Idaho Potato Comm. v. M & M Produce Farm & Sales

• Decision Date: 11 July 2003
• Docket Number: Docket No. 02-7792(L).,Docket No. 02-7818(XAP).
• Parties: IDAHO POTATO COMMISSION, Plaintiff-Appellant-Cross-Appellee, v. M & M PRODUCE FARM & SALES, doing business as M & M Produce, M & M Packaging, Inc., Matthew Rogowski and Mark Rogowski, Defendants-Counter-Claimants-Appellees-Cross-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

335 F.3d 130

IDAHO POTATO COMMISSION, Plaintiff-Appellant-Cross-Appellee, v. M & M PRODUCE FARM & SALES, doing business as M & M Produce, M & M Packaging, Inc., Matthew Rogowski and Mark Rogowski, Defendants-Counter-Claimants-Appellees-Cross-Appellants.

Docket No. 02-7792(L).

Docket No. 02-7818(XAP).

United States Court of Appeals, Second Circuit.

Argued: March 18, 2003.

Decided: July 11, 2003.

David Zaslowsky, Baker & McKenzie, New York, N.Y., for Plaintiff-Appellant-Cross-Appellee.

J. Joseph Bainton, Bainton McCarthy LLC, New York, NY (Irene M. Hurtado, on the brief), for Defendant-Counter-Claimants-Appellees-Cross-Appellants.

Thurbert E. Baker, Attorney General; Robert S. Bomar, Deputy Attorney General; Isaac Byrd, Senior Assistant Attorney General; Timothy J. Ritzka, Assistant Attorney General; Marc P. Goncher, Assistant Attorney General; Atlanta, GA; for Amicus Curiae State of Georgia, in support of the Idaho Potato Commission.

Kenneth Keck, General Counsel, Lakeland, FL, for Amicus Curiae Florida Department of Citrus, in support of the Idaho Potato Commission.

Before: FEINBERG, F.I. PARKER and SOTOMAYOR, Circuit Judges.

FEINBERG, Circuit Judge.

Plaintiff Idaho Potato Commission ("IPC") appeals from a May 2002 Memorandum and Order ("May 2002 Order") of the United States District Court for the Southern District of New York (Brieant, J.), vacating a $41,962 jury award for the IPC in its certification mark¹ infringement suit under the Lanham Act, 15 U.S.C. § 1051 et seq., against M & M Produce Farm and Sales, M & M Packaging, Inc., and Matthew and Mark Rogowski individually (collectively "M & M"). The district court held that under the circumstances of this case there was no basis for monetary damages absent a showing of counterfeiting. On appeal, the IPC argues that the Lanham Act does not require the owner of a certification mark to prove counterfeiting in order to recover monetary damages from an infringer.

Defendant M & M cross-appeals from the court's August 1998 Memorandum and Order ("August 1998 Order") denying M & M summary judgment on its counterclaims and holding that M & M was barred from seeking cancellation of the IPC marks by a no-challenge provision in its licensing agreement with the IPC.² M & M argues on appeal that the no-challenge provision should not be enforced because it violates the public policy embodied in the Lanham Act. M & M also argues that it was entitled to summary judgment on its counterclaims and attorneys' fees. For reasons stated below, we vacate the district court's August 1998 Order and remand for consideration of M & M's counterclaims on the merits. We also remand for clarification of the court's May 2002 Order on damages should M & M's counterclaims fail on the merits.

I. Background

A. Parties on Appeal

The IPC is an agency created by Idaho statute to promote the sale of Idaho russet potatoes and to prevent the substitution of potatoes grown in other regions as Idaho potatoes. To further these goals, the IPC has registered a number of certification marks with the United States Patent and Trademark Office, two of which are relevant to this appeal: (1) the word "IDAHO" in a distinctive font; and (2) the phrase "GROWN IN IDAHO" written inside an outline of the boundaries of the state of Idaho (collectively "the IPC marks"). Each mark certifies that "goods so marked are grown in the State of Idaho."

The IPC controls its marks through an elaborate licensing system that seeks to ensure the quality and geographic authenticity of potatoes packed in containers bearing the IPC marks. This system requires everyone in the chain of distribution, from in-state growers to out-of-state repackers and resellers, to be licensed in order to use the IPC certification marks on their packaging.³ Licensed vendors are also prevented from selling Idaho potatoes to non-licensed customers for repacking or reselling.

The standard licensing agreements provide licensees with the right to use the IPC marks, an important benefit because certified Idaho potatoes sell for more than non-Idaho potatoes. In return, licensees agree, among other things, to use the IPC marks only on potatoes that are certified as grown in Idaho and that meet the IPC's other quality standards. Licensees also agree to maintain purchase and sale records so that the IPC can check periodically for compliance and prevent "counterfeiting" (putting non-Idaho potatoes in bags bearing the IPC marks.)

