEXIS 47551 (E.D. Pa. June 17, 2008) (opinion by McLaughlin, J.), a dispute arose between a securities trading firm and two of its former employees. The former employees filed suit seeking a declaratory judgment to invalidate non compete covenants in their employment contracts with the firm. In return, the firm sued them for breach of contract, misappropriation of trade secrets, conspiracy and conversion.

Cal Fishkin ("Fishkin") previously worked for Susquehanna International Group, LLP ("SIG") as a floor trader in futures in the Dow Jones Industrial Average ("Dow Futures") at the Chicago Board of Trade. Fishkin was assigned to assist another SIG employee, Francis Wisniewski ("Wisniewski"), in the Dow Futures "pit" (the "Dow pit"), an octagon-shaped area of the Chicago Board of Trade where Dow Futures were traded in person. Wisniewski had previously developed a formula for trading (the "Dow Fair Value formula") based upon his observations of successful traders. Using the Dow Fair Value formula, Wisniewski was able to determine the prices at which he should purchase or sell futures in order to make a profit. Prior to Wisniewski's discovery of the Dow Fair Value formula, at least six other traders were using the concept behind the formula as their trading strategy. Fishkin learned this formula from Wisniewski and also used it when trading in the Dow pit. The formula was recorded on an electronic spreadsheet. Although Wisniewski and Fishkin initially used the formula to perform mental calculations, they were later able to employ the use of the spreadsheet to make calculations when SIG provided them with hand-held computers.

Near the end of his employment contract with SIG, Fishkin attempted to renegotiate his employment contract because he was unsatisfied with his compensation. After several months with no response from SIG, Fishkin was approached by other traders about forming a new group to trade Dow Futures. After several meetings, Fishkin and another SIG employee, Igor Chernomzav, formed a new company and entered into a joint venture agreement with a second company for the purpose of trading securities and futures products on the Chicago Board of Trade. Although Fishkin's employment contract had expired by the time he formed the new company, a covenant not to compete was still in effect. Chernomzav's employment contract with SIG contained a similar provision. In a previous opinion, the court upheld the restrictive covenants against Fishkin and Chernomzav.

After the formation of their new company and joint venture, Fishkin and Chernomzav traded Dow Futures using the same Dow Fair Value formula discovered by Wisniewski and used by Fishkin at SIG. SIG claimed that the Dow Fair Value formula was a protectable trade secret and that Fishkin and Chernomzav misappropriated it when they left SIG. The court, recognizing that all of the alleged acts of misappropriation began prior to the effective date of the Pennsylvania Uniform Trade Secrets Act, 12 Pa. C.S. § 5301, et seq., which was April 19, 2004, instead applied the principles of common law misappropriation of trade secrets.

After a bench trial, the court found that the Dow Fair Value formula, as well as the concept on which it was based and the spreadsheet on which it was recorded, were not protectable trade secrets because they were too widely known and too easily ascertainable. The court noted that the concept, formula and spreadsheet were not independently developed by SIG, but were developed by others and copied by SIG. In addition, the formula and concepts were used by other traders in the Dow pit to make trades just as SIG did. Therefore, the Dow Fair Value concept, formula and spreadsheet constituted "general secrets of the trade" at most, and not "particular secrets" to SIG as required to be protected at common law as trade secrets.

SIG also attempted to claim that the knowledge of the profitability of using the Dow Fair Value formula to trade Dow Futures was also a trade secret. The court recognized that under some circumstances, information about a firm's profitability could constitute a trade secret. However, as with the formula itself, the general profitability of SIG's Dow Futures trading was generally known and easily ascertained. Therefore, it too was not a protectable trade secret.

SIG's claims for conversion and conspiracy were dismissed because they both relied upon a finding that the Dow Fair Value formula was a trade secret. SIG had also raised a claim against Fishkin and Chernomzav's joint venture partner, NT Prop. Trading, LLC ("NT Prop"), for intentional interference with contractual relationships for inducing Fishkin and Chernomzav to breach their restrictive covenants. Although the court found NT Prop liable for intentional interference, SIG was unable to produce evidence of any damages incurred as a result of the interference. Although the court was unsure whether nominal damages were available for tortious interference claims under Pennsylvania law, the court awarded nominal damages anyway in the amount of $1.00. The court found no evidence that demonstrated that NT Prop intended to harm SIG by forming the joint venture with Fishkin and Chernomzav and therefore denied SIG's claims for punitive damages for tortious interference.

