970 P.2d 954 (Ariz.App. Div. 1 1998), 1 CA-CV 97-0484, Fairway Constructors, Inc. v. Ahern

Docket Nº:1 CA-CV 97-0484.
Citation:970 P.2d 954, 193 Ariz. 122
Opinion Judge:[7] The opinion of the court was delivered by: N O Y E S, Judge
Party Name:FAIRWAY CONSTRUCTORS, INC., and Ludwig Engineering, Inc., Plaintiffs-Appellants, v. Frank AHERN and Jane Doe Ahern, husband and wife, dba Frank Ahern Construction, Defendants-Appellees.
Attorney:[6] Anderson Law Offices by Michael C. Anderson, Attorneys for Appellants, Bullhead City Scholz & Scholz by Richard L. Scholz, Attorneys for Appellees, Bullhead City
Case Date:August 11, 1998
Court:Court of Appeals of Arizona
 
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Page 954

970 P.2d 954 (Ariz.App. Div. 1 1998)

193 Ariz. 122

FAIRWAY CONSTRUCTORS, INC., and Ludwig Engineering, Inc., Plaintiffs-Appellants,

v.

Frank AHERN and Jane Doe Ahern, husband and wife, dba Frank Ahern Construction, Defendants-Appellees.

No. 1 CA-CV 97-0484.

Court of Appeals of Arizona, First Division, Department D

August 11, 1998

Review Denied Jan. 12, 1999.

Page 955

[193 Ariz. 123] Anderson Law Offices by Michael C. Anderson, Bullhead City, for Appellants.

Scholz & Scholz by Richard L. Scholz, Bullhead City, for Appellees.

OPINION

NOYES, Judge.

¶1 Fairway Constructors, Inc. ("Fairway") and Ludwig Engineering, Inc. ("Ludwig") sued Frank Ahern, d.b.a. Frank Ahern Construction ("Ahern"), for unfair competition based on Ahern's use of a home design that was copyrighted by Ludwig and licensed to Fairway. The trial court dismissed the complaint on grounds of federal preemption, and it awarded attorneys' fees to Ahern. We affirm the dismissal and reverse the award of attorneys' fees.

I.

¶2 Fairway and Ahern are home builders in Mohave County. Ludwig owns the copyright on the design of a home that Fairway builds and markets under a license from Ludwig. Ahern has no such license. The complaint alleged that Ahern used the Ludwig design in three homes, and that Fairway and Ludwig were damaged by the "wrongful misappropriation of intellectual property, copyright infringement, improper passing off and/or imitation by Defendants of Plaintiffs' design." The complaint sought compensatory damages, punitive damages, and Ahern's profits from using Ludwig's design.

¶3 Ahern moved to dismiss on grounds the action arose under the Copyright Act of 1976, 17 U.S.C. §§ 101 to 1101, and was therefore within the exclusive original jurisdiction of federal court. See 28 U.S.C. § 1338(a). Fairway moved to amend the complaint, but the trial court granted Ahern's motion to dismiss, effectively denying the motion to amend.

¶4 Ahern requested an award of attorneys' fees, citing "A.R.S. 12-341.01" as authority. Plaintiffs opposed the request on grounds the action did not arise out of a contract. The ensuing minute entry cited no statute but advised that the trial court, "in its discretion, allows attorneys' fees in the amount of $1,300."

¶5 Fairway appealed from the dismissal, the denial of the motion to amend, and the award of attorneys' fees. Ludwig appealed from the award of attorneys' fees. We have jurisdiction pursuant to Arizona Revised

Page 956

Statutes Annotated section 12-2101(B) (1994).

II.

¶6 We conduct de novo review of an order dismissing a complaint for lack of subject matter jurisdiction. In re Marriage of Crawford, 180 Ariz. 324, 326, 884 P.2d 210, 212 (App.1994).

¶7 Fairway cannot sue Ahern in federal court for copyright infringement because Fairway is not an exclusive licensee of the Ludwig design. See Eden Toys, Inc. v. Florelee Undergarment Co., 697 F.2d 27, 32 (2d Cir.1982) (stating that federal law authorizes only copyrights owners and exclusive licensees to sue for copyright infringement); Althin CD Med., Inc. v. West Suburban Kidney Ctr., 874 F.Supp. 837, 842 (N.D.Ill.1994) (stating that non-exclusive licensee cannot sue for copyright infringement).

¶8 Fairway argues that it can sue Ahern in state court for unfair competition based on misappropriation and "palming off." Ahern counters that Fairway's claim is nothing more than a copyright infringement claim and is therefore preempted. We agree that an unfair competition claim is preempted unless it alleges elements that make it qualitatively different from a copyright infringement claim. Balboa Ins. Co. v. Trans Global Equities, 218 Cal.App.3d 1327, 267 Cal.Rptr. 787, 794 (1990).

¶9 The common law doctrine of unfair competition is based on principles of equity. House of Westmore, Inc. v. Denney, 151 F.2d 261, 265 (3d Cir.1945); Metropolitan Opera Ass'n v. Wagner-Nichols Recorder Corp., 199 Misc. 786, 101 N.Y.S.2d 483, 488 (1950). The general purpose of the doctrine is to prevent business conduct that is "contrary to honest practice in industrial or commercial matters." American Heritage Life Ins. Co. v. Heritage Life Ins. Co., 494 F.2d 3, 14 (5th Cir.1974). The doctrine encompasses several tort theories, such as trademark infringement, false advertising, "palming off," and misappropriation. W. Page Keeton et al., Prosser and Keeton on the Law of Torts 130 at 1013-30 (5th ed.1984). "At best, copyright preempts only some of the claims included in the term 'unfair competition.' " Balboa, 267 Cal.Rptr. at 795.

¶10 "[T]he central tort in unfair competition at common law is known as 'palming off,' or 'passing off.' It consists in a false representation tending to induce buyers to believe that the defendant's product is that of the plaintiff...." Keeton, supra, at 1015; see also Thompson v. Youart, 109 N.M. 572, 787 P.2d 1255, 1259 (App.1990) (and cases cited therein) (noting that the essence of "palming off" is active misrepresentation as to the source of a product). A properly stated "palming off" claim is not preempted by federal law. See Ippolito v. Ono-Lennon, 139 Misc.2d 230, 526 N.Y.S.2d 877, 882 (Sup.1988) (finding no preemption for activities such as "passing off"); see also Warner Bros. v. American Broadcasting Cos., 720 F.2d 231, 247 (2d Cir.1983) (stating that...

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