Lawn Managers, Inc. v. Progressive Lawn Managers, Inc.

• Decision Date: 20 May 2020
• Docket Number: No. 18-2658,18-2658
• Parties: LAWN MANAGERS, INC., a Missouri Corporation Plaintiff Appellee v. PROGRESSIVE LAWN MANAGERS, INC., a Missouri Corporation Defendant Appellant
• Court: U.S. Court of Appeals — Eighth Circuit

959 F.3d 903

LAWN MANAGERS, INC., a Missouri Corporation Plaintiff Appellee

v.PROGRESSIVE LAWN MANAGERS, INC., a Missouri Corporation Defendant Appellant

No. 18-2658

United States Court of Appeals, Eighth Circuit.

Submitted: April 17, 2019

Filed: May 20, 2020

Rehearing and Rehearing En Banc Denied June 29, 2020

Counsel who presented argument on behalf of the appellant and appeared on the brief was Don V. Kelly, of Saint Louis, MO. The following attorney also appeared on the appellant brief: Alexander Hurst, of Saint Louis, MO.

Counsel who presented argument on behalf of the appellee and appeared on the brief was Norah J. Ryan, of Saint Louis, MO. The following attorney also appeared on the appellee brief: Annette P. Heller, of Saint Louis, MO.

Before SMITH, Chief Judge, KELLY and KOBES, Circuit Judges.

KELLY, Circuit Judge.

In this trademark infringement case, Progressive Lawn Managers, Inc., (Progressive) appeals from the district court’s¹ findings of fact and conclusions of law after a bench trial finding it liable for trademark infringement and awarding damages to Lawn Managers, Inc. (Lawn Managers). We affirm.

I

A

Lawn Managers and Progressive are two Missouri lawn care businesses owned by Randy Zweifel and Linda Smith, respectively. Prior to Smith’s incorporation of Progressive, she and Zweifel were married and together owned and operated Lawn Managers for nearly 20 years in the St. Louis area. In April 2012, Zweifel and Smith divorced and entered into a marital settlement agreement (MSA) that was incorporated into a divorce decree issued by the Circuit Court of Jefferson County, Missouri, the following month.

Section 5 of the MSA, which we understand to be the parties’ trademark licensing agreement, disposed of Zweifel’s and Smith’s interests in the Lawn Managers business. Smith agreed to assign her 50% interest in the company to Zweifel. Zweifel would retain the corporate name of Lawn Managers, Inc., and all right, title, and interest in the business, except for, as relevant here, some commercial and residential accounts and business equipment specifically awarded to Smith, who would now operate a separate business. Section 5.02 divided Lawn Managers’ then-existing accounts and accounts receivables. It awarded "all right, title, and interest" in certain enumerated commercial accounts to Smith; the remainder went to Zweifel. Residential accounts, in turn, were divided by zip code, with each party receiving "all right, title, and interest in all residential accounts and accounts receivables" contained within specified zip codes. Section 5.03 divided between the parties various vehicles, outdoor equipment, and indoor office equipment.

Section 5.06 specified the conditions for the parties’ "Development of New Business" and provided that the parties would share the use of the corporate name "Lawn Managers" for a period of time. Zweifel and Smith agreed that Zweifel would retain ownership and control of the Lawn Managers business but that Smith could use the corporate name "Lawn Managers" for two years after the dissolution of their marriage by establishing a new lawn care company "using the name Progressive Lawn Managers, Inc. doing business as Lawn Managers." While Smith used the name Lawn Managers, she could "use the credit of Lawn Managers, Inc. to purchase equipment for her new business," provided she ensured Zweifel would not be liable for her purchases. At the end of the two years, Smith would discontinue her use of the Lawn Managers name and would use only the name Progressive Lawn Managers. The parties also agreed to a non-solicitation clause providing that for two years after the dissolution of their marriage, "[Smith] and her employees [would] refrain from soliciting residential accounts and commercial accounts in the zip codes that have been awarded to [Zweifel]," and Zweifel would do the same in Smith’s zip codes.

Not long after their divorce was finalized, Zweifel and Smith commenced divorce-related litigation in state court. Smith filed her first motion for contempt against Zweifel in early 2013, followed by cross-motions filed by each party. On July 25, 2014, Zweifel and Smith settled their cross-motions through a written agreement that changed a few terms of the licensing agreement. The Settlement Agreement extended Smith’s ability to use the Lawn Managers name to December 31, 2014. It also changed the parties’ limitations on obtaining new business. The parties could now sign up and service new commercial accounts regardless of zip code, but they could not "sign up or service any new residential accounts in the zip codes awarded to the other in their divorce settlement ...." The Settlement Agreement specified that "[t]his non compete agreement shall remain in effect for two years from [July 25, 2014,] and is enacted in lieu of the prior non-solicitation clause found in [§] 5.06 of the [licensing agreement]."

