Seventh Circuit affirms District Court dismissal of trademark infringement dispute between JAPONAIS restaurant founders

On February 22, 2008, the Seventh Circuit Court of Appeals affirmed a district court’s dismissal of a derivative trademark infringement claim brought by a co-founder of the Chicago restaurant Japonais against his fellow co-founders using the Japonais name and trade dress at additional restaurant locations outside Chicago. See Segal v. Geisha NYC, LLC, Appeal No. 06-2897 (7th Cir. February 22, 2008). A copy of the decision can be downloaded here.

Jonathan Segal was one of four founders of the Chicago restaurant Japonais Chicago, described as an up-scale restaurant and lounge serving a fusion of Japanese and European cuisine. Segal developed the concept for Japonais along with Rick Wahlstedt. They hired culinary expert Miae Lim and architect Jeffrey Beers to assist in developing the restaurant.

As part of the establishing of the first Japonais restaurant in Chicago, the four founders formed two Delaware LLCs -- Geisha Chicago, LLC (“Geisha Chicago”) and Hospitality Chicago, LLC (“Hospitality Chicago”). Geisha Chicago was set-up to own the Japonais Chicago restaurant and all intellectual property related to the Japonais name and design. In Geisha Chicago’s operating agreement, Hospitality Chicago is named as “Managing Member” and is the sole member listed on the agreement’s member schedule. The agreement also gives Hospitality Chicago complete authority to manage the business of Geisha Chicago and to utilize any asset of Geisha Chicago.

The four founders were the only named members in the operating agreement of Hospitality Chicago. The same agreement also included provisions which allowed at least two of the four founders to open a restaurant outside of Chicago using the Japonais Chicago restaurant concept provided that notice and opportunity to participate was given to the other founders.

In 2006, Wahlstedt, Lim, and Beers decided to open additional Japonais restaurants in New York City and Las Vegas which used the Japonais Chicago concept. When Segal discovered that his three co-founders had expanded the restaurant outside of Chicago (apparently without notifying him or allowing him to participate), he filed a lawsuit (on behalf of himself and derivatively on behalf of Geisha Chicago and Hospitality Chicago) stating ten state-law claims and one federal claim for trademark infringement under Section 43(a) of the Lanham Act (15 U.S.C. §1125(a)). Segal alleged that the defendants misappropriated the Japonais name and trade dress in violation of §1125(a).

In June 2006, the district court granted the defendants’ motion to dismiss the trademark infringement cause of action on the grounds that, as a matter of law, there could be no likelihood of confusion as to source or affiliation because of the clear language of the Hospitality Chicago operating agreement which allowed any two founders to use the Japonais Chicago concept and intellectual property in any expansion of the restaurant outside Chicago. After dismissing Segal’s federal claim, the district court dismissed the remaining state law claims under 28 U.S.C. §1367(c)(3) for lack of pendent jurisdiction. While Segal filed a separate action in Illinois state court, he also filed an appeal of the district court's dismissal of his trademark infringement claim.

The Court of Appeals affirmed the district court’s decision to dismiss the trademark infringement claim as well as the state law claims.

On appeal, Segal argued that Hospitality Chicago’s operating agreement was only meant to govern relations between the members and was not relevant to whether the defendant’s were authorized to use the Japonais Chicago’s intellectual property. The court, however, rejected Segal’s argument, finding that, under Delaware law, an LLC operating agreement allows the members to delegate control over the company by contract. See Del. Code Tit. 6, §18-1101(b). The court agreed that Geisha Chicago’s operating agreement gave Hospitality Chicago total control over Geisha Chicago’s assets, including use of the Japonais Chicago intellectual property. As such, it was relevant to review the provisions of the Hospitality Chicago operating agreement to determine how Geisha Chicago’s intellectual property could be controlled.

In reviewing the Hospitality Chicago operating agreement, the court agreed that the people who controlled the companies behind Japonais New York and Japonais Las Vegas, namely Wahlstedt, Lim, and Beers, were expressly authorized to use the Japonais Chicago intellectual property under such agreement for restaurants outside of Chicago.

Therefore, because Geisha Chicago, through its managing member, Hospitality Chicago, had authorized the three expanding founders to use the Japonais Chicago intellectual property owned by Geisha Chicago, the court agreed that Segal’s trademark infringement claim failed as a matter of law because Segal could not establish that use of the mark by Japonais New York and Japonais Las Vegas is likely to cause confusion with Japonais Chicago among consumers because they are authorized expansions of the same restaurant concept and share three of the same founders:

“[W]here the trademark holder has authorized another to use its mark, there can be no likelihood of confusion and no violation of the Lanham Act if the alleged infringer uses the mark as authorized. See ITOFCA, Inc. v. MegaTrans Logistics, Inc., 322 F.3d 928, 940 (7th Cir. 2003) (“A licensee infringes the owner’s copyright if its use exceeds the scope of its license.” (internal quotation marks and citations omitted)); Am. Legion v. Matthew, 144 F.3d 498, 499 (7th Cir. 1998) (“Without confusion about source, sponsorship, or affiliation, there is no possible claim under . . . § 1125(a).”); see also McDonald’s Corp. v. Robertson, 147 F.3d 1301, 1307 (11th Cir. 1998) (“[I]n order to prevail on a trademark infringement claim, a plaintiff must show that its mark was used in commerce by the defendant without the registrant’s consent and that the unauthorized use was likely to deceive, cause confusion, or result in mistake.”).

