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  • Writer's pictureJoe Huser

David May Beat Goliath, but Probably Not Oscar. Quarterly Insights, Vol III:

Adidas Does Not Own Stripes

No one had a first quarter as bad as Silicon Valley Bank. But the trademark team at Adidas reminded everyone that Goliath can, in fact, lose. The mega German sportswear brand, which reported sales of approximately €22.5 billion in 2022, sued Thom Browne, Inc. for trademark infringement and trademark dilution in the Southern District of New York on June 28, 2021. While Thom Browne hardly qualifies as a mom-and-pop business (it’s a segment of the Ermenegildo Zegna Group and reported sales of €331 million in 2022), in the context of a battle with Adidas, there’s no question who’s David.

For anyone who’s not familiar with Thom Browne, examples of the designer’s “Four Bar” and “Grosgrain” designs can be found here, here, here and here. What’s great about this lawsuit is that anyone alive, unless they are a member of one of the Uncontacted peoples, knows immediately after viewing images of Thom Browne’s work why Adidas may have cause for concern. The designs certainly would seem to have echoes of adidas’ “Three Stripe Mark.” But does it constitute trademark infringement on the part of Thom Browne?

It’s hard to imagine a trademark lawyer ever reaching the glamour of Johnny Cochrane, who infamously said “If it doesn’t fit, you must acquit” in his closing argument as O.J. Simpson’s defense. But in my mind, Robert T. Maldonado came pretty close with his closing statement: “Adidas does not own stripes.”

And in the end, it was a question of fact for the jury. Following an eight-day trial, a jury found Thom Browne not liable on the claims of trademark infringement and trademark dilution. My own view is that the jury got the question right as to trademark infringement. To be glib and use an extreme example, I do not see the average consumer confusing this with this. And it seems due to the pricing, the brands target different consumers. If I had been in the jury, however, I might have had more sympathy for Adidas’ trademark dilution claim. It seems inevitable that a market flooded with multi-stripe products erodes the distinctiveness of the Adidas marks.

That is surely the fear that Adidas had when it chose to file an opposition with the USPTO on March 27, 2023 against a mark filed by the Black Lives Matter Global Network Foundation. The mark in question, Serial Number 90304243, consists of three yellow stripes of equal width and length. The proposed mark is included in nearly a dozen categories of goods and services, including, without limitation, clothing in the form of: tops and bottoms, shirts, T-shirts, tank tops, hoodies, sweatshirts, sweatpants, jackets, and headwear.

Here again, unless you’re a member of the Uncontacted peoples, it’s pretty easy to see why Adidas might have a cause for concern. But this time, in about 48 hours the company had withdrawn its opposition to the mark. According to The Guardian, the company did not want to be seen as critical of the Black Lives Matter movement.

Tying this fracas together isn’t easy, but the takeaway for small and medium-sized enterprises is to consider fighting back against trademark bullying from larger brands. The Thom Browne case is a reminder that if the matter goes to a jury, then those regular, everyday citizens have to unanimously agree that the allegedly infringing use is in fact infringing. In a way that’s quite a high standard considering unanimity in America seems especially in short supply. The abrupt about-face on the Black Lives Matter mark underscores, as well, that public pressure can play a role in fighting back.

This Arbitration Clause Doesn’t Apply to You, But May be Used Against You

Previously, I have written about the dangers present when counsel concurrently represents the owner of a company and the company itself. It’s not exactly the same situation, but in JPV I L.P. v. Koetting, 88 Cal. App. 5th 172 (Ct. App. 2023), a similar version of muddied water is on display.

The defendant entities provided loan servicing to plaintiffs under an agreement that had an arbitration provision. Significantly, the principal owners of the defendants, herein referred to as the “brothers,” were not parties to the servicing agreement. For context, the chief allegation in the case is that when the term of the servicing agreement was about to end, the defendants and the brothers (in their individual capacity) moved the customers of plaintiffs to new entities (which were owned by the same brothers who owned the defendants). In the plainest vernacular, the allegation is that the brothers stole the customers of the plaintiffs.

Plaintiffs did not like these shenanigans and ended up suing the defendants and the brothers for breach of contract, breach of fiduciary duty and fraud. Pretty typical stuff, so far.

Early in the arbitration, the defendants and the brothers filed an answering statement denying the allegations and asserting that the brothers were not subject to the jurisdiction of the arbitrator. Several months later the defendants filed a motion in which they "formally objected to the inclusion of" the brothers in the arbitration and requested dismissal of the brothers. Defendants further requested that the arbitrator "hold" any ruling on the motion until an upcoming status conference due to their concern that immediate dismissal of the brothers would require defendants to defend a separate suit simultaneously with the arbitration.

The arbitrator eventually denied the motion, finding that the plaintiffs' allegations against the brothers were "so intertwined" with the agreements that the brothers were blocked from objecting to being parties to the arbitration.

