Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—2d Cir.: Former pizza shop franchisees obtain cancellation of trademark, (Jun 28, 2016)

By Thomas Long, J.D.

In a dispute between first cousins over use of the mark PUDGIE’S in connection with once franchised pizza restaurants, the federal district court in Rochester, New York, correctly determined on summary judgment that defendant Brett Tarntino obtained his registration for the PUDGIE’S mark through fraud on the USPTO, the U.S. Court of Appeals in New York City has held. The district court’s judgment cancelling Tarntino’s mark was affirmed (MPC Franchise, LLC v. Tarntino, June 27, 2016, Livingston, D.).

In 1963, three brothers—Charles "Pudgie" Cleary, Frances Cleary, and Michael Cleary, Sr.—opened the first "Pudgie’s" pizza parlor on the north side of Elmira, New York ("Northside Pudgie’s"), and later opened the "Southside Pudgie’s" and "Elmira Heights Pudgie’s" pizza parlors.

In 1972, the Cleary brothers formed Pudgie’s Pizza Franchising Corporation ("PPFC"), for the purpose of licensing the PUDGIE’S mark to franchisees. Subsequently, PPFC entered into numerous franchise agreements, allowing franchisees to operate "Pudgie’s" pizza parlors in New York and other states. In 1973, PPFC entered into a franchise agreement with the Cleary brothers’ sister, Bernadette Tarntino, permitting her to use the PUDGIE’S mark in connection with a pizza parlor in Horseheads.

In 1990, Michael Cleary, Sr. died. At the time of his death, he owned 50 percent of the stock in PPFC. He also owned MP Cleary, Inc. ("MP Cleary"), a company that operated the Southside Pudgie’s and a Pudgie’s pizza parlor in Mansfield, Pennsylvania. After Michael’s death, his wife, Rosa, and his sons, David Cleary and Robert Cleary, became the owners of MP Cleary.

PPFC dissolved in September 1993. Thereafter, the former PPFC franchisees, including Bernadette, continued to operate their individual Pudgie’s pizza parlors as before, though independently, and not pursuant to any franchise or licensing agreement. At some point in the early 1990’s, the Elmira Heights Pudgie’s closed. For many years, the parties co-existed peacefully, even placing their advertisements together.

In 2004, MP Cleary sought to obtain a new federal registration of the PUDGIE’S mark, but it was owned by a third-party, TruFoods. TruFoods and MP Cleary entered into a Trademark License Agreement, giving MP Cleary a non-exclusive, perpetual, and transferable right to use the PUDGIE’S mark in connection with MP Cleary’s existing businesses, defined as "restaurants, carry out and food service businesses that principally offer pizza, subs or other similar products." The license also granted MP Cleary the right to sue for infringement of the mark. In 2009, MP Cleary formed MPC Franchise, LLC ("MPC Franchise"), for the purpose of opening PUDGIE’S pizza parlor franchises.

In 2007, Bernadette Tarntino died, and her three children—Brent Tarntino, Edward Tarntino and Kristen Tarntino—equally inherited her stock in Pudgie’s Pizza Corporation – Horseheads, Inc. ("PPC-Horseheads")—which owned and operated the Horseheads Pudgie’s pizza parlor.

In 2010, the parties’ relationship broke down, in part because of a dispute over rights to use Pudgie’s in Elmira Heights. In July 2011, Brent Tarntino, in his individual capacity, applied for federal registration of the PUDGIE’S mark for "pizza parlors; Restaurant services featuring pizza, pasta and subs." The registration issued in February 2011. Tarntino intended to begin franchising new Pudgie’s pizza restaurants. Tarntino informed MPC Franchise and its franchisees that he was the "true owner" of the PUDGIE’s mark.

In June 2011, MP Cleary and MPC Franchise (collectively, "MPC") filed suit against Brent Tarntino, seeking (1) a declaration that Tarntino had no ownership interest in the PUDGIE’S mark owned by TruFoods; (2) cancellation of Tarntino’s registered mark on the grounds of fraud on the USPTO and a likelihood of confusion with TruFoods’ mark; and (3) a declaration that Tarntino committed trademark infringement and unfair competition with regard to TruFoods’ mark, in connection with his use of his registered mark to franchise new restaurants. Tarntino, along with PPCH, counterclaimed, alleging federal trademark infringement, common-law trademark infringement, and federal unfair competition.

The district court determined on summary judgment that Tarntino fraudulently obtained his mark, finding that that Tarntino "knew that Plaintiffs were already franchising pizzerias, using the very same mark that he was attempting to register for that same purpose." The district court canceled Tarntino’s registration, dismissed Tarntino and PPCH’s counterclaim for federal trademark infringement, granted Tarntino and PPCH’s motion for summary judgment on Plaintiffs’ federal unfair-competition claim, and denied Tarntino and PPCH’s motion for summary judgment on several other counterclaims. Tarntino appealed, principally contesting the district court’s judgment on fraudulent procurement.

The appellate court affirmed, finding that no genuine issue of material fact existed as to whether Tarntino obtained the registration fraudulently. Tarntino did not dispute that he applied for the PUDGIE’S mark in his individual capacity and signed an oath attesting that: (1) he believed himself to be "the owner of the … mark"; and (2) "[t]o the best of his[] knowledge and belief[,] no other person, firm, corporation, or association has the right to use the [Pudgie’s] mark," either in "identical form" or "in such near resemblance … as to be likely … to cause confusion, or to cause mistake, or to deceive."

Tarntino admitted that his statements were material—in that the USPTO would not have otherwise issued the registration—but he argued that the plaintiffs failed to prove by clear and convincing evidence that he had sufficient scienter to be liable for fraud. According to Tarntino, the scienter standard for fraud on the USPTO was met only when an applicant actually knew that material statements in the trademark application were false, and that it was not enough that the applicant should have known about such falsity. Tarntino further argued that the district court improperly granted the plaintiffs’ summary judgment on the basis that he "should have known" the statements to the USPTO were false.

The appellate court agreed that Tarntino had stated the correct standard for finding fraud on the USPTO. It held, nevertheless, that there was no genuine issue of material fact that Tarntino fraudulently obtained his mark. First, the Second Circuit said, the district court did not rely on an incorrect scienter standard in determining that Tarntino fraudulently obtained his mark. Rather, the district court unequivocally found that no material issue of fact existed as to Tarntino’s actual knowledge of falsity.

"Indeed, it is beyond question that Tarntino possessed the requisite degree of scienter, even under the more stringent standard for which Tarntino advocates," the Second Circuit said. "Even though Tarntino applied individually and personally for the mark, Tarntino admits—as he must—‘that [he] did not individually or personally use the [PUDGIE’S m]ark’ at any point in time."

There was abundant evidence that Tarntino knew that others had rights to use the mark that were at least equal, if not superior, to his own. Most importantly, the court noted, Tarntino was well aware of multiple other Pudgie’s locations that were using the mark in the precise same capacity in which he applied for the mark. Accordingly, the district court correctly concluded that no material issue of fact existed as to whether Tarntino knowingly made false, material representations in his application, the appellate court concluded.

The case is No. 15-717-cv.

Attorneys: Jeffrey Zucker (Fischer Zucker, LLC) for MPC Franchise, LLC and MP Cleary, Inc. Michael H. Zhu (Michael H. Zhu, Esq. PC) for Brent Tarntino.

Companies: MPC Franchise, LLC; MP Cleary, Inc.

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