Spartan Food Systems, Inc. v. HFS Corp., 86-2092

Decision Date13 March 1987
Docket NumberNo. 86-2092,86-2092
PartiesSPARTAN FOOD SYSTEMS, INC., Plaintiff-Appellant, v. HFS CORPORATION, Defendant-Appellee.
CourtU.S. Court of Appeals — Fourth Circuit

Barry Eastburn Bretschneider (Douglas P. Mueller, Gerald L. Lett, Wegner & Bretschneider, Washington, D.C., Louis P. Howell, Spartanburg, S.C., Spartan Food Systems, Inc., on brief), for plaintiff-appellant.

John Sidney Hale (Gipple & Hale, David McC. Eastbrook, Washington, D.C., Creeger & Creeger, on brief), for defendant-appellee.

Before WIDENER, Circuit Judge, BUTZNER, Senior Circuit Judge, and SIMONS, Senior District Judge for the District of South Carolina, sitting by designation.

BUTZNER, Senior Circuit Judge:

Spartan Food Systems appeals from the district court's judgment dismissing its complaint against H.F.S. Corporation and from the district court's injunction restraining Spartan from using its federally registered service mark, QUINCY'S, for restaurant services throughout Virginia. Because H.F.S. is not entitled to bar Spartan from using its mark in all areas of the state, we reverse dismissal of the complaint, dissolve the injunction, and remand the case for further proceedings.

Spartan, a Delaware corporation whose principal place of business is in Spartanburg, South Carolina, has continuously used the service mark, QUINCY'S, in connection with restaurant services in interstate commerce since 1976. Spartan operates 219 QUINCY'S restaurants in the states of North Carolina, South Carolina, Florida, Georgia, Alabama, Tennessee, and since about November 1985, Newport News, Hampton, and Martinsville, Virginia. Spartan advertises its QUINCY'S restaurants through newspapers, signs, and radio. On August 21, 1984, Spartan registered its service mark with the United States Patent and Trademark office, based on its date of first use in interstate commerce of September 1, 1976.

Also using the QUINCY'S service mark is H.F.S., a Virginia corporation with its principal place of business in Arlington, Virginia. H.F.S. has operated two restaurants in Arlington and McLean, northern Virginia suburbs of Washington, D.C., since September 1979. H.F.S. advertises those restaurants through newspapers, including the Washington Post, and through signs and radio. H.F.S. obtained a Virginia registration on March 9, 1982, for its mark. Before Spartan opened its Virginia restaurants it knew that H.F.S. used the QUINCY'S mark in the northern part of the state.

Spartan sought a declaratory judgment of its rights as a federal registrant under the Lanham Act to use the QUINCY'S mark in its Virginia restaurants and in other parts of the state except Arlington and McLean. H.F.S. counterclaimed for service mark infringement in violation of common law, the Virginia Trademark and Service Mark Act, Va.Code Sec. 59.1-77--92, and Sec. 43(a) of the Lanham Act. H.F.S. asserts entitlement to exclusive use of the QUINCY'S mark throughout Virginia.

The district court held that because Spartan's federal registration was not incontestable, H.F.S. could assert its state registration as a defense to Spartan's claim that the Lanham Act afforded it the right to use its mark in all areas of the state except northern Virginia. The court construed Virginia's trademark statute and common law as giving H.F.S. statewide right to the QUINCY'S mark and enjoined Spartan from using its federally registered mark anywhere in Virginia.

I

Spartan's registration has not been in effect five years, so its right to use the mark is not incontestable. Consequently, Sec. 33(a) of the Lanham Act, 15 U.S.C. Sec. 1115(a) is applicable. This section provides:

(a) Any registration ... of a mark registered on the principal register provided by this chapter and owned by a party to an action shall be admissible in evidence and shall be prima facie evidence of registrant's exclusive right to use the registered mark in commerce on the goods or services specified in the registration subject to any conditions or limitations stated therein, but shall not preclude an opposing party from proving any legal or equitable defense or defect which might have been asserted if such mark had not been registered.

Section 33(a) enables H.F.S. to rebut Spartan's prima facie evidence of exclusive right to use the mark, QUINCY'S. Section 43(a) of the Act, 15 U.S.C. Sec. 1125(a) enables H.F.S. to seek injunctive relief against Spartan's use of the mark. H.F.S. has offered no proof that Spartan's registration is invalid or defective. Therefore, the scope of its defense under Sec. 33(a) and the geographical extent of the injunction it seeks under Sec. 43(a) are governed by common law as expounded by the Supreme Court. See Natural Footwear Ltd. v. Hart, Schaffner & Marx, 760 F.2d 1383 (3d Cir.1985); Minuteman-Press International v. Minute-Men Press, 219 U.S.P.Q. 428, 431 (N.D.Cal.1983); 2 J. McCarthy, Trademarks and Unfair Competition, Sec. 26.18, p. 331 (2d ed. 1984).

