Sunward Electronics, Inc. v. McDonald

• Decision Date: 03 March 2004
• Docket Number: Docket No. 03-7432.
• Citation: 362 F.3d 17
• Parties: SUNWARD ELECTRONICS, INC., Plaintiff-Appellee, v. Keith L. McDONALD, Robert D. McDonald and Dog Guard Out-of Site Fencing, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

362 F.3d 17

SUNWARD ELECTRONICS, INC., Plaintiff-Appellee, v. Keith L. McDONALD, Robert D. McDonald and Dog Guard Out-of Site Fencing, Inc., Defendants-Appellants.

Docket No. 03-7432.

United States Court of Appeals, Second Circuit.

Argued: October 16, 2003.

Decided: March 3, 2004.

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James W. Hulme, Cooper Erving & Savage, LLP (Phillip G. Steck, on the brief), Albany, NY, for Plaintiff-Appellee.

William Dunnegan, Perkins & Dunnegan, New York, NY, for Defendants-Appellants.

Before: OAKES, JACOBS, and POOLER, Circuit Judges.

POOLER, Circuit Judge.

Defendants-Appellants Dog Guard Out-of-Site Fencing, Inc., and Keith L. McDonald and Robert D. McDonald, the owners and officers of Dog Guard Out-of-Site Fencing, Inc. (collectively "Defendants") appeal from the April 23, 2003 judgment of the United States District Court for the Northern District of New York (Lawrence E. Kahn, District Judge) granting Plaintiff-Appellee Sunward Electronics, Inc.'s ("Plaintiff") request for a preliminary injunction enjoining Defendants' use of Plaintiff's trademark and specifically, requiring Defendants to assign to Plaintiff any of its telephone numbers that feature Plaintiff's trade name or trademark in its phone book listing.

BACKGROUND

Plaintiff, a New York corporation, manufactures and distributes pet fencing systems using the trade names and trademarks "Dog Guard" and "Out-of-Sight Fencing" ("Dog Guard"). The system functions by administering an electrical shock through a collar worn by the animal when the animal approaches a boundary established by an underground wire. On November 15, 1995, Defendants, an Alabama corporation and Alabama citizens, entered into an exclusive dealership agreement with Plaintiff's predecessor-in-interest whereby Defendants became authorized dealers of Dog Guard products in the Birmingham, Alabama region ("Dealership Agreement"). At one point, according to Plaintiff, Defendants were the top three DOG GUARD dealers in the country. Moreover, Defendant Keith L. McDonald helped recruit other Dog Guard dealers, frequently spoke at Dog Guard meetings and seminars, and tested new Dog Guard products.

Pursuant to the Dealership Agreement, Defendants were required to use Plaintiff's trade name and trademarks for "Dog Guard" and "Out-of-Sight Fencing" in connection with the sale of its pet containment systems. Section 7 of the Dealership Agreement states:

DEALER has the right to use and, unless otherwise instructed by [Plaintiff], shall use the tradename "DOG GUARD," for the term of this agreement. DEALER shall obtain necessary licenses, registrations and appropriate governmental authorities, as they pertain to DEALER'S business and territory. DEALER will obtain a telephone listing under the tradename as specifically outlined by the [Plaintiff] in the territory assigned to DEALER. The tradename registrations will automatically become the property of, and revert to, [Plaintiff] on termination of this agreement, and DEALER shall cause any such transfer to be made within 30 days of termination.

The Dealership Agreement also required Defendants to cease any use of Plaintiff's trade names following the dissolution of the dealership: "DEALER shall have no right after termination of this agreement to use the name `DOG GUARD' or any similar name which may confuse or tend to confuse the general public."

The Dealership Agreement contained a one-year non-compete provision, whereby Defendants agreed to refrain from managing or joining any entity engaged in the production or sale of pet fence products within a certain sales territory.

Defendants' relationship with Plaintiff eventually deteriorated and they began selling pet fencing systems manufactured by Pet Stop, Inc., a competitor of Plaintiff. On or about February 27, 2003, Plaintiff terminated the Dealership Agreement. Plaintiff alleges that Defendants, however, continued to use the trademarks Dog Guard and Out-of-Site Fencing at their store and were passing off other products as manufactured by Plaintiff.

Most importantly, Defendants' listings in local phone books featured Plaintiff's trademark and trade name. The listings state "Dog Guard" and "Out-of-Sight Fencing" near the top of the ad and in bold, and then provide Defendants' phone number and web address (www.dogguardalabama.com). The listed phone numbers go to the Defendant's office, and at one point after the dissolution of the dealership Defendants' office answering machine stated that it was "Pet Stop of Alabama (formerly Dog Guard of Alabama)." A copy of the listing at issue is attached hereto as Appendix A.

