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  • Writer's pictureJoe Huser

Every Dog (Toy) Has Its Day, Wrinkles on Increased Homestead Exemption. Quarterly Insights, Vol. IV:

Updated: Oct 22, 2023

Puppy Chew Toy Reaches the Supreme Court

In the first quarter of this year we saw an epic trademark case where Thom Browne, Inc. slayed the Goliath, Adidas. But in the second quarter, it was Goliath who won in the Supreme Court case, Jack Daniel’s Props. v. VIP Prods. LLC, 599 U.S. 140, 163; 143 S. Ct. 1578, 1592–93; (2023), when the venerable whiskey maker Jack Daniel’s prevailed over the maker of a dog chew toy called “Bad Spaniels Silly Squeaker” (hereinafter “Bad Spaniels”).

The Bad Spaniels chew toy was essentially shaped like the Jack Daniel’s bottle. The area of the chew toy bottle that would have been the labeling on the Jack Daniel’s bottle was, more or less, a black and white area with fonts copying the Jack Daniel’s typography. The word “Jack Daniel’s” was replaced with “Bad Spaniels.” The phrase “Old No. 7 Brand Tennessee Sour Mash Whiskey” was replaced with “The Old No. 2 On Your Tennessee Carpet.” The cardboard tag on the back of the chew toy used to hang the toy for display at retail outlets also mimicked the black and white Jack Daniel’s label and had two product logos—one the top left for the “Silly Squeakers line,” and on the top right for “Bad Spaniels.”

Jack Daniel’s sent a letter demanding that VIP Prods. LLC, (hereinafter “VIP”), the maker of the chew toy, stop selling it. Of course, it is easy to Monday-morning quarterback any case with the benefit of hindsight. Nevertheless, it seems curious that VIP responded to the demand letter by filing a lawsuit seeking declaratory judgment that the Bad Spaniels chew toy did not infringe on the Jack Daniel’s mark. Recall: “If [your enemy] is secure at all points, be prepared for him. If he is in superior strength, evade him.” Tzu, Sun, The Art of War 11 (Lionel Giles trans., Open Road Integrated Media, Inc. 2003).

Simplifying the procedural history, VIP lost at trial and was enjoined from selling the Bad Spaniel’s product, leading VIP to appeal to the Ninth Circuit. The Ninth Circuit found that the dog chew toy, while not the Mona Lisa, was an expressive work entitled to First Amendment considerations under Rogers v. Grimaldi, 875 F.2d 994, 999 (2d Cir. 1989) and remanded to the district court. So chastened, the district court found that Jack Daniel’s could not satisfy the Rogers test and granted summary judgment to VIP. The Ninth Circuit affirmed and Jack Daniel’s petitioned for a writ of certiorari for the Supreme Court to consider the case. The Supremes rejected the Ninth Circuit in its entirety. In an opinion authored by Justice Kagan, the Supreme Court unanimously found that when an alleged infringer is using a mark to identify the source of the product, that such use isn’t subject to the Rogers test or First Amendment considerations. Instead, it is subject to the regular “likelihood of confusion” analysis, but such likelihood of confusion analysis may consider the parodying elements as to whether the source would so parody itself. It them remanded the case to the courts below.

In other words, your proposed T-shirt of a hung-over Mickey Mouse with cannabis leaves in the background may be entitled to First Amendment protection so long as the shirt doesn’t appear to be sourced from Disney itself. And in analyzing that issue, one is entitled to consider whether Disney could be the source of such a shirt. Though the Supreme Court didn’t linger in its analysis about the cardboard tag used to hang the chew toy, because it was mentioned, one wonders whether this played a large role in the matter. Arguably, VIP’s use of both its “Silly Squeakers” product logo and the “Bad Spaniels” product logo (with the Jack Daniels like design) suggested a partnership between “Silly Squeakers” and Jack Daniels. Moreover, the tag could have been an opportunity to completely distance the product from the Jack Daniel’s insignia and leave the end consumer with less doubt about the possible source of the product. Finally, though many aspects of the cases are different, on comparison to the Thom Browne matter, I would also suggest that the Jack Daniel’s marks are inherently more distinct and more unique than the three stripes of Adidas. Clients often want to apply for more basic marks (I blame SEO). This blog article and the underlying Tweets from David Perell are also very compelling about the homogenization of design. Further, building a brand farther away from a descriptive title may be more difficult. However, the moat of protection around a mark essentially corresponds to its distinctiveness.

