Murphy Door Bed Co., Inc. v. Interior Sleep Systems, Inc.

• Decision Date: 01 May 1989
• Docket Number: D,Nos. 727,837,s. 727
• Citation: 10 USPQ2d 1748,874 F.2d 95
• Parties: , 10 U.S.P.Q.2d 1748 The MURPHY DOOR BED CO., INC., Plaintiff-Appellee, v. INTERIOR SLEEP SYSTEMS, INC., d/b/a Murphy Beds, etc., Murphy Bed Co. of America, Inc. in Florida, Murphy Bed Co. of America, Inc. in Georgia, and Frank Zarcone, Individually, Defendants-Appellants. ockets 88-7877, 88-9043.
• Court: U.S. Court of Appeals — Second Circuit

Page 95

874 F.2d 95

57 USLW 2692, 10 U.S.P.Q.2d 1748

The MURPHY DOOR BED CO., INC., Plaintiff-Appellee, v. INTERIOR SLEEP SYSTEMS, INC., d/b/a Murphy Beds, etc Murphy Bed Co. of America, Inc. in Florida, Murphy Bed Co. of America, Inc. in Georgia, and Frank Zarcone, Individually Defendants-Appellants.

Nos. 727, 837, Dockets 88-7877, 88-9043.

United States Court of Appeals Second Circuit.

Argued Feb. 16, 1989.

Decided May 1, 1989.

Bruce E. Lilling, White Plains, N.Y. (Talay Hafiz, Lilling & Greenspan, White Plains, N.Y., Cord Flint, Greenville, S.C., of counsel), for defendants-appellants.

Leon Friedman, New York City (Robert I. Skoy, Mineola, N.Y., of counsel), for plaintiff-appellee.

Before LUMBARD and MINER, Circuit Judges, and SPRIZZO, District Judge. ^*

MINER, Circuit Judge:

Defendants-appellants appeal from a judgment entered in the United States District Court for the Eastern District of New York (Mishler, J.), awarding plaintiff, the Murphy Door Bed Company ("Murphy" or "Murphy Co."), $6330 with interest in damages for breach of contract, $801,161 in compensatory damages and $25,000 in punitive damages for trademark infringement and unfair competition. The judgment includes a permanent injunction enjoining all defendants from use of the Murphy name.

Murphy is incorporated in New York and has its principal place of business there. Each of the defendant corporations is incorporated either in Florida or Georgia and each has its principal place of business in the state where it is incorporated. Defendant Frank Zarcone is a citizen of Florida. Jurisdiction therefore properly was invoked in the district court under the diversity of citizenship statute, 28 U.S.C. Sec. 1332. The district court determined that defendants had committed a breach of contract by failing to pay for goods received, and by using the name Murphy bed without authorization, such use having also been found to constitute trademark infringement and unfair competition. The damages were assessed against defendants Frank Zarcone and Interior Sleep Systems, Inc. ("ISS"). The $6330 award apparently is not contested on appeal. Plaintiff cross-appeals from the judgment, seeking to subject defendants Murphy Bed Co. of America, Inc. in Georgia ("MBCA Ga.") and Murphy Bed Co. of America, Inc. in Florida ("MBCA Fl.") to the damages awards.

We hold that "Murphy bed" is a generic term, having been appropriated by the public to designate generally a type of bed. Consequently, defendants could not have infringed on plaintiff's trademark, alleged to be Murphy bed, and the district court erred in finding trademark infringement. We agree with the district court, however, that defendants breached their contractual obligation to refrain from using the term Murphy bed after termination of their distribution agreement with the Murphy Co. Further, we agree with the district court that defendants engaged in unfair competition by passing off beds of their own manufacture as beds of the Murphy Co. Accordingly, we affirm the court's entry of a permanent injunction prohibiting defendants from use of the term Murphy bed.

As to remedy for damage to Murphy by trademark infringement and unfair competition, the district court, constrained by a stipulation of the parties to limit compensatory

damages to defendants' profits gained from improper use of the Murphy name, awarded plaintiff compensatory damages based on defendants'gross profits. We hold that in awarding damages for unfair competition--damages for trademark infringement are inappropriate in this case--defendants' profits should be calculated by deducting all costs attributable to items sold in violation of plaintiff's rights. Accordingly, we remand the case for recalculation of damages based on defendants' net profits. Additionally, because the punitive damages award was based on findings of trademark infringement as well as unfair competition, without apportionment, we remand the case for reformulation of punitive damages. Finally, we do not decide the issue raised on cross-appeal, because the extent of the judgment's coverage now may be properly specified by the district court.