M & M is a small business in New York owned and operated by two brothers, Matthew and Mark Rogowski. M & M's main business is growing onions on a small farm, but because onions are a seasonal crop, the brothers also repack potatoes to stay in business throughout the year. In 1990, M & M entered into a licensing agreement with the IPC and was given the right to use the IPC's certification marks, subject to the terms in the agreement. While M & M was a licensee, it would purchase potatoes in bulk from licensed Idaho potato vendors and would repackage those potatoes into small five-pound bags bearing the certification marks.

In 1994, M & M received a notice of audit from the IPC requesting M & M's records with regard to all Idaho potatoes bought and sold. Because M & M did not produce sufficient records,⁴ the IPC considered M & M in breach of the licensing agreement and requested that M & M return its license. In February 1995, M & M voluntarily gave up the license and consequently no longer had the right to use the IPC marks.

After returning the license, however, M & M continued repacking Idaho potatoes in bags with the IPC marks. M & M's major source of potatoes after February 1995 was G & T Terminal Packing, Inc. ("G & T"), a licensed reseller of Idaho potatoes. G & T is a large reseller of produce serving such supermarket chains as Pathmark, Twin County, Key Food, Grand Union and Wakefern.

The business relationship between M & M and G & T after M & M lost its license was complex. G & T would purchase potatoes in bulk directly from Idaho vendors. When G & T would receive an order for potatoes from one of its supermarket customers, it would call that order in to M & M. G & T would then "sell" potatoes to M & M, which would in turn repack the potatoes into smaller bags printed with G & T's name and the IPC marks and then deliver the repacked potatoes to G & T's customer. After delivering the potatoes, M & M would "sell" the potatoes back to G & T for a small profit and return the delivery ticket to G & T. The district court explained the business relationship between these two vendors, in which G & T was essentially selling and buying back the same potatoes, as follows:

In economic reality, G & T, a licensee of the IPC, was merely using M & M as an agent or independent contractor to repack G & T's potatoes in five pound bags with G & T's name on them as seller, and then deliver the potatoes to various customers of G & T in accordance with the directions of G & T, returning the delivery tickets to G & T. The supermarkets in most cases did not deal with M & M.

B. Procedural History

During an October 1997 compliance audit of G & T, the IPC learned of the continuing business relationship between G & T and M & M. In November 1997, the IPC filed the current lawsuit against M & M alleging: (1) trademark infringement in violation of 15 U.S.C. § 1114, (2) false designation of origin and dilution in violation of 15 U.S.C. § 1125, and (3) unlawful and unfair competition in violation of various New York and Idaho statutes and common law.

In response, M & M filed counterclaims for, among other things, cancellation of the IPC marks under federal and state law. M & M argued that the IPC marks should be cancelled for numerous reasons, including that the IPC abused its marks by: discriminatorily refusing to certify potatoes that were grown in Idaho, imposing standards for certification beyond the geographic origin the marks are registered to certify, and using its certification marks for purposes other than to certify, all in violation of the Lanham Act. M & M also alleged that the IPC lacks the independence necessary for certification mark owners under the Lanham Act.

The pre-trial procedural history of this case is long and complicated. We give only a brief description of those proceedings relevant to the current appeal. In April 1998, this case was consolidated for pre-trial purposes with two other cases involving a challenge to the IPC marks — one a counterclaim brought by Majestic Produce Corp., the other a direct claim brought by Hapco Farms, Inc. In its August 1998 Order, the district court denied a joint motion for summary judgment filed by Hapco, Majestic and M & M. With regard to M & M, the court held that M & M was estopped from challenging the IPC marks by a provision in its licensing agreement in which M & M (1) acknowledged that the marks "are valid, registered marks;" and (2) agreed that it would "not during the term of the agreement, or at any time thereafter, attack the title or any rights" of the IPC in the relevant marks. Citing a number of trademark cases, the district court held that "courts have consistently enforced estoppel in circumstances directly analogous to this case." It further rejected any arguable distinction between trademarks and certification marks in this context explaining that "the owners of certification marks can license their marks, just as trademark holders can, and are therefore clearly entitled to licensee estoppel where the licensing agreement specifically provides for it."⁵

The IPC's claims for infringement against M & M proceeded to trial, and in February 2002 the jury returned a verdict for the IPC. The jury found that M & M had earned $41,962 in profits from selling potatoes in bags with the IPC marks without the consent of the IPC. However, the jury also found that the IPC did not prove that M & M had engaged in counterfeiting.

After trial, M & M moved to vacate the jury's...