The Edge of the Increased Homestead Exemption May Not be as Favorable as it Seems

In a previous blog article, I wrote about California’s increased homestead exemption. I mused that the way the law was written, at least for asset protection purposes, business owners would be motivated to purchase homes in the least affluent neighborhoods of the most affluent counties to maximize their homestead exemption.

While Soda Springs is not the cheapest area in Placer County, California (this article would suggest it falls in the middle), the facts of In re Oliver, 649 B.R. 206 (Bankr. E.D. Cal. 2023) more or less suggest the wisdom of that strategy and yet also its limits. There, the debtor sought to take advantage of a generous homestead exemption based on median prices in Placer County (near Lake Tahoe). Id. at 208.

Chapter 7 bankruptcies operate as a liquidation of assets, the proceeds of which are used to pay prepetition creditors. An individual debtor who files under Chapter 7 essentially “gives up” everything they own. For those without a legal background, imagine that the debtor puts everything they own into a box and hands it over to the legal process to divvy up to their creditors. The exemptions then, are rules about what the debtor can take out of the box before the box is distributed. Exemptions allow a debtor to keep certain assets, so that not everything they own is taken to pay off their debts. In In re Oliver, the debtor argued that his home in Soda Springs should be taken out of the box because of the increased California homestead exemption. Not so fast, said the bankruptcy judge. In the opinion the judge ruled that under 11 U.S.C. § 522(q)(1)(B)(ii) the exemption is subject to an overall cap of $189,050 in cases where the debtor owes a debt arising from “fraud, deceit, or manipulation in a fiduciary capacity.” Id. at 208. Thus the $626,400 exemption claimed under California law (and linked to the real estate market of Placer County) could be cut down to $189,050.

When a debt is alleged to have arisen from fraud, there are mini lawsuits inside of bankruptcy called adversary proceedings. Since two pending adversary proceedings alleged some type of fraud in In re Oliver and since an objection to abandonment of the property (i.e., in our earlier parlance, objections to the debtor removing property from the box) based on the federal cap established in 11 U.S.C. 522(q)(1)(B)(ii) can be made at any time prior to the case being closed, the court reasoned it was more prudent to leave the debtor’s home inside the bankruptcy box until the case was closed. Id, at 216.

On the surface, this decision seems logical and in theory would not affect an unquestionably honest debtor. Imagine, for example, a teacher that simply got in way over their head on credit card debts. In such a scenario, whether the debtor receives the full value of the homestead exemption at the beginning of bankruptcy or at the end would not matter.

In practice though, this is a pro-creditor decision. In the real world, the difference between breach of contract and fraud (at least at the pleading stage) is not as neat as law school textbooks would suggest. Therefore, this decision incentivizes creditors to bring weak adversary proceedings which allege fraud because many debtors, if they would otherwise be entitled to a generous homestead exemption, will settle at some amount to save more of the homestead exemption. That is to say, rather than possibly losing an adversary proceeding and having the exemption bumped down from, let’s say $626,500 to $189,050, most debtors will settle if they are able. How a person feels about that probably reveals how they feel about bankruptcy law in general.

Bankruptcy law supposedly exists in part to support risk-taking entrepreneurial activity. My view is that the entrepreneurial business owner is far more likely to be faced with adversary proceedings which allege fraud than a teacher or another employee debtor. Therefore, this decision somewhat subverts this policy goal as the risk-taking class of debtor is less likely to receive their full homestead exemption.

In either event, the practice tip remains the same. The higher a person’s risk profile, the more likely they should be utilizing their homestead as part of their asset protection plan. The debtor in In re Oliver will likely settle the adversary proceedings to protect some of the equity in their home, but they are most likely settling from a place of higher power than if the equity had been outside of their homestead.

Texas Joins Cavalcade of States with Data Privacy Laws

In the second quarter, Texas jumped on the bandwagon and enacted the Texas Data Privacy and Security Act. Given that California and Texas are often perceived as polar opposites on the political spectrum in America, it certainly suggests a broad desire amongst the populace for more control over their own data.