Slip op. at 7-8.

Finally, the court agreed that since Segal’s pendent state law claims were based solely on the district court’s supplemental jurisdiction, the district court properly relinquished its jurisdiction over such state law claims under 28 U.S.C. § 1367(c)(3) once Segal’s sole federal claim was dismissed. See Williams v. Rodriguez, 509 F.3d 392, 404 (7th Cir. 2007) (citing Wright v. Associated Ins. Cos., 29 F.3d 1244, 1251-52 (7th Cir. 1994)).

Vegas™Esq. Comments:
The court seems to gloss over the fact that the Hospitality Chicago operating agreement apparently required notice be given to Segal as well as an opportunity to participate in order to be authorized to expand the restaurant outside of Chicago – and that Segal apparently never received such notice and opportunity to participate from the three expanding founders. Under the agreement, if such steps were not taken, then were the three expanding founders legitimately authorized under the agreement to have used the Japonais Chicago intellectual property in restaurants outside of Chicago?

This case serves as an important reminder of how trademark law and corporate law can become intertwined and how anyone becoming involved in a business venture with others should be careful in how the business is structured and the governing documents dictating the relationships among the business partners.

Agri Beef subsidiary wins summary judgment of no infringement in trademark infringement lawsuit brought by Allen Brothers over AB mark.

On March 8, 2006, Allen Brothers, Inc. (“Allen Brothers”) filed a trademark infringement lawsuit in the U.S. District Court for the Northern District of Illinois against AB Foods LLC (“AB Foods”) alleging that AB Foods’ use of the mark “AB” in connection with the sale of meat products infringed Allen Brothers common law trademark rights to the “AB” mark in connection the same goods in violation of §43(a) of the Lanham Act (15 U.S.C. §1125(a)) and Illinois common law.

On Wednesday, U.S. District Judge Wayne R. Andersen ruled in favor of AB Foods and granted its motion for summary judgment. See Allen Brothers Inc v. AB Foods LLC, Case. No. 06-CV-1269, 2008 U.S. Dist. LEXIS 8642 (N.D. Ill. February 6, 2008).

Founded in 1893, Allen Brothers is a nationwide supplier of high-quality, gourmet meat products to restaurants and to individual consumers with annual sales exceeding $75 million. Allen Brothers advertises its products through local and national magazines, newspapers, and radio shows; through a consumer catalog; and through such websites as allenbrothers.com and absteaks.com.

Allen Brothers argued that it had been using the “AB” mark in connection with its meat products “continuously and exclusively” in its catalogs, marketing materials, and radio advertisements, as well as on its shipping materials and websites.

AB Foods is a subsidiary of Agri Beef, Co. (“Agri Beef”) – a vertically-integrated beef producer that has used the letters “AB” as a trademark since the mid-1970s. AB Foods was organized in 2006 as part of a corporate reorganization of Agri Beef and is responsible for the production, marketing, and sales of beef and beef-related products for Agri Beef, including selling meat products to restaurants (with plans to expand the business to individual consumer sales). Agri Beef granted a license to AB Foods to use Agri Beef's “AB” mark in connection with the sale of its goods.

In order to prove its §43(a) violation, Allen Brothers had to show (1) that it had trademark rights in the mark “AB” before AB Foods' began using the allegedly infringing mark, and (2) that AB Foods' use of “AB” would likely cause confusion among consumers in the marketplace about the identity or source of AB Foods' products. Johnny Blastoff, Inc. v. Los Angeles Rams Football Co., 188 F.3d 427, 436 (7th Cir. 1999).

The district court focused entirely on the second factor since it was dispositive of the case – noting that while likelihood of confusion is typically a question of fact, the issue may be resolved on summary judgment when the evidence is “so one-sided that there can be no doubt about how the question should be answered.” Door Sys., Inc. v. Pro-Line Door Sys., Inc., 83 F.3d 169, 171 (7th Cir. 1996).

The court set forth the seven factors used in the Seventh Circuit to determine whether a likelihood of confusion exists: (1) similarity of the marks; (2) similarity of the products; (3) area and manner of concurrent use; (4) degree of care likely to be used by consumers; (5) strength of the complainant's mark; (6) evidence of actual confusion; and (7) intent of the defendant to palm off his product as that of another. Int'l Kennel Club of Chi. v. Mighty Star, Inc., 846 F.2d 1079, 1087 (7th Cir. 1988).