On March 20, 2003, Plaintiff filed a complaint against Defendants alleging false designation and unfair competition under the Lanham Act, common law trademark infringement, breach of contract, common law unfair competition, injury to business reputation and dilution, tortious interference, and cyber piracy. At that time, Plaintiff also moved by order to show cause for a preliminary injunction. On April 2, 2003, the district court heard oral argument on Plaintiff's motion. At that time, Plaintiff sought an order enjoining only Defendants' continued use of phone numbers featuring Plaintiff's trade name and trademark in its phone book listings. Plaintiff requested that Defendants discontinue using the phone numbers, or alternatively, that the phone numbers be sent to a neutral intercept operator who would provide the new phone numbers of both Plaintiff and Defendants. Defendants rejected these proposals on the grounds that (1) the district court lacked personal jurisdiction over them; and (2) even if personal jurisdiction was properly asserted, they had not violated the Lanham Act.

On April 23, 2003, the district court issued a preliminary injunction ordering Defendants to assign to Plaintiff the phone numbers at issue. On May 5, 2003, Defendants made a motion to stay the injunction pending appeal, which the district court denied on May 12, 2003. However, the district court, at that time, directed Plaintiff to maintain certain records of calls received by the assigned phone numbers.

DISCUSSION

I. Personal Jurisdiction

"The standard of review applicable to district court decisions regarding personal jurisdiction is clear error for factual findings and de novo for legal conclusions." U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., Ltd., 241 F.3d 135, 151 (2d Cir.2001).

In a federal question case, where the defendant resides outside the forum state, federal courts apply the forum state's personal jurisdiction rules if the applicable federal statute does not provide for national service of process. See PDK Labs., Inc. v. Friedlander, 103 F.3d 1105, 1108 (2d Cir.1997). Because the Lanham Act does not provide for national service of process, the New York state long-arm statute governs this inquiry. See generally, 15 U.S.C. § 1051, et seq.; FED. R. CIV. P. 4(k)(1)(A).

Section 302(a)(1) of the New York state long-arm statute provides that a court may exercise personal jurisdiction over any foreign defendant if that defendant "transacts any business within the state," and the claim arises from those business transactions. N.Y. CIV.PRAC.L. & R. § 302(a)(1). Several factors should be considered in determining whether an out-of-state defendant transacts business in New York, including:

(i) whether the defendant has an on-going contractual relationship with a New York corporation; (ii) whether the contract was negotiated or executed in New York and whether, after executing a contract with a New York business, the defendant has visited New York for the purpose of meeting with parties to the contract regarding the relationship; (iii) what the choice-of-law clause is in any such contract; and (iv) whether the contract requires franchisees to send notices and payments into the forum state or subjects them to supervision by the corporation in the forum state.

Agency Rent A Car Sys., Inc. v. Grand Rent A Car Corp., 98 F.3d 25, 29 (2d Cir.1996) (internal citations omitted). Although all factors are relevant, no one factor is dispositive and other factors may be considered. See id. "[T]he ultimate determination is based on the totality of the circumstances." Id.

Here, the district court applied these factors and correctly found that Defendants transacted business in New York. The Dealership Agreement contained a New York choice of law clause. A choice of law clause is a significant factor in a personal jurisdiction analysis because the parties, by so choosing, invoke the benefits and protections of New York law. CutCo Indus., Inc. v. Naughton, 806 F.2d 361, 367 (2d Cir.1986); see also Sacody Technologies, Inc. v. Avant, Inc., 862 F.Supp. 1152, 1156 (S.D.N.Y.1994).

Moreover, Defendants maintained a continuous and on-going commercial relationship with Plaintiff, a New York business, after becoming Dog Guard dealers. The Dealership Agreement required Defendants to mail to Plaintiff certain payments and warranty cards. Each McDonald brother traveled to New York on two occasions to attend Dog Guard training programs. Defendants also purchased a substantial number of supplies from New York through Plaintiff. According to Plaintiff, "Defendants purchased enough systems to support approximately six thousand customers and realized annual sales in the last few years of approximately $75,000 — $92,000." Plaintiff Br. at 12. Indeed, the amount of purchases by Defendants from New York alone may be sufficient to confer jurisdiction. See Fashion Two Twenty, Inc. v. Steinberg, 339 F.Supp. 836, 841 (E.D.N.Y.1971) (holding that there was jurisdiction over defendants that had previously purchased $30,000 worth of supplies in New York state).

Further, Plaintiff continuously supervised and assisted Defendants during the term of the Dealership Agreement. Plaintiff provided Defendants with training materials and other proprietary information to be used in selling,...