John C. Flood of Va. Inc. v. John C. Flood Inc.

• Decision Date: 17 June 2011
• Docket Number: No. 10–7098.,10–7098.
• Citation: 99 U.S.P.Q.2d 1047,395 U.S.App.D.C. 284,642 F.3d 1105
• Parties: JOHN C. FLOOD OF VIRGINIA, INC., et al., Appellantsv.JOHN C. FLOOD, INC., et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

642 F.3d 1105

395 U.S.App.D.C. 284

99 U.S.P.Q.2d 1047

JOHN C. FLOOD OF VIRGINIA, INC., et al., Appellants

v.JOHN C. FLOOD, INC., et al., Appellees.

No. 10–7098.

United States Court of Appeals, District of Columbia Circuit.

Argued March 8, 2011.Decided June 17, 2011.

Appeal from the United States District Court for the District of Columbia (No. 1:06–cv–01311).Stephen J. Zralek argued the cause for appellants. With him on the briefs was Paul W. Kruse.Robert A.W. Boraks argued the cause for appellees. With him on the brief was Benjamin J. Lambiotte.Before: SENTELLE, Chief Judge, TATEL, Circuit Judge, and EDWARDS, Senior Circuit Judge.Opinion for the Court filed by Chief Judge SENTELLE.SENTELLE, Chief Judge:

Two businesses with nearly identical names—John C. Flood, Inc. (“1996 Flood”) and John C. Flood of Virginia, Inc. (“Virginia Flood”)—brought suit against each other over which company had the right to use two trademarks: JOHN C. FLOOD and its abridged form FLOOD. The district court concluded that 1996 Flood was the proper owner of the two trademarks and that Virginia Flood, as the licensee of the marks, was estopped from challenging 1996 Flood's ownership. John C. Flood of Virginia, Inc. v. John C. Flood, Inc., 700 F.Supp.2d. 90, 98–99 (D.D.C.2010). Because we agree with the district court on these points, we affirm the decision below, but remand the case back to the district court for clarification regarding whether Virginia Flood's use of the mark JOHN C. FLOOD OF VIRGINIA was prohibited by its decision.

I.

The parties in this case are two plumbing, heating and air conditioning businesses and the principals of those businesses whose histories are intertwined. The story begins in 1984 when Mark Crooks and Mel Davis—defendants below and two of the appellees in this case—incorporated John C. Flood, Inc., a Maryland business that served the Washington D.C. metropolitan area (“1984 Flood”). 1984 Flood traded under the service mark JOHN C. FLOOD, its abbreviated form FLOOD, and variations thereof. In 1988, looking to expand into the Virginia market, Crooks, Davis and two of their 1984 Flood employees, Clinton Haislip and James Seltzer—plaintiffs below and two of the appellants in this case—incorporated a separate Virginia business, John C. Flood of Virginia, Inc. Haislip and Seltzer originally owned only 49% of Virginia Flood, but soon came to own 50% of the business to become equal owners with Crooks and Davis. Although Virginia Flood had a verbal license to use the marks JOHN C. FLOOD and FLOOD with or without the modifier “of Virginia,” the parties disagree over the nature and scope of that license. Regardless of what limitations were or were not part of the original oral agreement, neither party disputes that Virginia Flood has used the two disputed marks continuously since 1989.

In June 1991, 1984 Flood filed for Chapter 11 bankruptcy reorganization. One month later, Crooks and Davis resigned as officers of Virginia Flood, but continued to operate 1984 Flood in bankruptcy until March 1993, when the bankruptcy court appointed a trustee and converted the case to a Chapter 7 bankruptcy. At that time, Crooks and Davis shut down 1984 Flood's operations and ceased monitoring the operation of Virginia Flood and its use of the disputed marks. In 1995, Haislip and Seltzer purchased Crooks and Davis's 50% share of Virginia Flood from the trustee, becoming the sole owners of the business.

After leaving 1984 Flood, Crooks and Davis joined with Robert and Joanne Smiley—the remaining defendant/appellees—and continued to trade in the plumbing, heating and air conditioning business through various corporations known as J.C.F, Inc., J.C. Flood, Inc., John C. Flood of DC, Inc. and John C. Flood of MD, Inc. (collectively the “New Flood entities”). While operating the New Flood entities, Crooks, Davis, and the Smileys misappropriated the assets, including the disputed marks, of 1984 Flood. In an effort to preserve 1984 Flood's assets, in May 1995 the bankruptcy trustee filed an adversary proceeding, which resulted in the bankruptcy court issuing a consent order for a preliminary injunction against the New Flood entities and for the appointment of a receiver with the authority to take charge of the New Flood entities and their assets. By August 1995, the bankruptcy court made the injunction and the receivership permanent.

