E.G.L. Gem Lab Ltd. v. Gem Quality Institute, Inc.

• Decision Date: 02 February 2000
• Docket Number: No. 97 Civ. 7102(LAK).,97 Civ. 7102(LAK).
• Citation: 90 F.Supp.2d 277
• Parties: E.G.L. GEM LAB LTD., Plaintiff, v. GEM QUALITY INSTITUTE, INC. d/b/a European Gemological Laboratory and d/b/a EGL Los Angeles and d/b/a EGL-LA, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

90 F.Supp.2d 277

E.G.L. GEM LAB LTD., Plaintiff, v. GEM QUALITY INSTITUTE, INC. d/b/a European Gemological Laboratory and d/b/a EGL Los Angeles and d/b/a EGL-LA, et al., Defendants.

No. 97 Civ. 7102(LAK).

United States District Court, S.D. New York.

February 2, 2000.

COPYRIGHT MATERIAL OMITTED

Robert B. Hanlon, Lara Holzman, Donna Corby Sobel, Bryan Cave LLP, New York City, for Plaintiff.

Robert D. Katz, Robert T. Maldonado, Cooper & Dunham LLP, New York City, for Defendants Gem Quality Institute Inc., Thomas E. Tashey and Myriam Tashey.

OPINION

KAPLAN, District Judge.

Brand names — trademarks — are pervasive in modem business. Frequently, however, the business carried out under those marks is conducted by licensees pursuant to relationships in which the licensee benefits from the goodwill and consumer recognition of the licensed trademark while the licensor benefits from the capital investment and entrepreneurial skills of the licensee.

A licensee often faces substantial risks in such a relationship, especially the risk that the licensee's business will be so dependent upon the continued right to use the trademark that its very existence would be jeopardized by the expiration or termination of the license.¹ A rational licensee in such circumstances often will take steps to ensure the development of a business sufficiently independent of the licensed trademark to survive the end of the license. Whether the steps taken are consistent with the licensee's obligations to the licensor or trademark owner and to the consuming public, however, frequently present close questions of policy and fact. This case presents just such questions.

I

Plaintiff E.G.L. Gem Lab Ltd. ("EGL Ltd.") brought this action for trademark infringement and dilution, false designation of origin, unfair competition and breach of contract against Gem Quality Institute, Inc. ("GQI") d/b/a European Gemological Laboratory and d/b/a EGL LA, Independent Gemological Laboratory, Inc. ("IGL"), Guy Margel, Thomas E. Tashey, Jr. and Myriam Tashey. GQI and the Tasheys counterclaimed against EGL Ltd. and Nachum Krasnianski, president and sole shareholder of EGL Ltd., alleging fraud and intentional interference with business relations and cross-claimed against Margel. The issues relating to Margel were settled before trial and the counterclaims against EGL Ltd. and Krasnianski have been abandoned. Plaintiff has consented to the dismissal of the claim against IGL.² The remainder of the case was tried to the Court. The following are the Court's findings of fact and conclusions of law.

A. Gem Grading

This case involves the small and tight-knit business of gem grading — the classification of precious stones, generally diamonds, according to certain characteristics. Gem grading laboratories examine and rate stones and issue certificates setting forth their findings. Those dealing in stones rely on such certificates as verifications of quality and, at least indirectly, value. Gem grading laboratories thus provide independent assessments frequently used in what otherwise often would be ill-informed purchase and sale decisions.

Two sorts of gem grading are relevant to this case. Gem stones, particularly diamonds, are classified by cut, color, clarity and weight.³ In addition, colored stones, including some diamonds, may be rated or graded with respect to color, although there are no universally accepted criteria for such color characterizations.⁴

B. The EGL Network

There is only a handful of prominent gem grading businesses in the world. Among the two leaders is European Gemological Laboratories, or EGL,⁵ which was founded by Guy Margel when he opened the first EGL laboratory in Antwerp, Belgium, in 1974.⁶ He then expanded quickly, opening a second laboratory three years later in New York, a third in Los Angeles in 1978,⁷ and others in Israel, France and South Africa soon thereafter.⁸ In 1980, he obtained federal registrations of the trademarks "European Gemological Laboratory" and "E.G.L." in the name of European Gemological Laboratory, Inc. ("EGL Inc."), a New York corporation of which he was the sole shareholder.⁹

The protagonists in the current dispute, Nachum Krasnianski and Thomas Tashey, Jr., both were employees of Margel's EGL operation. Krasnianski managed its New York laboratory. Tashey worked as a grader in the EGL Los Angeles laboratory for about fifteen months before leaving and, in 1980, starting his own Los Angeles operation with his wife, Myriam, under the name Independent Gem Lab.¹⁰

1. Margel's Sale of the U.S. EGL Business

In the mid-1980's, amidst a downturn in the international diamond market, Margel found his gem grading laboratories in some financial difficulty and so decided to spin off his U.S. operations while attempting to keep the network he had built intact.