Court Grants Renewed Application For Preliminary Injunction For Confusingly Similar Trade Dress

In McNeil Nutritionals, LLC v. Heartland Sweeteners LLC, Civil Action No. 06-5336, 2008 U.S. Dist. LEXIS 49548 (E.D. Pa. June 26, 2008) (opinion by Padova, J.), the manufacturer of the no-calorie sweetener Splenda®, McNeil Nutritionals, LLC ("McNeil"), requested that the court enjoin competitors from manufacturing and distributing certain store-brand products that used packaging confusingly similar to the trade dress of Splenda®.

McNeil had filed suit against Heartland Sweeteners LLC and Heartland Packaging Corp. (collectively "Heartland") alleging violations of Section 43(a)(1)(A) of the Lanham Act, 15 U.S.C. § 1125(a)(1)(A), and other state law claims. In deciding whether to grant a preliminary injunction, the court considered the following factors from Shire US, Inc. v. Barr Labs, Inc., 329 F.3d 348, 352 (3d Cir. 2003): (1) McNeil's likelihood of success on the merits; (2) extent that McNeil would suffer irreparable harm without injunctive relief; (3) extent that Heartland would suffer irreparable harm if injunction were issued; and (4) the public interest. The court had previously denied McNeil's request for preliminary injunction based upon its determination that McNeil was unlikely to succeed on the merits because it was unlikely to establish the third element of a trade dress infringement claim under the Lanham Act - that the defendant's use of the plaintiff's trade dress is likely to cause consumer confusion. McNeil Nutritionals, LLC v. Heartland Sweeteners LLC, 512 F. Supp. 2d 217 (E.D. Pa. 2007). Upon appeal, the Third Circuit reversed, holding that McNeil had demonstrated a likelihood of success on the element of consumer confusion and remanded for a determination of the other required elements under Section 43(a)(1)(A) of the Lanham Act. McNeil Nutritionals, LLC v. Heartland Sweeteners, LLC, 511 F.3d 350 (3d Cir. 2007).

On remand, the court found that McNeil was likely to succeed on the two additional elements of a trade dress infringement claim with regard to two of Heartland's products. In discussing the first element of trade dress infringement, whether the trade dress is inherently distinctive, the court applied the test set forth inAbercrombie & Fitch Co. v. Hunting World, Inc., 537 F.2d 4, 10-11 (2d Cir. 1976). Although the court noted that the Third Circuit in Duraco Products, Inc. v. Joy Plastic Enterprises, Ltd., 40 F.3d 1431, 1440-41 (3d Cir. 1994), had rejected the application of the Abercrombie test in infringement actions based upon product configuration/product design, the court relied upon the Third Circuit's distinction between product configuration/product design trade dress and product packaging trade dress to support the application of the Abercrombie test in this case. Under this test, the court found that the Splenda® trade dress was arbitrary or fanciful and therefore inherently distinctive as required by the first element of trade dress infringement. The court noted that McNeil would also be able to satisfy the distinctiveness element because of the secondary meaning of the trade dress gained through the extent of McNeil's sales and advertising of its Splenda® products.

Turning to the second element of trade dress infringement, the court considered whether the Splenda® trade dress was nonfunctional. The court, relying on the Third Circuit's instructions in Duraco Products, 40 F.3d at 1439, that trade dress is a "complex composite of features" that are all required to be "considered together, not separately," found that the Splenda® packaging was nonfunctional. The court recognized that if McNeil had sought to enjoin Heartland from using any specific element of the trade dress, such as the color yellow, or from depicting food and beverages on the packaging, or from using a particular size and shape of packaging, that each element would have to be examined individually to determine functionality. However, McNeil was not seeking any such restrictions, and the court had no problem finding that the overall product packaging was not essential to the use or purpose of the product, and that it did not affect the cost or quality of the product.

