R. G. Barry Corp. v. Mushroom Makers, Inc.

• Decision Date: 11 December 1979
• Docket Number: D,No. 193,193
• Parties: R. G. BARRY CORPORATION, Plaintiff-Appellant, v. MUSHROOM MAKERS, INCORPORATED, Defendant-Appellee. ocket 79-7303.
• Court: U.S. Court of Appeals — Second Circuit

Page 651

612 F.2d 651

204 U.S.P.Q. 521

R. G. BARRY CORPORATION, Plaintiff-Appellant, v. MUSHROOM MAKERS, INCORPORATED, Defendant-Appellee.

No. 193, Docket 79-7303.

United States Court of Appeals Second Circuit.

Argued Nov. 13, 1979.

Decided Dec. 11, 1979.

Walter D. Ames, Washington, D. C., Watson, Cole, Grindle & Watson and Henry B. Roth, New York City, Herzfeld & Rubin, New York City, for plaintiff-appellant.

Leslie D. Taggart, New York City, Watson, Leavenworth, Kelton & Taggart, New York City, for defendant-appellee.

Before KAUFMAN, Chief Judge, SMITH and OAKES, Circuit Judges.

IRVING R. KAUFMAN, Chief Judge:

In the early days of the Republic, it was perceived that a risk of litigation by a citizen of one state against a citizen of another state was such that the local prejudice of the litigating forum would prevail. Accordingly, since as far back as 1789, Congress has permitted out-of-state defendants sued in state courts to remove actions brought against them to a federal forum for adjudication on the merits. ¹ This fear of parochial bias supplied the principal impetus for removal petitions until 1887, when Congress drastically expanded the grounds for removal to include all actions over which federal courts could otherwise exercise original jurisdiction. ² Now, as then, a defendant sued in state court may remove the action to federal court if the complaint states a claim within the federal court's original jurisdiction, or if the defendant is a citizen of a state other than the forum. In the present case, we must determine whether either of these predicates for removal jurisdiction exists.

I.

R. G. Barry Corporation manufactures and sells women's footwear under the registered trademark MUSHROOMS. In a related but separate market, Mushroom Makers, Inc., employs the MUSHROOM mark to promote and sell its line of women's sportswear, including jeans, skirts, and jackets. Following two unsuccessful attempts to register the MUSHROOM mark with the United States Patent and Trademark Office, Mushroom Makers filed suit in the Southern District of New York seeking a declaration that its use of the symbol did not infringe Barry's rights under the Lanham Act, 15 U.S.C. § 1114. After issue was joined with the filing of a counterclaim by Barry, alleging trademark infringement, unfair competition, and false designation, a trial ensued before Judge Weinfeld.

Nearly three months after trial, but before a decision had been rendered, Barry moved to amend its answer to aver an additional counterclaim against Mushroom Makers based on its alleged violation of the New York anti-dilution statute, N.Y.Gen.Bus.Law § 368-d (McKinney 1968). Barry attempted to justify its belated application on the ground that, shortly beforehand, the New York Court of Appeals had worked a significant change in the State's law of trademark dilution by interpreting § 368-d to create a cause of action to enjoin another's use of a strong distinctive mark, even where there is no likelihood of confusion. See Allied Maintenance Corp. v. Allied Mechanical Trades, Inc., 42 N.Y.2d 538, 399 N.Y.S.2d 628, 369 N.E.2d 1162 (1977). Judge Weinfeld denied Barry's motion, however, and subsequently found minimal likelihood of consumer confusion over the two marks, as well as insufficient injury to Barry to warrant an injunction against Mushroom Makers's continued use of the MUSHROOM mark. Mushroom Makers, Inc. v. R. G. Barry Corp., 441 F.Supp. 1220 (S.D.N.Y.1977), Aff'd 580 F.2d 44 (2d Cir. 1978), ³ Cert. denied, 439 U.S. 1116, 99 S.Ct. 1022, 59 L.Ed.2d 75 (1979).

Three weeks after Judge Weinfeld filed his opinion, Barry commenced the present action in New York Supreme Court restricted to a single claim for violation of § 368-d. Soon thereafter, Mushroom Makers removed the case to federal district court pursuant to 28 U.S.C. § 1441(b). ⁴ Barry, in turn, moved to remand the action to the state court, arguing that Mushroom Makers was a citizen of New York and therefore without right to remove under § 1441(b). Mushroom Makers countered by asserting that it was a citizen of Mississippi, not New York, and that Barry's complaint raised a federal question under the Lanham Act, 15 U.S.C. § 1051 Et seq., over which the district court had original jurisdiction. See 28 U.S.C. § 1338(a). ⁵