The arbitration continued. The plaintiffs ultimately won the underlying arbitration and the arbitrator found the brothers jointly and severally liable with the defendants. Considering that the vast, vast majority of lawsuits settle, after the arbitration award this case entered into rarefied airit became the subject of not just one, but two appeals.

First Appeal

In the first appeal, the brothers argued to vacate the judgment because the arbitrator exceeded its authority by finding that the brothers were subject to arbitration as an alter ego of the defendants. The appellate court agreed. “An arbitrator has no power to determine the rights and obligations of one who is not a party to the arbitration agreement.” Green Gate Servs. v. Koetting, No. A158316, 2020 LEXIS 8037, at *8 (Cal. Ct. App. Dec. 4, 2020). The analysis reviewed other cases and essentially the standard for whether a party who is not a signatory to the arbitration agreement consents to the arbitration is whether the party indicated a “clear willingness to arbitrate the issue.” Since the brothers had in fact objected, their actions could not constitute a clear willingness to arbitrate the issue.

The matter was sent back to the trial court to vacate the award as to the brothers. The brothers are in the clear now, right?

Second Appeal

After losing the first appeal, the plaintiffs made a motion back at the trial court to amend the judgment to include the brothers on an alter ego theory of liability. Yes, the same judgment above which had been vacated as to the brothers because they had not been signatories to the agreement which contained the arbitration clause.

In the motion process, the brothers and the defendant submitted evidence that all corporate formalities had been followed: that the entities filed tax returns, had bank accounts and financial documentation, were adequately capitalized, had insurance coverage, and paid its members reasonable draws. Pretty typical stuff to defeat an alter ego allegation. The plaintiffs contended that the arbitrator had already determined that the brothers were liable on an alter ego basis and that the doctrine of collateral estoppel should apply to the arbitrator’s findings to prevent the defendants from submitting the new evidence.

The trial court denied the plaintiffs’ motion to amend the judgment. It found that the arbitrator’s findings as to the brothers’ alter ego liability were vacated as a result of the first appeal and that there was insufficient evidence to support alter ego liability.

For the nonlegal reader, collateral estoppel is a fancy legal phrase meaning that the issue between the parties has already been decided by a court. For example, let’s say you sue your neighbor to determine where the property line between the two of you is located. After hearing all of the evidence, the court decides where the property line is located. Years later, the tree of the same neighbor falls and crushes your fence. You sue your neighbor again. In the second lawsuit, the determination in the first lawsuit about the location of the property line is given collateral estoppel effect—or in plain language, you and the neighbor don’t need to argue about where the property line is located in the second lawsuit because that was decided in the first lawsuit.

Here, among other rulings made, the appellate court ruled that the trial court had been incorrect in failing to give collateral estoppel to the arbitrator’s findings on alter ego liability for the brothers. The appellate court sent the matter back down to the trial court with the order to conduct further proceedings consistent with its ruling.

Eeeesh. At first, I was a bit flabbergasted by this ruling. To sum it up: The arbitrator cannot issue a judgment that is binding on the individual business owners because they were not parties to the agreement that contained the arbitration clause, BUT, the same arbitrator can make findings of fact that can be used against the individual business owners.

How a person feels about this probably reveals how you think about the legal system generally. If you believe it operates majestically and that the same facts more or less would get the same outcome in a different forum with a different judge or jury, then you’re probably not bothered by this ruling. If you feel (as I do) that the system majestically attempts to deliver fair outcomes—but that the proceedings contain significant elements of chance—then you are probably bothered by this ruling. Next, the ruling effectively makes individual owners subject to the arbitration clauses of their business. Yes, the court said the opposite, but if those findings could be used against you, would you want to sit out the arbitration?

Recall that in the hearings leading up the arbitration, the defendants requested that the arbitrator "hold" any ruling on the motion which objected to the inclusion of the brothers in the arbitration until an upcoming status conference, due to their concern that immediate dismissal of the brothers would require defendants to defend a separate suit simultaneously with the arbitration. Although not mentioned above, at a separate juncture in the arbitration the parties entered into a stipulation concerning the filing of additional proceedings where defendants would receive a five-day notice before plaintiffs filed additional proceedings. In the real world it’s hard to find fault with either of these positions as expenses would have mushroomed if the proceedings bled into multiple forums. However, with the benefit of hindsight, I suspect the better posture would have been for the corporate defendants to carry the fiction to its logical conclusion: Our owners are separate from us and how the plaintiffs choose to proceed against them is not our concern.

David versus Oscar

Most classes in law school focus on learning the law and deciding whether or not a party broke the law. And then, bam. You enter private practice and realize those questions are interesting, but not very interesting unless the person in question has money. Collecting on a judgment can be extremely difficult as highlighted recently in Juarez v. Ward, 88 Cal. App. 5th 730 (Ct. App. 2023).