Having determined that McNeil satisfied the first factor for granting a preliminary injunction, the court briefly discussed the remaining factors and found that McNeil had met its burden. The court found that McNeil suffered and continued to suffer irreparable harm because, as the Third Circuit held in Opticians Ass'n of America v. Independent Opticians of America, 920 F.2d 187, 196-97 (3d Cir. 1990), a finding of a likelihood of confusion leads to the "inescapable conclusion" that there is irreparable injury. The court also found that the third factor weighed in favor of the injunction because Heartland had not identified any irreparable harm that it would suffer as a result of the injunction. Finally, the court found that the public interest favored the injunction because the public had a right not to be deceived or confused.

--Contributed by Jeffrey B. Cadle, Esquire, Picadio Sneath Miller & Norton, P.C., Pittsburgh, PA; jcadle@psmn.com

Court Refuses To Stay Patent Infringement Litigation Pending Completion Of Reexamination By The United States Patent And Trademark Office

In Innovative Office Products, Inc. v. Spaceco, Inc., 2008 U.S. Dist. LEXIS 675 (E.D. Pa. Aug. 29, 2008) (Opinion by Stengel, J.), a patent infringement case, the court was presented with a motion to stay proceedings pending the completion of the reexaminations of seven patents by the United States Patent and Trademark Office ("USPTO"). Based upon the facts of the case and the three-part test for determining whether to stay a matter pending reexamination, the court denied the Motion for Stay.

Plaintiff Innovative Office Products, Inc. ("Innovative") and defendant Spaceco, Inc. ("Spaceco") are competitors which develop and sell monitor arms to position electronic devices such as flat screen displays and tilter assemblies. Innovative filed suit against Spaceco on July 28, 2005, alleging Spaceco was infringing seven of Innovative's U.S. patents. Prior to the Motion for Stay, the parties had completed fact discovery, the Markman hearing and expert discovery. Moreover, after the Markman hearing, but before the court issued its Markman order, Spaceco filed bankruptcy. The patent infringement case was initially stayed as a result, until Innovative successfully sought relief from the automatic stay. In addition, Spaceco filed for reexamination in the USPTO for all seven patents at issue. The court noted that the reexamination process takes 22.8 months, on average, and the median pendency from the filing date to certificate issue date is 17.6 months. Further, the court stated its belief that these averages are likely to increase due toKSR Int'l Co. v. Telefax, Inc., 127 S. Ct. 1727 (2007), which altered the obviousness standard for patentability, and which will likely result in an extremely large number of reexamination requests.

The court began its analysis by stating that the decision whether or not to stay a patent case during reexamination is discretionary. Additionally, in deciding whether to stay a matter pending reexamination, the courts have developed a three-part test: (1) whether a stay would unduly prejudice or present a clear tactical disadvantage to the non-moving party; (2) whether a stay will simplify the issues in question and trial of the case; and (3) whether discovery is complete and whether a trial date has been set.

Under the first part of the test, the court found that a lengthy stay would prejudice Innovative and give Spaceco a tactical advantage. Innovative asserted that it was suffering irreparable harm in lost sales. This was supported by a Spaceco bankruptcy court ruling which found that Spaceco's operations were having a negative impact upon Innovative's market share and sales revenue. Moreover, at the time of the Motion for Stay, the patent infringement case had been pending for three years and had already been stayed once due to Spaceco's bankruptcy. Also, the court found that Spaceco had sought to delay the adjudication of the patent infringement case on numerous occasions through motions practice. The court reasoned that there was nothing preventing Spaceco from filing reexamination requests indefinitely.

Under the second part of the test, the court held that the likelihood that the issues in the case would be simplified was outweighed by the potential harm to Innovative in prolonging the suit. Innovative argued that the need for a trial would only be eliminated if the reexaminations resulted in the cancellation of all of the asserted claims of each patent. According to Innovative, statistics show that since 1981, 91% of all ex parte reexamination requests have been granted but only 12% have resulted in decisions cancelling all claims. Innovative contended that the chance of this 12% possibly occurring seven consecutive times for seven reexaminations was infinitesimally small. The court agreed. While recognizing the potential for the reexamination to simplify the remaining issues, the court found the potential for irreparable harm far outweighed the slight chance that all claims would be canceled. Moreover, the court determined that even if some of the claims were eventually amended, the time and expense of adjusting expert reports and motions after discovery was completed and the case was ready for trial was minor in light of the potential harm.