Hanover Star Milling Co. v. Metcalf, 240 U.S. 403, 36 S.Ct. 357, 60 L.Ed. 713 (1916), and United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90, 39 S.Ct. 48, 63 L.Ed. 141 (1918), explain the applicable common law. These cases hold that a junior user, who in good faith adopted a mark for use at a place remote from the place of senior use of a similar mark, has a right to continue its use of the mark superior to the right of the senior user. H.F.S. used the QUINCY'S mark in good faith in northern Virginia, a place remote from Spartan's senior use of the mark. Consequently, H.F.S. can continue to use the QUINCY'S mark on its restaurants in northern Virginia, and Spartan cannot use the mark there. This much Spartan concedes.

II

H.F.S. contends, however, that its use of the QUINCY'S mark is not limited to northern Virginia. It asserts that it has the right of exclusive use of the mark throughout Virginia and that Spartan must be barred from using the mark anywhere in the state. The following passage from Hanover Milling, 240 U.S. at 415-16, forecloses these claims:

That property in a trade-mark is not limited in its enjoyment by territorial bounds, but may be asserted and protected wherever the law affords a remedy for wrongs, is true in a limited sense. Into whatever markets the use of a trade-mark has extended, or its meaning has become known, there will the manufacturer or trader whose trade is pirated by an infringing use be entitled to protection and redress. But this is not to say that the proprietor of a trade-mark, good in the markets where it has been employed, can monopolize markets that his trade has never reached and where the mark signifies not his goods but those of another.... "Since it is the trade, and not the mark, that is to be protected, a trade-mark acknowledges no territorial boundaries of municipalities or states or nations, but extends to every market where the trader's goods have become known and identified by his use of the mark. But the mark, of itself, cannot travel to markets where there is no article to wear the badge and no trader to offer the article."

In a concurring opinion, Justice Holmes stated that he thought a trademark established in one part of a state cannot be used by another person in any part of that state. 240 U.S. at 426, 36 S.Ct. at 365. A majority of courts, however, have not accepted the Holmes dictum. See, e.g., Natural Footwear Ltd. v. Hart Schaffner & Marx, 760 F.2d 1383, 1398 n. 34 (3d Cir.1985); Food Fair Stores v. Square Deal Market Co., 206 F.2d 482, 484-85 (D.C.Cir.1953). See also 2 J. McCarthy, Trademarks and Unfair Competition, Sec. 26:12, pp. 309-11 (2d ed. 1984). Although Hanover Milling and United Drug were decided before passage of the Lanham Act, their common law exposition of trademark rights applies today. The common law rights are restricted to the locality where the mark is used and to the area of probable expansion. See In re Beatrice Foods Co., 429 F.2d 466, 472 (CCPA 1970).

Notwithstanding Hanover Milling and United Drug, H.F.S. asserts that this circuit recognizes statewide rights for trademarks regardless of their limited use. In support of this proposition it cites Armand's Subway, Inc. v. Doctor's Associates, Inc., 604 F.2d 849, 850-51 n. 3 (4th Cir.1979), which states:

In delineating geographical areas for trademark use, whole States are the usual unit. Wrist-Rocket [Mfg. Co., Inc. v. Saunders Archery Co.], supra, 578 F.2d at 732 [8th Cir.1978]; Hanover Star Milling Co., supra, 240 U.S. at 416 . This may be a historical survival of the origin of trademark protection as part of the law of unfair competition. Perhaps individual areas less than statewide might be appropriate under certain circumstances. The sandwich shops in the instant case draw walk-in trade from a small surrounding area. The manufacture of brick is another local industry, where high transportation costs limit penetration of a wide market.

Armand's does not hold that in this circuit trademark rights encompass an entire state. The footnote is dicta. Moreover, as the court recognized, areas less than statewide may be appropriate for local business, such as sandwich shops or restaurants. The court also acknowledged that the critical factor, even in a single state, is the likelihood of confusion engendered by competing uses of similar marks rather than state lines. 604 F.2d at 850-51.

Apart from its claim to use the mark throughout Virginia on the basis of Armand's dicta, H.F.S. asserts that it is entitled to statewide use because of market penetration and potential expansion. In support of this contention it relies on establishment of two restaurants in northern Virginia, its advertising in the Washington Post, which circulates throughout Virginia, and plans to expand to other parts of the state.

Some courts have interpreted the area of use to include a "zone of natural expansion," Minuteman Press International, Inc. v. Minute-Men Press, 219...

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