After reviewing testimony of Mushroom Makers's officers, both at the earlier trial and in subsequent depositions, Judge Cannella stated that he was "not persuaded that (Mushroom Makers), a Mississippi corporation, (could) be deemed a citizen of New York for purposes of diversity jurisdiction," and denied Barry's motion to remand. Subsequently, the district court judge granted Mushroom Makers's motion for summary judgment and dismissed Barry's complaint holding that Judge Weinfeld's earlier decision presented a complete bar to Barry's second action under the principles of Res judicata and Stare decisis. Barry appealed from the denial of its motion to remand to State court, and the dismissal of its complaint by summary judgment. On appeal, it has presented only the jurisdictional question. Because we believe the present action should not have been removed to the district court, we reverse the denial of Barry's motion to remand, vacate the judgment entered in the district court, and order the cause remanded to the New York Supreme Court. 28 U.S.C. § 1447(c).

II.

Section 1441(b) of Title 28 provides that a civil action initially brought in a state court may be removed to a federal district court only if the cause of action is founded on a claim or right arising under federal law or, in any other action, "only if none of the parties . . . served as defendants is a citizen of the State in which such action is brought." In denying Barry's motion to remand the present action to state court, Judge Cannella apparently did not consider whether the complaint raised a federal question, but rather rested his decision simply on the ground that Mushroom Makers was not a citizen of New York.

A.

It is clear that for purposes both of diversity jurisdiction under 28 U.S.C. § 1332 and removal jurisdiction under 28 U.S.C. § 1441, a corporation is deemed to be a citizen of the state in which it is incorporated, and of the state where its principal place of business is located. 28 U.S.C. § 1332(c). It is a notable sidelight that, historically, such dual citizenship for corporate entities has not always been the rule. In the first case to construe the jurisdictional question of a corporation's citizenship, the Supreme Court stated that only natural persons could be deemed "citizens" for diversity purposes. Bank of United States v. Deveaux, 9 U.S. (5 Cranch) 61, 3 L.Ed. 38 (1809). Consequently, for years diversity jurisdiction depended on the citizenship of a corporation's shareholders, and not the location of the business enterprise or its state of incorporation. In Louisville C. & C. R. R. v. Letson, 43 U.S. (2 How.) 497, 11 L.Ed. 353 (1844), however, the Court began to retreat from Deveaux. Letson held that a corporation may be considered a "person" and thus a citizen of the state in which it is incorporated. Thus, corporate citizenship could be found in the state of incorporation as well as each state in which the corporation's shareholders were citizens. Later, the Court confined the situs of corporate citizenship solely to the state of incorporation in Marshall v. Baltimore & Ohio R. R., 57 U.S. (16 How.) 314, 14 L.Ed. 953 (1853), by holding that a corporation's shareholders are conclusively presumed to be citizens of the state in which the business is incorporated. See also St. Louis & S. F. Ry. v. James, 161 U.S. 545, 16 S.Ct. 621, 40 L.Ed. 802 (1896).

It is against this backdrop that Congress amended 28 U.S.C. § 1332 ⁶ in 1958 to treat corporations as citizens, both of the state of their incorporation and of the state in which their principal place of business is located. The purpose of the amendment, according to the Report of the Senate Committee on the Judiciary, was to eradicate "the evil whereby a local institution, engaged in a local business and in many cases locally owned, is enabled to bring its litigation into the Federal courts simply because it has obtained a corporate charter from another state." S.Rep.No.1830, 85th Cong., 2d Sess. 4 (1958), U.S.Code Cong. & Admin.News 1958, pp. 3099, 3101-3102. Since the underlying reason for diversity jurisdiction is to protect out-of-state litigants from assumed local prejudices, Congress could perceive no reason to open the federal forum to an essentially local enterprise. Moreover, it was considered unfair to permit a corporation to avoid trial in the court of a state where it transacts its principal business by means of a legal device not available to an individual citizen. Id.

Thus, in an effort to conform diversity citizenship with business reality, Congress selected as one test of a corporation's citizenship its principal place of business, a standard previously used under the old Bankruptcy Act, 11 U.S.C. § 11 (1958). In turning to the bankruptcy standard, however, Congress apparently disregarded the great difficulty courts had encountered in applying the test to corporations with multistate operations. ⁷ Nonetheless, as more courts began to address the question, two consistent lines of authority emerged concerning the significance to be accorded different aspects of corporate activity.

Where corporate operations are spread across numerous states, courts have tended to emphasize those factors that identify the place where overall corporate policy originates. Thus, in an apt metaphor originated by Judge Weinfeld, the principal place of business of a far-flung corporate enterprise is "the nerve center from which it radiates out to its constituent parts and from which its officers direct, control and coordinate all activities without regard to locale, in the furtherance of the corporate objective." Scot Typewriter Co. v. Underwood...