Monday, February 25, 2008

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.

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