Juarez provided personal services as a housekeeper for Ward, including cleaning his two-story home, doing laundry, and running errands. She was employed under the terms of an oral agreement. In 1974, Ward was awarded an Oscar for his work on the film, The Sting.

Juarez was terminated and later made a claim before the Labor Commissioner of California for unpaid overtime wages. In 2020, Juarez obtained a judgment against Ward for unpaid wages and penalties in the amount of $82,269.94. She served a demand for a debtor's examination. At the debtor’s examination, Ward claimed he had no assets other than the Oscar and some other memorabilia. Following the examination, Juarez obtained a court order for a delivery of a baseball bat signed by the cast of the film Major League.

In law school I recall a professor once said, parenthetically, that it was often possible to tell how the judge was going to rule early in the opinion. And here, in the recitation of the facts the appellate opinion did not begin with Juarez’s housekeeping services, but with a history of the Oscar being awarded to Ward in 1974. Apparently, when Oscars are awarded, the recipient signs an agreement with the Academy of Motion Picture Arts and Sciences and promises: “I agree to comply with your rules and regulations respecting its use and not to sell or otherwise dispose of it [the Oscar], nor permit it to be sold or disposed of by operation of law, without first offering to sell it to you for the sum of $10.00.”

So when Juarez also applied for an order to deliver Ward’s Oscar, she ran into some bumps in the road. The trial court asked the parties to brief whether the Oscar could be sold. Ultimately the trial court held that the Oscar statuette was subject to an “equitable servitude” and that Juarez was owed the $10.00 when Ward sold the statute back to the Academy.

On appeal, among other things, Juarez claimed that equitable servitudes were only enforceable with respect to a real property interest. The appellate court rejected that claim and relied on the case Nadell & Co. v. Grasso, 175 Cal. App. 2d 420 (Ct. App. 1959).

In Nadell, a wholesaler purchased mass quantities of damaged Kraft products with the restriction that the products not be sold under the Kraft label. Later, a retailer with knowledge of that restriction when it purchased the products, was selling the damaged goods in the Kraft label and the wholesaler sought an injunction to prohibit the sale of the goods. The wholesaler sought a permanent injunction against the retailer and the trial court in Nadell granted it. The appellate court in Nadell upheld the permanent injunction, relying on a string of cases going back to the English case De Mattos v. Gibson (1859) 4 De G. & J. 276 (E.W.H.C.), citing it for the proposition that “reason and justice seem to prescribe that, at least as a general rule, where a man, by gift or purchase, acquires property from another, with knowledge of a previous contract, lawfully and for valuable consideration made by him with a third person, to use and employ the property for a particular purpose in a specified manner, the acquirer shall not, to the material damage of the third person, in opposition to the contract and inconsistently with it, use and employ the property in a manner not allowable to the giver or seller.” See, e.g., Murphy v. Christian Press Ass’n Publ’g Co., 56 N.Y.S. 597 (N.Y. App. Div. 1899); New York Bank-Note Co. v. Hamilton Bank Note Engraving & Printing Co., 68 N.Y.S. 1144 (N.Y. App. Div. 1901); P. Lorillard Co. v. Weingarden, 280 F. 238. (W.D.N.Y. 1922), for case law in which the acquirer of property had requisite knowledge of a previous contract and thus was not able to use such property in a way contrary to it.

What seems fundamentally unfair about Juarez is that unlike the purchasers of the Kraft products who knew of the restrictions, we have no evidence that Juarez would have known of the right of first refusal in favor of the Academy of Motion Picture Arts and Sciences at the time when she provided the cleaning services. I would ask as well, whether Ward’s awards and mementos were prominently displayed in his home (as is often the case in Los Angeles) and created the effect that he and his wife had significant means? But perhaps not, as the Juarez’s early knowledge (or lack thereof) of the Oscar are beyond the scope of the record. But even still, in a case where the Labor Commissioner found Juarez’s evidence that she was working thirteen-hour days without overtime pay to be credible . . . it’s an unsettling outcome for the court to resort to an equitable doctrine to deprive an overworked housekeeper from unlocking the real value of the Oscar to cover her overtime pay.

I think there’s two real world tips from Juarez. For anyone extending credit in any capacity, the first is a reminder that what glitters isn’t always gold. Do your diligence. As the Juarez opinion stated, “the interest of any judgment debtor is subject to all prior interests in the property, whether known or unknown, recorded or unrecorded.” Next, based on the evidence and the findings of the Labor Commissioner, it appears that Juarez was quite overworked by Ward and not compensated for her overtime pay. At one point, she testified that she was working seven days a week from 7:00 a.m. to 8:00 p.m., for about a two-month period. I have no reason to doubt that. But, because there are so many informal relationships with housekeepers in the Los Angeles area, the second real world tip is to keep records. Ward had no such records to dispute the time and when an employer has failed to keep such records, the testimony of the employee is sufficient.

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