Gorenstein Enterprises, Inc. v. Quality Care-USA, Inc.

• Citation: 874 F.2d 431
• Decision Date: 02 May 1989
• Docket Number: Nos. 84-1731,88-1031,88-1731 and 88-2068,CARE-US,INC,s. 84-1731
• Parties: , 14 Fed.R.Serv.3d 330, 10 U.S.P.Q.2d 1762 GORENSTEIN ENTERPRISES, INC., Sam Gorenstein, and David Gorenstein, Plaintiffs-Appellants, v. QUALITYand David A. Scheinman, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 431

874 F.2d 431

57 USLW 2706, 14 Fed.R.Serv.3d 330,

10 U.S.P.Q.2d 1762

GORENSTEIN ENTERPRISES, INC., Sam Gorenstein, and David Gorenstein, Plaintiffs-Appellants, v. QUALITY CARE-USA, INC. and David A. Scheinman, Defendants-Appellees.

Nos. 84-1731, 88-1031, 88-1731 and 88-2068.

United States Court of Appeals Seventh Circuit.

Argued Nov. 29, 1988.

Decided May 2, 1989.

Merle L. Royce, Chicago, Ill., for plaintiffs-appellants.

David J. Brody, Widett, Slater & Goldman, Boston, Mass., for defendants-appellees.

Before POSNER, COFFEY and RIPPLE, Circuit Judges.

POSNER, Circuit Judge.

This protracted litigation over a franchise resulted in a resounding defeat for the franchisee and its principals--the Gorenstein brothers. Substantial and experienced businessmen who own and operate several nursing homes in the Chicago area, they had obtained a franchise in 1978 from Quality Care-USA to provide home health care services in the Chicago area under Quality Care's registered trademark. Home health care services involve the provision of nursing and other medical care in the home rather than in an institution. Licensed home health care providers can provide some services that unlicensed ones cannot; the parties disagree over whether Quality Care undertook as part of its deal with the Gorensteins to obtain a license for the franchised operation.

Shortly after obtaining the franchise from Quality Care the Gorensteins defaulted on their royalty obligations, and in 1980 Quality Care terminated the Gorensteins' franchise and demanded that they cease using the Quality Care trademark forthwith. Ignoring the demand, the Gorensteins instead sued Quality Care in an Illinois state court, seeking rescission of the franchise agreement. Quality Care removed the suit to federal district court on grounds of diversity, and there also filed its own suit against the Gorensteins, basing jurisdiction on both diversity and the federal trademark statute and seeking both to collect the unpaid royalties under the agreement and to enjoin, as a violation of the trademark statute and of the franchise agreement as well, the Gorensteins' continued use of the Quality Care trademark. After the district judge granted Quality Care's motion for a preliminary injunction, the Gorensteins dismissed the removed suit and refiled it as a counterclaim to Quality Care's suit. Contending that Quality Care had abandoned the trademark by acquiescing in the Gorensteins' continued use of it after the termination of the franchise, the counterclaim sought rescission of the franchise on the ground that Quality Care had induced the Gorensteins to accept it by false representations, in violation of the Illinois Franchise Disclosure Act, Ill.Rev.Stat. ch. 121 1/2, paragraphs 701 (now 1712) et seq.

In 1982 the district judge granted partial summary judgment for Quality Care, ruling that the Gorensteins were indeed guilty of infringing Quality Care's trademark. Six months later the Gorensteins moved to vacate the grant of partial summary judgment on the basis of newly discovered evidence and a new legal theory, and to amend their counterclaim. The newly discovered evidence purported to show that Quality Care had made false representations going far beyond those charged in the counterclaim. The new legal theory was that the Gorensteins' effort to rescind the franchise entitled them to continue using the Quality Care trademark until the district judge decided whether to grant rescission. The judge denied the Gorensteins' motion, whereupon (in 1983) they filed the proposed amended counterclaim as a fresh lawsuit in state court. Quality Care removed this suit to the federal district court and then moved to dismiss it on the ground that it was a compulsory counterclaim to Quality Care's suit. See Fed.R.Civ.P. 13(a). The district judge granted the motion.

Quality Care's case then went to the jury, which found in its favor and awarded damages. The judge trebled the jury's award of damages for trademark infringement, and also awarded Quality Care attorney's fees on the entire judgment, plus prejudgment interest, at 9 percent per annum, on the award of trademark damages (untrebled), making a grand total that with postjudgment interest is now approaching $900,000.