The Texas law has some of the usual items. Small businesses are exempt, but rather than referencing a revenue or records threshold, the Texas law relies on the definition of a small business as defined by the United States Small Business Administration. But, exemption is not absolute—the Texas law forbids even small businesses from engaging in the sale of a consumer’s data without the consent of the consumer.

The key operative provisions of the Texas Data Privacy and Security Act contain many of what have become typical rights enumerated in this type of legislation, chiefly: the right to know if a controller is processing data and the right to access it; the right to correct inaccuracies; the right delete; the right to transfer the data; and the right to opt out of certain types of processing.

The sticky wicket (or one of the sticky wickets) that has held up the American Data Privacy and Protection Act is how to enforce the law. Perhaps in keeping with its political reputation, the Texas law is lighter on enforcement, at least facially. It expressly states that no private right of action is created by the law. Further, prior to commencing an action, the Attorney General must provide a thirty (30) day cure period to the person allegedly violating the Texas Data Privacy and Security Act.

In some instances, that sort of makes sense. If Debby in Dallas has repeatedly asked for the name of her dead husband to be removed from the mailers of a grocery store to no avail, I suspect that a communication from the Texas Attorney General will get the right attention. In short order, the mailers will be fixed and the violation will be cured. But, assuming the same store has sold that same data in contravention of Debbie’s opt-out request, how can that be cured? Further, the Texas Attorney General may recover a civil penalty “not to exceed $7,500 for each violation.” Does “each violation” mean every time that the aforementioned grocery store sent a mailer despite Debby’s request to delete or does it treat all of those mailers as one violation? Next, I would note that the cure period is not particularly long if a prospective violation involved tens of thousands of records.

In any event, the law doesn’t go into effect until July 1, 2024. So, for most small- and medium-sized enterprises, this means it’s still next year’s problem. But these questions (and certainly, many, many more) are why this area is crying out for a federal law. No one, except perhaps law professors, enjoy the small academic differences between various state laws and navigating these waters will only become more difficult as more states pass such laws.

Does Ego Lead to Alter Ego?

Also, previously I have written about courts justifying application of the alter ego theory on the basis that the same counsel was used by the company defendant and the company owners. In the second quarter of this year, another such case arose where a motion was made to amend a judgment to include the principal of the company. The motion was granted at least in part, on the basis that the principal had shared attorneys with the company defendant. Hacker v. Fabe, 92 Cal.App.5th 1267, 1277; 2023 Cal. App. LEXIS 499, at *10 (2023).

The issue of sharing the same counsel was not dispositive, nor was that specific issue fully explored. The opinion recited basic California law on alter ego and applied it to the facts of the case. Id. at 1275–78.

It is unpublished opinion and therefore it cannot be cited in legal proceedings. In the opinion the California Court of Appeals noted that it “was its third opinion in the case.” Id. at 1271. It cited the trial court’s finding that “[t]his case just has a history of hardball resistance to reasonable requests to enforce the judgment.” Id. at 1271. It gave a history of how parties related to the judgment debtor resisted third party debtor’s exams and then provided obfuscating or thin testimony once they finally occurred.

Differences of opinion exist. Perhaps sometimes a hardball tactic works. It is at the edge of the law and the mystery of human affairs. Judgment creditors give up. Or move to another state. Or, perhaps, die. It is possible this judgment debtor made settlement offers that were not part of this record.

Here, I do find the court’s recitation of the alter ego analysis fundamentally correct. However, I also think this opinion (unofficially) stands for the proposition that courts will rarely tolerate a wholly vanquished and mostly persistent judgment creditor. A judgment creditor that has not been successful after ten years of attempting to collect on the judgment is very nearly an affront to the power of the courts themselves.

On the issue of shared counsel—I do not wish to become a broken record on this issue. But I raise again because often I have seen sloppy representation where the interest of the company and the owners are blurred. In some cases, the amount in dispute may not justify separate personal and company counsel, but in all matters the lines should be drawn as crisply as possible. Undoubtedly the judgment creditor in Hacker will now have more leverage since the judgment has been amended to include the owner individual.

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