In October 1995, the bankruptcy trustee proposed that the disputed marks, as well as the seized assets and stock of the New Flood entities, be sold to Crooks, Davis, and the Smileys. As creditors of the 1984 Flood bankruptcy estate, Haislip and Seltzer objected to the sale on the grounds that Crooks, Davis, and the Smileys had unlawfully diverted and concealed estate assets. In response, Crooks and Davis withdrew and the Smileys increased the amount of their bid. Haislip and Seltzer made a competing bid to purchase only the disputed marks and the 1984 Flood phone numbers. In February 1996, over Haislip and Seltzer's objections, the trustee executed a bill of sale conveying the disputed marks and the stock of the New Flood entities to the Smileys, who then incorporated a new Maryland business under the name John C. Flood, Inc. (“1996 Flood”).

Since 1996, both 1996 Flood and Virginia Flood have traded in the plumbing, heating, and air conditioning business in the Washington D.C. metropolitan area with both companies using the marks JOHN C. FLOOD and FLOOD. In 2000, Virginia Flood sought and obtained two trademark registrations from the United States Patent and Trademark Office, one for the phrase “JOHN C. FLOOD” and one for a logo incorporating that phrase. According to 1996 Flood, when it learned that Virginia Flood had registered the disputed marks, it brought an action before the Trademark Trial and Appeal Board of the U.S. Patent and Trademark Office to cancel the registrations. That action was suspended pending disposition of a civil action in July 2006 after Virginia Flood brought a trademark infringement suit against 1996 Flood. In response, 1996 Flood filed a counterclaim claiming, inter alia, that 1996 Flood had priority over Virginia Flood to the disputed marks.

Throughout the subsequent litigation, Virginia Flood argued that 1984 Flood abandoned all rights to the disputed marks when it created a “naked license” during its Chapter 7 bankruptcy. Virginia Flood also argued that it suffered a decline in its quality of service, due to no fault of its own, immediately following the appointment of a trustee and 1984 Flood's cessation of oversight and involvement. As we noted above, during that time 1984 Flood did not operate and no one from 1984 Flood other than the bankruptcy trustee was available to monitor Virginia Flood's use of the licensed trademarks. As the Ninth Circuit has noted, this lack of supervision is important because “ ‘uncontrolled or ‘naked’ licensing may result in the trademark ceasing to function as a symbol of quality and controlled source.' ” Barcamerica Int'l. USA Trust v. Tyfield Importers, Inc., 289 F.3d 589, 596 (9th Cir.2002) (quoting McCarthy on Trademarks and Unfair Competition § 18:48 at 18–79 (4th ed. 2001)). “Consequently, where the licensor fails to exercise adequate quality control over the licensee, ‘a court may find that the trademark owner has abandoned the trademark, in which case the owner would be estopped from asserting rights to the trademark.’ ” Id. (quoting Moore Business Forms, Inc. v. Ryu, 960 F.2d 486, 489 (5th Cir.1992)). Although naked licensing was a central element of Virginia Flood's claim, the district court never had an opportunity to rule on the merits of the naked licensing argument.

Instead, ruling on the parties' cross-motions for summary judgment, the district court concluded that “[b]ecause 1996 Flood is the successor-in-interest of 1984 Flood, the original owner of the FLOOD marks, and because Virginia Flood is barred by the doctrine of licensee estoppel from asserting its naked licensing claim to obtain priority over the marks, 1996 Flood is entitled to summary judgment on all of Virginia Flood's claims” and to “a declaration of its priority over Virginia Flood and of its exclusive right to use and register the marks JOHN C. FLOOD and FLOOD.” John C. Flood of Virginia, 700 F.Supp.2d. at 98–99. For the reasons set forth below, we agree.

II.

Virginia Flood argues that the district court made two errors: first, holding that 1996 Flood had priority over the disputed marks, and second, holding that Virginia Flood was legally barred under the theory of licensee estoppel from challenging 1996 Flood's ownership. Virginia Flood claims that the district court improperly discounted the New Flood entities' unlawful use of the disputed marks when it determined that 1996 Flood had priority to the marks over Virginia Flood. Virginia Flood argues that the New Flood entities' unlawful use broke the chain of priority upon which the district court relied to determine that 1996 Flood was the proper successor-in-interest of 1984 Flood, the creator and original owner of the marks. Once that chain of priority was broken, Virginia Flood argues that its continued use of the marks from 1989 to the present—compared to 1996 Flood's use of the marks from 1996 to the present—established its ownership of the mark by demonstrating that it was the first to use the mark in commerce.

Virginia Flood also asserts that the equitable doctrine of licensee estoppel should not apply in this case. Virginia Flood argues that it should not be estopped from challenging 1996 Flood's ownership of the disputed marks because the verbal license between the parties did not include an explicit no-challenge provision; because Virginia Flood attempted to maintain the quality of the marks, but failed to do so only because of lack of supervision by the licensor; and because in this case, the trademark principles that discourage naked licensing should outweigh the contract...