Finally, under the third part of the test, the court found that the status of the case favored denying the requested stay. The court reasoned that granting the stay, which could last several years, would be inefficient and costly given that discovery had been completed and a trial date was pending.

Thus, the court held that all three factors weighed against a stay, and the Motion for Stay was denied.

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

Court Refuses To Stay Patent Infringement Litigation Pending Completion Of Reexamination By The United States Patent And Trademark Office

In Innovative Office Products, Inc. v. Spaceco, Inc., 2008 U.S. Dist. LEXIS 675 (E.D. Pa. Aug. 29, 2008) (Opinion by Stengel, J.), a patent infringement case, the court was presented with a motion to stay proceedings pending the completion of the reexaminations of seven patents by the United States Patent and Trademark Office ("USPTO") ("Motion for Stay"). Based upon the facts of the case and the three-part test for determining whether to stay a matter pending reexamination, the court denied the Motion for Stay.

Plaintiff Innovative Office Products, Inc. ("Innovative") and defendant Spaceco, Inc. ("Spaceco") are competitors which develop and sell monitor arms to position electronic devices such as flat screen displays and tilter assemblies. Innovative filed suit against Spaceco on July 28, 2005, alleging Spaceco was infringing seven of Innovative's U.S. patents. Prior to the Motion for Stay, the parties had completed fact discovery, the Markman hearing and expert discovery. Moreover, after the Markman hearing, but before the court issued its Markman order, Spaceco filed bankruptcy. The patent infringement case was initially stayed as a result, until Innovative successfully sought relief from the automatic stay. In addition, Spaceco filed for reexamination in the USPTO for all seven patents at issue. The court noted that the reexamination process takes 22.8 months, on average, and the median pendency from the filing date to certificate issue date is 17.6 months. Further, the court stated its belief that these averages are likely to increase due toKSR Int'l Co. v. Telefax, Inc., 127 S. Ct. 1727 (2007), which altered the obviousness standard for patentability, and which will likely result in an extremely large number of reexamination requests.

The court began its analysis by stating that the decision whether or not to stay a patent case during reexamination is discretionary. Additionally, in deciding whether or not to stay a matter pending reexamination, the courts have developed a three-part test: (1) whether a stay would unduly prejudice or present a clear tactical disadvantage to the non-moving party; (2) whether a stay will simplify the issues in question and trial of the case; and (3) whether discovery is complete and whether a trial date has been set.

Under the first part of the test, the court found that a lengthy stay would prejudice Innovative and give Spaceco a tactical advantage. Innovative asserted that it was suffering irreparable harm in lost sales. This was supported by a Spaceco bankruptcy court ruling which found that Spaceco's operations were having a negative impact upon Innovative's market share and sales revenue. Moreover, at the time of the Motion for Stay, the patent infringement case had been pending for three years and had already been stayed once due to Spaceco's bankruptcy. Also, the court found that Spaceco had sought to delay the adjudication of the patent infringement case on numerous occasions through motions practice. Also, the court reasoned that there was nothing preventing Spaceco from filing reexamination requests indefinitely.

Under the second part of the test, the court held that the likelihood that the issues in the case would be simplified was outweighed by the potential harm to Innovative in prolonging the suit. Innovative argued that the need for a trial would only be eliminated if the reexaminations resulted in the cancellation of all of the asserted claims of each patent. According to Innovative, statistics show that since 1981, 91% of all ex parte reexamination requests have been granted but only 12% have resulted in decisions cancelling all claims. Innovative contended that the chance of this 12% possibly occurring seven consecutive times for seven reexaminations was infinitesimally small. The court agreed. While recognizing the potential for the reexamination to simplify the remaining issues, the court found the potential for irreparable harm far outweighed the slight chance that all claims would be canceled. Moreover, the court determined that even if some of the claims were eventually amended, the time and expense of adjusting expert reports and motions after discovery was completed and the case was ready for trial was minor in light of the potential harm.

Finally, under the third part of the test, the court found that the status of the case favored denying the requested stay. The court reasoned that granting the stay, which could last several years, would be inefficient and costly given that discovery had been completed and a trial date was pending.