The Gorensteins appeal, challenging the refusal to let them amend their counterclaim, the exclusion of the newly discovered evidence of misrepresentation, other rulings on the evidence, the instructions to the jury, the dismissal of the suit they filed in 1983 which duplicated the amended counterclaim that they were forbidden to file, the trebling of the jury's award of damages for trademark infringement, the award of attorney's fees, the award of prejudgment interest, and the 9 percent prejudgment interest rate. Quality Care, invoking Rule 38 of the Federal Rules of Appellate Procedure, asks us to award it the attorney's fees that it has incurred in defending against the appeal.

We begin with the question whether the Gorensteins should have been permitted to change their defense and counteroffensive three years into the case. The proposed change was dramatic. Originally the Gorensteins had argued that Quality Care had abandoned its trademark and that the franchise was voidable because Quality Care had made three specific misrepresentations, mainly about licensure. Pretrial discovery revealed that these claims had no merit. Meanwhile the Gorensteins' original counsel had been disqualified, on Quality Care's motion, because he had both negotiated the franchise and later, when the Gorensteins could not make a go of the franchise, had advised them to keep on using Quality Care's trademark after they lost the franchise; he was therefore potentially a key witness. The Gorensteins also had had a parting of the ways with a second law firm and were now on their third set of lawyers. It was these lawyers--their present counsel--who decided in 1983 to switch the focus of the suit. They wanted to reopen discovery for the purpose of gathering evidence that Quality Care had misrepresented the profitability of its franchises in the negotiations with the Gorensteins, and they wanted to resist the trademark infringement claim by arguing that the Gorensteins were entitled to continue using Quality Care's mark until their claim for rescission of the franchise was resolved.

The Gorensteins argue that lawsuits ought to be decided on the merits and that the district judge unreasonably penalized them for the mistakes of their first two sets of lawyers. In a perfect world, lawsuits would be decided on the merits rather than on procedural grounds, but in the imperfect world that we happen to live in many lawsuits are cut off without full--often without any--consideration of the merits: the case is settled, or a party defaults, or the complaint is dismissed or a defense precluded as a sanction, and so forth. The Gorensteins' plaint falls particularly flat because the "merits" they wish to urge are technical and legalistic, having nothing to do with equity or substantive justice, and were in fact adequately ventilated notwithstanding the judge's procedural rulings.

Regarding Quality Care's claim of trademark infringement, a claim based entirely on the Gorensteins' refusal to stop using Quality Care's trademark when the franchise was terminated, the merits were fully ventilated. The Gorensteins had argued abandonment and acquiescence, on which see Piper Aircraft Corp. v. Wag-Aero, Inc., 741 F.2d 925, 933-34 (7th Cir.1984), and had lost, and they do not press the argument in this court. Then they argued that they had a right to use the trademark for as long as they were seeking to rescind the franchise. The district judge was not pleased that the argument was first made after he ruled that the trademark had been infringed, but he considered the argument anyway--and rejected it on the merits. He was right to reject it. The argument was frivolous, and, not surprisingly, offered without supporting authority. Once a franchise has been terminated, the franchisee cannot be allowed to keep on using the trademark. The owner of a trademark has a duty to ensure the consistency of the trademarked good or service. If he does not fulfill this duty, he forfeits the trademark. See, e.g., Oberlin v. Marlin American Corp., 596 F.2d 1322, 1327 (7th Cir.1979). The purpose of a trademark, after all, is to identify a good or service to the consumer, and identity implies consistency and a correlative duty to make sure that the good or service really is of consistent quality, i.e., really is the same good or service. If the owner of the trademark has broken off business relations with a licensee he cannot ensure the continued quality of the (ex-)licensee's operation, whose continued use of the trademark is therefore a violation of trademark law. See, e.g., Burger-King Corp. v. Mason, 710 F.2d 1480, 1492 (11th Cir.1983); El Greco Leather Products Co. v. Shoe World, Inc., 806 F.2d 392, 396 (2d Cir.1986); Franchised Stores of New York, Inc. v. Winter, 394 F.2d 664, 668 (2d Cir.1968).

The argument for entitling the ex-licensee to retain the trademark is particularly feeble where, as in this case, he himself is seeking to break off business relations with the licensor. The Gorensteins were seeking to rescind the franchise. They didn't want to continue providing Quality Care home health services, yet they wanted to keep on using the trademark that identified them as a provider of those services. There is considerable evidence that the Gorensteins were holding the trademark hostage as a bargaining tactic to pressure Quality Care into renegotiating the franchise or settling the suit. Whether or not this was their motive, the Gorensteins cannot repudiate the franchise yet retain the major consideration they received under it--the right to use Quality Care's trademark. Costandi v. AAMCO Automatic Transmissions, Inc., 456 F.2d 941 (9th Cir.1972) (per curiam).

No...