Intellectual Property Failure to disclose license for trademark was sanctionable

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Where a company licensed the use of a trademark without disclosing that the company itself was under a license to use that mark, and failed to disclose the license at any point during the discovery process, barring the company from asserting trademark infringement claims and raising any equitable defenses was an appropriate sanction.

Background

L&L Wings Inc. operates a network of retail stores selling beach apparel and related merchandise under the name “WINGS.” L&L sought federal trademark registration for the “WINGS” mark from the United States Patent and Trademark Office, or PTO, beginning in 1987, but their applications were denied due to the prior registration of the name “WINGS” to Piedmont Industries Inc., the predecessor-in-interest to Shepard R. Morrow.

In 1993, Morrow and L&L entered into a license for the mark in which L&L explicitly acknowledged Morrow’s ownership of the mark and agreed to pay 10 annual royalty installments in exchange for use of the mark. L&L remitted the first royalty payment in 1993 but failed to make any additional payments and failed to respond to Morrow’s requests for payment in June and August 1994.

L&L continued to use the mark. In 1994, a former L&L employee founded Beach Mart Inc. and entered into a one-year licensing agreement with L&L to use the “WINGS” mark on two of its stores. Beach Mart continued using the mark after the agreement expired in 1995.

In 2005, Beach Mart and L&L entered into a licensing agreement that required Beach Mart to cease using the “WINGS” mark but authorized it to use variations of that mark, including “BIG WINGS” and “SUPER WINGS.” L&L did not disclose the Morrow license to Beach Mart at the time and expressly stated that was the owner of the “WINGS” mark.

By 2008, all of Morrow’s registrations had expired or were canceled by the PTO. Between 2008 and 2012, L&L obtained its own registrations for “WINGS” and related marks. In 2011, L&L notified Beach Mart of L&L’s intent to terminate the 2005 license.

Beach Mart then filed this suit against L&L for breach of contract. L&L never did not disclose the existence of the Morrow license during discovery, but Beach Mart found out about it immediately before trial. The district court then granted Beach Mart’s motion for sanctions and precluded L&L from asserting trademark infringement and unfair competition claims against Beach Mark and from seeking any equitable relief or asserting any equitable defenses related to Beach Mart’s operation of its current stores.

Beach Mart then amended its complaint and asserted new claims for fraudulent inducement, negligent misrepresentation, unfair and deceptive trade practices, trademark registration cancellation and false or fraudulent registration. The case was later assigned to a new judge who granted summary judgment to L&L on all of Beach Mart’s claims. This appeal followed.

Analysis

First, we conclude that the district court did not abuse its discretion in imposing preclusive sanctions on L&L. Notably, L&L does not challenge the court’s factual finding that L&L’s corporate designee provided false testimony, that L&L intentionally withheld the Morrow license, or that L&L had acted willfully and in bad faith. Thus, the record plainly supports the district court’s conclusion that L&L acted with a high degree of culpability. The substantial prejudice suffered by Beach Mart similarly is apparent from the record.

While public policy generally favors deciding cases on the merits, in the present case the court made a specific factual finding that only severe preclusive sanctions would deter L&L from engaging in similar misconduct in the future. Although L&L disagrees with this assessment, here the court carefully evaluated all the relevant circumstances and exercised the greatest caution before dismissing L&L’s counterclaims, and we defer to its determination.

However, the district court erred in granting summary judgment to L&L on Beach Mart’s negligent misrepresentation claim. While Morrow’s registrations were publicly available, it is undisputed that the Morrow license itself was not and it is the nondisclosure of L&L’s status as a licensee that forms the basis of Beach Mart’s misrepresentation claim.

In addition, L&L’s assertion of licensee estoppel is barred by the sanctions order as it plainly constitutes an equitable defense related to Beach Mart’s use of the “WINGS” mark on its current stores. As such, the district court erred in granting summary judgment to L&L on Beach Mart’s claim for cancelation of the mark based on abandonment.

The district court also erred in granting summary judgment to L&L on the basis that the Morrow license terminated in 1994. Indeed, the record is replete with disputed facts that prevent such a conclusion from being made on summary judgment. Notably, the letters demanding payment of royalties did not state that the license would be terminated in the event of nonpayment.

Finally, given the district judge’s statements indicating that he has no intention of managing a trial with respect to any claims in this case, reassignment to a different judge is appropriate.

Affirmed in part, vacated in part and remanded.

Beach Mart Inc. v. L&L Wings, Inc. (Barbara Milano Keenan, J.) Case Nos. 18-1477, 18-1486, 18-1517 and 18-1975. Aug. 1, 2019. From E.D.N.C. (Terrence Boyle, J.) Charles A. Burke for Appellants/Cross-Appellees; Richard S. Taffet for Appellees/Cross-Appellants. 26 pp.