The court found that the first factor – similarity of the marks – favored a finding of no likelihood of confusion. While both parties use a mark with the letters “AB”, the evidence showed that Allen Brothers' use of “AB” in its catalogs, marketing materials, and shipping materials was “almost always accompanied” by the words “Allen Brothers.” In addition, while Allen Brothers uses the “ab-” prefix in its domain names, the consumer is merely directed to Allen Brothers’ main website where the words “Allen Brothers” are predominantly displayed on the page. The court stated:

Thus, even if “AB” is the dominant portion of Allen Brother's mark, the evidence demonstrates that “AB” almost never appears alone on any of Allen Brothers' products. Therefore, a consumer will be likely to differentiate between Allen Brothers' products and those of AB Foods.

Id. at *9.

The court also commented on the visual dissimilarity of the “AB” marks used by each party:

Allen Brothers' mark is a sharp, slanted “AB” with horizontal bars cutting through the letters and is usually displayed in blue. In contrast, AB Foods' mark is a curved, connected “AB” with no sharp or angular lines and is usually displayed in maroon and white. Although restaurant buyers or individual consumers will not have the opportunity to compare the marks side-by-side, after arefully examining the marks we find that they are so visually dissimilar that there is no likelihood of confusion as to the source of the parties' respective products.

Id. at *9-10.

Allen Brothers tried to argue that confusion would exist because the marks are “aurally identical” when heard on radio advertisements. Nonetheless, the court found that, much like its catalogs, marketing materials, and shipping materials, Allen Brothers almost always references “AB” in radio advertisements in conjunction with the words “Allen Brothers” and the “absteaks.com” website mentioned in the ads directs consumers to Allen Brothers' website where the words “Allen Brothers” are predominantly displayed. Thus, the court found that this first factor favored AB Foods

As for the second and third factors, it was undisputed that the products sold by the parties are similar and that both parties are direct competitors selling their selling their meat products to restaurants and consumers (i.e., there is concurrent use among the parties), so these factors favored Allen Brothers.

As for the fourth factor – degree of consumer care – the court noted that “Allen Brothers furnishes high-quality, gourmet meat products to fine-dining restaurants and to connoisseurs of gourmet foods.” Id. at *12. The court also noted the high cost of Allen Brothers’ meat products. As such, the court inferred that “Allen Brothers' customers are sophisticated buyers who exercise a high degree of care before purchasing Allen Brothers' products” which favored AB Foods.

With respect to the fifth factor – strength of Allen Brother's mark – the court rejected Allen Brothers’ arguments that its “AB” mark was strong because a) its mark was arbitrary and thus automatically protected and b) it had used its mark for over 20 years. The court reiterated that the evidence does not show that consumers have come to identify Allen Brothers' products with the mark “AB” alone because Allen Brothers almost always uses “AB” in conjunction with the words “Allen Brothers”:

Therefore, although Allen Brothers' “AB” may be arbitrary in the sense that “AB” does not describe food products or services, it is not legally arbitrary because there is no evidence that it has retained distinctiveness as an identifier of Allen Brothers' products. See Id. at 497. Accordingly, we reject Allen Brothers' contention that it is entitled to trademark protection in “AB” as an arbitrary mark.

Id. at *15. In addition, while Allen Brothers may have used the “AB” mark in some form for 20 years, Allen Brothers did not produce sufficient evidence demonstrating that consumers have come to identify Allen Brothers' products with the “AB” mark by itself. As such, the court found this factor favored AB Foods, concluding that AB Foods' use of “AB” is unlikely to cause confusion among consumers in the marketplace as to the source of AB Foods' products.

With respect to the sixth factor – actual confusion – the court inferred from the absence of any evidence of actual confusion by Allen Brothers that there was also no likelihood of confusion, and thus found this factor to favor AB Foods.

As for the seventh factor – AB Foods’ intent to palm off its goods as those of Allen Brothers – the court observed that Agri Beef had used its “AB” mark for several decades, even before Allen Brothers began to use it mark, without any conflicts. As such, the court rejected Allen Brothers’ argument that Agri Beef chose to name its subsidiary AB Foods and to use the “AB” mark in connection with the sale of meat products in order to trade on the goodwill of Allen Brothers' name, and found this factor to favor AB Foods.

The court concluded that “Allen Brothers has failed to produce evidence that, if believed by a trier of fact, would show that consumers are likely to be confused as to the source of AB Foods' products because of AB Foods' use of ‘AB.’” Id. at *18. And given the lack of similarity in the marks, the sophistication of the consumers, the lack of strength in the mark “AB” alone, no evidence of actual confusion, and no evidence of palming off by AB Foods, the court concluded that “no rational trier of fact could find that AB Foods' use of ‘AB’ causes a likelihood of confusion and AB Foods' motion for summary judgment must therefore be granted with respect to Count One, the Lanham Act claim, as well as Count Two, the common law claim.” Id. at *18.