Thus, the court held that all three factors weighed against a stay, and the Motion for Stay was denied.

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

Registration Of Infringing Mark Accorded Little Weight In Suit By Holder Of Original Mark

In Kingdom, Inc. v. Pro Music Group, LLC, 2008 U.S. Dist. LEXIS 64796 (M.D. Pa. August 22, 2008) (McClure, Jr., J.), plaintiff Kingdom filed suit against Pro Music Group on May 28, 2008, under the Lanham Act for alleged trademark infringement (15 U.S.C. § 1114), false designation of origin and unfair competition (15 U.S.C. § 1125(a)), trademark dilution and tarnishment (15 U.S.C. § 1125(c)(1)), as well as a state statutory claim for trademark dilution (54 Pa. C.S.A. § 1124) and a state common law claim for unfair competition. On June 17, 2008, Kingdom filed a motion for preliminary injunction seeking to enjoin Pro Music's use of the trademark "KingdomPro." On July 31, 2008, a hearing was held on Kingdom's motion for a preliminary injunction. The court made several findings of fact and granted Kingdom's motion.

Kingdom was a company of 145 employees located in Mansfield, Pennsylvania. Kingdom sold a wide variety of audio and visual products to the religious community. Kingdom had gross sales that exceeded $20 million annually. It mailed two million product catalogs per year to churches throughout the country. The Kingdom mark was a strong mark with a positive reputation in the church marketplace.

On March 10, 2003, Kingdom filed an application to register the mark "Kingdom." On December 17, 2005, the USPTO issued a trademark for the mark "Kingdom." Kingdom used various modifiers with its Kingdom mark. With respect to its use of KingdomPro, it sold blank CDs and DVD labels under this name. It had used the "Pro" modifier continually since 2004.

Pro Music Group had been in business for more than 30 years. It historically sold sound, lighting and stage equipment to various businesses. In August 2007, Pro Music began using the name KingdomPro as a trade name to focus sales efforts directed at the church worship market. At the time of the adoption of the KingdomPro name by Pro Music, the CFO of Pro Music was aware of Kingdom, Inc. On July 21, 2006, Pro Music filed an application with the USPTO for registration of the mark "KingdomPro." On December 18, 2006, the USPTO issued an Examiner's Amendment for Pro Music's application in which an examiner concluded that no similar registered or pending mark had been found that would bar registration. On July 29, 2008, the USPTO issued a trademark to Pro Music for the mark "KingdomPro."

Kingdom, Inc. first became aware of the use of the KingdomPro mark by Pro Music when it received a catalog from Pro Music in the mail. After Pro Music began using the KingdomPro mark, Kingdom's sales decreased.

To obtain a preliminary injunction, the court stated that the moving party must show: 1) a reasonable probability of success on the merits; 2) the extent to which plaintiff has been irreparably harmed by the conduct complained of; 3) the extent to which the defendant will suffer irreparable harm if the preliminary junction is issued; and 4) the public interest. Id. at 8 (citing Crissman v. Dover Downs Entertainment, Inc., 239 F.3d 357, 364 (3rd Cir. 2001)). The court further explained that to establish trademark infringement, a plaintiff must demonstrate that: 1) its mark is valid and legally protectable; 2) it owns the mark; and 3) defendant's use of the mark to identify its goods or services is likely to create confusion concerning the origin of those goods or services.

The court held that Kingdom had a valid and legally protectable mark in the name Kingdom that it began using well before defendant began using the mark KingdomPro. The court also held that Kingdom had demonstrated a likelihood of showing defendant's use of the KingdomPro mark was likely to cause confusion with customers. Specifically, the court held that the marks Kingdom and KingdomPro were nearly identical when considering the sight, sound and meaning of the two marks. The only difference in sight and sound was the short modifier of Pro on the end of Pro Music's mark.

The court rejected Pro Music's argument that it was entitled to use the KingdomPro mark because the USPTO had issued a registered trademark to Pro Music after determining there were no similar registered or pending marks. The court gave little weight to the USPTO's decision because the USPTO's examining attorney did not review all of the evidence available to the district court. After holding that Kingdom had established a likelihood of success on the merits, the court held that the remaining factors for preliminary injunction were present and granted Kingdom's motion for preliminary injunction.