Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ill.: Most claims in product distribution and trademark licensing dispute resolved without trial, (Nov 12, 2013)

By Cheryl Beise, J.D.

The federal district court in Chicago has resolved most claims and counterclaims as a matter of law in a dispute involving the licensing of certain trademarks owned by Kashwere, LLC and the right to distribute Kashwere goods in Japan (Kashwere LLC v. Kashwere USAJPN, November 8, 2013, Der-Yeghiauan, S.).

Kashwere LLC (“Kashwere”) was formed in 1999 by defendant Peter Seltzer. In 2006, another entity owned by Seltzer—Kashwere Comforts, LLC (“Comforts”)—entered into a contract with Flat Be Co. Ltd. (“FBC”), granting FBC the exclusive right to distribute Kashwere goods in Japan (“FBC Agreement”). In January 2010, Seltzer sold Kashwere to plaintiff TMG Kreations, LLC (TMG) and Kashwere entered into a licensing agreement (“Licensing Agreement”) with Comforts, granting it the exclusive right to distribute Kashwere products in Japan through FBC.

In January 2011, Seltzer created defendant Kashwere USAJPN, LLC (USAJPN), a holding company, and transferred Comforts’ rights under the Licensing Agreement to USAJPN.

In June 2012, USAJPN filed a lawsuit in federal court in California (California Action) seeking to enforce its exclusive right to sell Kashwere goods in Japan. The California Action was ultimately resolved with all defendants agreeing to cease selling Kashwere goods in Japan.

Shortly after the conclusion of the California action, Kashwere and TMG brought the instant action against USAJPN and Seltzer, asserting claims seeking: (1) a declaration that the Licensing Agreement was terminated as a result of material breaches by USAJPN, (2) a declaration that the Licensing Agreement was terminable at will and was effectively terminated by Kashwere; (3) rescission and restitution; (4) injunctive relief relating to the Licensing Agreement; (5) a breach of contract finding; and (6) injunctive relief relating to a non-compete agreement.

In response, USAJPN, FBC, Sirius Corporation (“Sirius”), and Seltzer filed counterclaims against TMG, Kashwere, Cedric Reingold, and Merri Gleckler for (1) breaches of contract claims, (2) intentional interference with contract and economic relations (IICER); and (3) accounting.

The plaintiffs responded with a counterclaims against FBC and Sirius (collectively, the “FBC Parties”), which included claims for (1) injunctive relief; (2) seeking declaratory relief based on alleged breaches of the Licensing Agreement; (3) a declaration that the Licensing Agreement was terminable at will; (4) rescission and restitution claims; (5) unjust enrichment; and (6) tortious interference with prospective economic advantage (TIPEA). On September 26, 2013, the court denied the FBC Parties’ requests to dismiss the TIPEA claim.

Before the court was the defendants’ motion for summary judgment on the plaintiffs’ claims; the plaintiffs’ motion for summary judgment on the counterclaims brought against them by the defendants, and the FBC Parties’ motion for summary judgment on the counterclaims brought against them by the plaintiffs.

Plaintiffs’ claims against the defendants. The court first considered the defendants’ motion to dismiss the plaintiffs’ breach of contract claims. The plaintiffs contended that the defendants breached the Licensing Agreement in eight different ways, including by improperly designating FBC as a sublicensee, by FBC’s improper registration of the Marks in Japan, by creating USAJPN and an unauthorized new “RE Line,” and by filing the California Action.

The court concluded that there was no breach of the Licensing Agreement by the defendants. There was insufficient evidence to show that FBC exceeded the scope of its license. It was undisputed that FBC was to be the exclusive distributor of Kashwere products in Japan, and that FBC’s counsel advised FBC that it needed to register the Marks in Japan in order to do so. It was also clear that in seeking to register the Marks, FBC was not attempting to deprive the plaintiffs of any interest in the Marks, the court found. USAJPN was merely a holding company not engaged in commercial activity and there was no indication that the “USA” designation created a false designation of origin. Since USAJPN was a holding company in which Seltzer held a majority interest, there was no transfer to a third party that would have triggered the plaintiffs’ right of first refusal. Moreover, nothing in the Licensing Agreement prohibited the defendants from filing suit to protect their right to exclusive distribution of Kashwere products in Japan.

The court granted the defendants’ motion for summary judgment on the plaintiffs’ contract claims. The court also determined that the plaintiffs were estopped from asserting that the Licensing Agreement was terminable at will. In addition, because the plaintiffs failed to establish that any breach of the Licensing Agreement had occurred, their claims for rescission and restitution and injunctive relief based on enforcement of the agreement were also dismissed.

The court also dismissed the plaintiffs’ claim for injunctive relief to enforce the terms of a non-compete agreement signed by Seltzer because there was no evidence for a reasonable trier of fact to conclude that the defendants pursued the California Action in bad faith or were barred from seeking relief for perceived infringements on their rights.

Defendants’ claims against the plaintiffs. The defendants contended that the plaintiffs breached the Licensing Agreement by selling Kashwere goods to third-party wholesalers (Third Parties) and by encouraging the Third Parties to sell the goods in Japan. However, the defendants failed to show that the plaintiffs established a competing distributor in Japan and nothing in the Licensing Agreement provided that no Kashwere goods could ever enter Japan on a second and third-hand basis, according to the court. In addition, because the Third Parties obtained genuine Kashwere products from Kashwere, the goods in question were not infringing the Marks, the court determined. The undisputed facts showed that the plaintiffs did not violate any terms of the Licensing Agreement in their dealings with the Third Parties, the court decided. The defendants’ breach of contract claims and their tortious interference and fraud claims based on the breach claims were accordingly dismissed.

Plaintiffs’ claims against the FBC Parties. The plaintiffs contended that the FBC Parties violated the terms of the Licensing Agreement by attempting to register the Marks in Japan and by their involvement in the RE Line. The plaintiffs’ contract-related claims were dismissed because the defendants and FBC Parties complied with the terms of the Licensing Agreement, including their conduct involving the RE Line. The plaintiffs also failed to allege any facts to support their speculative allegations that the FBC Parties attempted to interfere with the plaintiffs’ reasonable business expectancy by naming the plaintiffs’ customers in lawsuits. Nothing barred FBC Parties from pursuing litigation when they believed that their interests were being harmed and that they were entitled to relief under the law, the court noted.

The court therefore granted all of the parties’ motions for summary judgment on the claims brought against them.

The case is No. 12 C 5018.

Attorneys: Phillip Stewart Reed (Patzik, Frank & Samotny Ltd.) for Kashwere, LLC and TMG Kreations, LLC. Robert Gary Klein (Law Office Of Robert G. Klein) for Kashwere USAJPN, LLC.

Companies: Kashwere, LLC; TMG Kreations, LLC; Kashwere USAJPN, LLC

Cases: FranchisingDistribution IllinoisNews