As contemplated by the licensing agreement, Zweifel continued to operate the Lawn Managers business, and Smith began operating Progressive using both the name Progressive Lawn Managers and, simply, Lawn Managers. Smith’s company used the two names in advertisements, business materials, and representations to third parties. Some employees who worked for Lawn Managers before the divorce went to work for Smith. The public, however, did not know of Zweifel and Smith’s divorce or the terms of the licensing agreement.

In February 2015, after Smith was to stop using the Lawn Managers name, Lawn Managers registered the word mark "Lawn Managers" with the U.S. Patent and Trademark Office. Later that year, Lawn Managers sent Progressive a letter stating that it considered Progressive’s logo to infringe on the Lawn Managers mark. Progressive did not make any changes to its logo.

B

Lawn Managers sued Progressive in February 2016, asserting one count of federal trademark infringement under the Lanham Act, see 15 U.S.C. § 1114, and seeking injunctive and monetary relief. Progressive counterclaimed, asserting one count of cancellation of the trademark registration by virtue of "naked licensing." As relevant here, Progressive also raised the affirmative defense of unclean hands.

After a bench trial, the district court entered judgment in favor of Lawn Managers. The court found that through the licensing agreement, Zweifel had granted a license to Smith to use the Lawn Managers trademark, and that the license had not been a naked license. Next, it found that Progressive had infringed on the Lawn Managers mark after the expiration of the license on December 31, 2014. As relevant here, the court found that Progressive continued to use the mark in commerce after that date without consent and, that between 2012 and 2015, there was "constant and obvious consumer confusion, due to the post-divorce proceedings and the resulting ... license agreement." And the district court found that after the expiration of the license, "[Progressive] did not make a good-faith effort to dissipate confusion, but acted to deliberately exacerbate any consumer confusion with the intent of profiting from [Lawn Managers’] accrued consumer goodwill for as long as possible."

The district court entered an injunction and awarded Lawn Managers damages of $80,688—comprising a percentage of Progressive’s profits during the relevant time period—and $71,346 for corrective advertising. In calculating its damages award, the court rejected Progressive’s unclean hands defense. In a post-trial order, the court also awarded Lawn Managers $138,925 in attorney’s fees.

II

On appeal, Progressive does not contest the district court’s finding of infringement. But it argues that the issue should not have been reached because Zweifel granted a naked license to Smith, resulting in the abandonment of the Lawn Managers mark. In the alternative, Progressive argues that the district court improperly rejected its unclean hands defense and abused its discretion in its award of damages. After a bench trial, we review the district court’s legal conclusions de novo and its factual findings for clear error. Urban Hotel Dev. Co., Inc. v. President Dev. Grp., L.C., 535 F.3d 874, 879 (8th Cir. 2008).

A

"As a general matter, trademark owners have a duty to control the quality of their trademarks." FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509, 515 (9th Cir. 2010). "The purpose of the quality-control requirement is to prevent the public deception that would ensue from variant quality standards under the same mark ...."² Taco Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1121 (5th Cir. 1991), aff’d on other grounds sub nom. Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 112 S.Ct. 2753, 120 L.Ed.2d 615 (1992) ; see, e.g., Syntex Labs., Inc. v. Norwich Pharmacal Co., 315 F. Supp. 45, 56 (S.D.N.Y. 1970) (emphasizing that "the purpose of the control requirement is to avoid the danger that the public may be deceived as to the quality of a product sold under a recognized name" (emphasis added)), aff’d, 437 F.2d 566 (2d Cir. 1971). Naked licensing occurs when a trademark owner licenses a mark without exercising sufficient quality control over the services provided under the mark. See, e.g., Stanfield v. Osborne Indus., Inc., 52 F.3d 867, 871 (10th Cir. 1995), abrogated on other grounds by Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014) ; FreecycleSunnyvale, 626 F.3d at 515–16. "[Naked licensing] is inherently deceptive and constitutes abandonment of any rights to the trademark by the licensor." Stanfield, 52 F.3d at 871 (cleaned up).

To succeed on a claim of naked licensing, a party must establish that the licensor did not retain sufficient control over its licensee to guarantee consistent quality of the services provided under the mark. See, e.g., id. Because a finding of naked licensing results in involuntary trademark abandonment and the forfeiture of trademark rights, the party claiming insufficient control...