BACKGROUND

At the turn of this century, William Lawrence Murphy invented and manufactured a bed that when not in use could be concealed in a wall closet. By using a counter-balancing mechanism, the bed could be lowered from or raised to a closet in a wall to which the bed is hinged. In 1918, the United States Patent Office granted Mr. Murphy a patent for a "pivot bed," which was substantially similar to the wall bed. Mr. Murphy incorporated in New York in 1925 as the Murphy Door Bed Company and began to sell the wall bed under the name of "Murphy bed." Since its inception, the Murphy Co. has used the words Murphy and Murphy bed as its trademark for concealed beds. Other manufacturers of wall beds generally describe their products as "wall beds," "concealed beds," "disappearing beds," "authentic adjustable hydraulic beds" and the like, but rarely as Murphy beds. In fact, at least twice, when independent companies marketed their products as Murphy beds, Murphy complained to them and, as a result, the companies refrained from further deliberate use of the term Murphy bed.

On March 23, 1981, and again on November 16, 1982, the Patent and Trademark Office ("PTO") denied the Murphy Co.'s application to register the Murphy bed trademark. The PTO examining attorney explained that the words "Murphy bed" had become generic and that the phrase Murphy bed was "merely descriptive of a characteristic of the goods." In August 1984, the Trademark Trial and Appeal Board ("TTAB") affirmed the denial of registration. See In re Murphy Door Bed Co., Inc., 223 U.S.P.Q. 1030 (T.T.A.B.1984). The TTAB noted that "Murphy bed has for a long period of time been used by a substantial segment of the public as a generic term for a bed which folds into a wall or a closet." Id. at 1033.

In December 1981, Frank Zarcone, on behalf of ISS and himself, entered into a distributorship agreement with the Murphy Co. and became the exclusive distributor of the Murphy bed in the four Florida counties of Broward, Dade, Palm Beach and Monroe. The agreement, in the form of a letter signed by both Murphy and Zarcone, provided in part that:

4) ... Interior Sleep Systems will pay for material purchased within 30 days of date of Murphy's invoice....

5) --Whenever the Murphy name is used, it must be in capital letters and identified by the word trademark or TM adjacent to Murphy. Cabinets or other material not furnished by Murphy will not be promoted or sold as Murphy products.

* * *

8) --Upon termination of this agreement Interior Sleep Systems, Inc. agrees to discontinue the use of the name "Murphy bed".

After learning of the TTAB's 1984 decision denying Murphy's application for trademark registration, Zarcone formed MBCA Ga. in December 1985, and MBCA Fl. in February 1986. In addition, Zarcone obtained a telephone listing in New York City under the name "Murphy Bed Company." ¹

On March 20, 1986, Magnolia Builders ("Magnolia") of Pensacola, Florida ordered 109 Murphy beds, Model SL 60/80, from MBCA Fl. Zarcone previously had filled similar Magnolia orders with beds of the Murphy Co. To fill this order, however, Zarcone delivered beds designated as Murphy bed Model SL 60/80 but that were, in fact, manufactured by one of his companies.

Thereafter, Zarcone ordered from the Murphy Co. forty-eight Murphy beds, which were delivered with an invoice on May 21, 1986. Zarcone habitually paid Murphy sixty to ninety days after being billed, for which he always was charged interest of 1 1/2% for each month that payment was overdue. On this occasion, however, more than ninety days passed without payment and so, on August 21, 1986, Zarcone was served by ordinary mail a notice of cancellation of the distribution agreement. Zarcone denies receipt of the letter. Murphy then notified Zarcone by a letter sent by certified mail, dated September 24, 1986 and received by Zarcone on September 30, 1986, that in keeping with paragraph 8 of the agreement, Zarcone was within "ten (10) days from receipt of this letter to remove the name 'Murphy Bed' from all signs, vehicles, billboards, and all advertising." Despite receipt of this second letter, Zarcone continued to advertise regularly in south Florida using the Murphy name, including describing his product as "Murphy Bed Co. of America, Inc.--Original Wall-Bed Systems" and "The New Murphy Beds ... Original Wall Bed Systems."

Murphy initiated this action on December 19, 1986, seeking compensation, punitive damages, and injunctive relief based on claims of: (i) trademark infringement, (ii) unfair competition and (iii) breach of contract. Defendants denied the allegations of the complaint and asserted, inter alia, four affirmative defenses: (i) equitable estoppel, (ii) failure of consideration in forming the distribution contract, (iii) fraud in the inducement of the contract and (iv) res judicata and collateral estoppel by reason of the TTAB's denial of registration.

A bench trial was held and in a decision and order dated May 13, 1988, the district court found for the Murphy Co. on all counts. 687 F.Supp. 754, 756 (E.D.N.Y.1988). First, the court ruled that the name Murphy was not generic because a "secondary meaning" had been attributed to it by the general public, and that the common law of trademark therefore protected the Murphy Co. Id. at 759. Thus, the court held that the burden was on the defendants to show abandonment of the Murphy trademark--i.e. that the trademark had lost its significance. Id. at 760. The court then found that defendants did not sustain their burden. Id. at 761.

Second, the court held that, with the sale of the 109 beds to Magnolia and the post-contract termination advertisements using the word "original," Zarcone had engaged in unfair competition by passing off products of his own manufacture as those of...