2. Margel's Sale to Krasnianski

In January 1986, EGL Inc. sold assets and its business to N.K. Gemological Services Inc., a company wholly owned by Krasnianski which thereupon changed its name to E.G.L. Gem Lab Ltd. ("EGL Ltd."), the plaintiff in this case. As part of the transaction. EGL Ltd. acquired all of the U.S. EGL marks and granted to Margel a "royalty free license to use the [EGL marks] in connection with the business of evaluating gems in the greater Los Angeles, California area."¹¹

3. The Sublicense to Tashey

At or about the same time, Margel began negotiations with Tashey to grant him a sublicense to use the EGL marks in Los Angeles in return for royalty payments.

On February 7, 1986, Margel's counsel wrote to Tashey following a series of conversations. The letter confirmed that Tashey had been granted a license to use the EGL marks in the Los Angeles area, that Tashey would pay Margel a percentage of his gross income earned in connection with those marks, and that Tashey would "have no authority to do business in the name or on behalf of [EGL Inc.] or any other corporation of which Mr. Margel was or is a principal."¹² It asked that Tashey sign and return a copy of the letter to signify his agreement.

Tashey responded by expressing concern about the prohibition of his doing business in the name or on behalf of EGL Inc.:¹³

"The use of the name for our company in promotion and advertising is essential to its value. We do not intend to hold ourselves out as agents, officers, or representatives of your client or his businesses, corporate or otherwise."

"In a recent phone conversation with Mr. Margel, he specifically indicated to me that he wished us to use the name in our business in the same manner as if we were connected to the California corporation and to the larger `EGL family', rather than as a separate entity. We are attempting to comply with his requirements."¹⁴

Margel's counsel promptly responded that Tashey's letter had captured the intentions of the parties.¹⁵ Upon his receipt of that communication. Tashey signed and returned the initial letter.¹⁶

Tashey portrays the agreement thus reached as having done no more than given Tashey the right to use the EGL name.¹⁷ But he takes much too narrow a view, colored substantially by his present self interest. It was in the mutual interest of Margel and Tashey that Tashey's Los Angeles operation be viewed as part of the overall EGL operation, that it present itself to the public as before — as an EGL laboratory and part of the larger EGL network. As Margel testified, and as Tashey's own letter suggests, Margel told Tashey that he was to operate only under the EGL name, and Tashey agreed.¹⁸ Hence, Tashey undertook to operate the Los Angeles laboratory under the EGL name just as if it "were connected to the California corporation and to the larger `EGL family', rather than as a separate entity."¹⁹ His agreement to do so was a material part of Margel's inducement to grant the sublicense, as Margel intended the entire EGL network to continue to present itself as a single entity, despite the ownership changes in the United States, and he certainly would not have placed the EGL Los Angeles laboratory in the hands of a competitor.

For a time, Tashey's Los Angeles operation was uncontroversial. In 1991, however, a dispute over royalty payments²⁰ led Tashey and Margel to renegotiate the 1986 sublicense.²¹ The new agreement, which became effective on December 30, 1991, resolved the economic dispute and confirmed the terms of the 1986 agreement but added a number of additional provisions that are relevant here. First, it extended the term of Tashey's rights to December 31, 2001.²² Second, it required Tashey to furnish Margel with samples of all promotional material, certificates, and other documents that used or referred to the EGL marks in any manner.²³ Finally, it proscribed any use of the EGL marks that would "impair or tend to impair [them] ... or the business reputation and goodwill associated therewith."²⁴

The EGL business in the United States, to all outward appearances, continued as before for some time. As the foregoing indicates, however, the ownership situation actually was quite different. The U.S. business and marks were owned by Krasnianski's EGL Ltd. subject to the license for use of the marks in the Los Angeles area, which belonged to Tashey as a result of his sublicense from Margel. From an ownership perspective, Margel was out of the U.S. picture although he remained the licensee-sublicensor with respect to Los Angeles and retained the right to receive royalties from both Tashey and Krasnianski.

C. The Expansion of Tashey's Activities

Tashey proved an aggressive and effective operator of the EGL business in Los Angeles. By 1993 or 1994, however, it had dawned on Tashey that a potential problem loomed. He successfully had invested a great deal of effort in promoting the EGL marks in Los Angeles, but his right to use the EGL name and marks would expire, absent a new agreement, at the end of 2001. He therefore was subject to the risk that Margel would refuse to renew the sublicense and...