Original Appalachian Artworks, Inc. v. S. Diamond Associates, Inc., 89-8368

• Decision Date: 18 September 1990
• Docket Number: No. 89-8368,89-8368
• Citation: 911 F.2d 1548
• Parties: 1990 Copr.L.Dec. P 26,636, 16 U.S.P.Q.2d 1194 ORIGINAL APPALACHIAN ARTWORKS, INC., a Georgia Corporation, Plaintiff-Counterclaim defendant-Appellee, v. S. DIAMOND ASSOCIATES, INC., an Illinois Corporation, Defendant-Counterclaim plaintiff-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1548

911 F.2d 1548

1990 Copr.L.Dec. P 26,636, 16 U.S.P.Q.2d 1194

ORIGINAL APPALACHIAN ARTWORKS, INC., a Georgia Corporation Plaintiff-Counterclaim defendant-Appellee, v. S. DIAMOND ASSOCIATES, INC., an Illinois Corporation Defendant-Counterclaim plaintiff-Appellant.

No. 89-8368.

United States Court of Appeals, Eleventh Circuit.

Sept. 18, 1990.

Kenneth L. Shigley, Earl J. VanGerpen, Deborah Lorraine Morgan, VanGerpen, Shigley & Hoffman, Marietta, Ga., Martin L. Stern, Charles A. Laff, Lawrence R. Robins, Laff, Whitesel, Conte & Saret, Chicago, Ill., for defendant-counterclaim plaintiff-appellant.

E. Kendrick Smith, John L. Latham, Robert W. Beynart, Thomas M. Barton, Smith, Gambrell & Russell, Atlanta, Ga., for plaintiff-counterclaim defendant-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before TJOFLAT, Chief Judge, TUTTLE, and RONEY ^*, Senior Circuit Judges.

TJOFLAT, Chief Judge:

The defendant in this declaratory judgment action appeals the district court's grant of summary judgment for the plaintiff. The defendant, an exclusive licensee of the plaintiff's, contends that the district court erred in holding that the defendant had no right to a proportion of the plaintiff's settlement in a lawsuit against a third party for copyright infringement. We agree with the defendant. Accordingly, we reverse the district court's decision and remand for further proceedings.

I.

Since 1979, Original Appalachian Artworks, Inc. (OAA) has owned the copyright and trademark for the Cabbage Patch Kids. In 1982, OAA began a licensing program that allowed companies to use the Cabbage Patch Kids name and characters in association with a variety of products, including dolls, books, records, cereals, and children's clothing, shoes, and linens. As its exclusive licensing agent, OAA employed Schlaifer, Nance & Company.

In February 1983, OAA (through its licensing agent) entered into a licensing agreement with S. Diamond Associates (Diamond). ¹ The agreement gave Diamond "the exclusive license to utilize the name, character, symbol, design, likeness and visual representation" of the Cabbage Patch Kids "solely and only in connection with the manufacture, distribution and sale" of a puffy sticker product. In exchange for those rights, Diamond agreed to pay OAA $45,000 and ten percent of its sales revenues. OAA expressly retained the right to any goodwill associated with the Cabbage Patch name. In addition, OAA reserved "the sole right to determine whether or not any action shall be taken on account of any infringements or imitations [of the licensed marks]." The agreement thus proscribed Diamond from taking such action "without first obtaining the written consent of [OAA] to do so."

In 1985, Topps Chewing Gum, Inc. (Topps) began to market a product called Garbage Pail Kids. The product consisted of a package containing sticker cards with images of characters that were strikingly similar to the Cabbage Patch Kids, but depicted in less than flattering situations. For example, the stickers showed one Garbage Pail Kid, Graffiti Petey, painting graffiti on a wall; another Garbage Pail Kid, Adam Bomb, has just blown himself up. ² In 1986, Topps also began a licensing program for Garbage Pail Kids products such as T-shirts, school supplies, and balloons. Topps had previously discussed the possibility of a licensing arrangement with OAA but had never entered into one.

In March 1986, OAA brought suit in the district court against Topps for copyright infringement, trademark infringement, and unfair competition. In August 1986, the district court granted OAA a preliminary injunction enjoining Topps from selling the Garbage Pail Kids stickers. See Original Appalachian Artworks, Inc. v. Topps Chewing Gum, Inc., 642 F.Supp. 1031 (N.D.Ga.1986). On February 2, 1987, OAA and Topps entered into a settlement agreement: Topps agreed to pay OAA $7 million; in return, OAA agreed not to sue Topps and not to authorize any of its licensees to sue Topps for any copyright or trademark infringement related to Topps' Garbage Pail Kids.

On February 4, 1987, after learning of the settlement agreement, Diamond moved to intervene before the court dismissed the case. Diamond contended that it had suffered injury as a result of Topps' infringing conduct and sought injunctive relief and damages. To that end, Diamond requested an accounting to determine how much Topps owed OAA and Diamond. The district court denied Diamond's motion.

OAA then brought the present diversity jurisdiction action against Diamond in the district court. OAA sought a declaratory judgment pursuant to 28 U.S.C. Secs. 2201, 2202 (1988) that Diamond had no interest in the proceeds of the settlement agreement. Diamond counterclaimed, contending that it had suffered substantial economic injury from the marketing of the Garbage Pail stickers and that OAA had a duty, under the licensing agreement, to protect Diamond's interests as a licensee. Diamond thus requested the court to impose a constructive or resulting trust, or an equitable lien, on the settlement proceeds and also requested an accounting to determine the proportion of the proceeds to which Diamond was entitled. ³

After a period of discovery, both parties moved for summary judgment. In a March 1989 order, the district court granted summary judgment for OAA. The district court held that Diamond had no right, pursuant to the licensing agreement, to compensation when OAA recovered from an infringer. In the court's view, Diamond relinquished any such right since OAA retained the exclusive right to "institute suit or take any action on account of any infringements or imitations." The court acknowledged that this provision gave rise to a fiduciary obligation on OAA's part "to protect Diamond's exclusive licensed rights," but the court held that this fiduciary obligation "does not require that OAA equitably compensate Diamond where OAA recovers for the unauthorized appropriation of Diamond's rights." Thus, although OAA must presumably take action to prevent infringement, OAA has no obligation to compensate Diamond if OAA recovers for any injury suffered by Diamond as a result of the infringement.

In addition to its contract interpretation, the district court supported its decision by finding that OAA's settlement with Topps constituted a recovery solely for the damage that the Garbage Pail Kids caused to the goodwill associated with the Cabbage Patch name. OAA's recovery, according to the court, did not reflect any decrease in licensing fees associated with decreases in Diamond's revenues as a result of the marketing of the Garbage Pail Kids. As the court observed, OAA expressly retained the right to that goodwill in the licensing agreement. Based on those conclusions, the district court determined, pursuant to Fed.R.Civ.P. 56(c), that no genuine issue of material fact existed and that OAA was entitled to summary judgment as a matter of law.

On appeal, Diamond argues that the district court erred, as a matter of law, in holding that the licensing agreement prevented Diamond from recovering the proportion of the Topps' settlement reflecting the injuries Diamond suffered as a result of Topps' infringing conduct. Based on that error, Diamond contends, the district court also erred in holding that OAA had no fiduciary duty to pay Diamond a proportion of the settlement. We agree, and accordingly reverse the district court's grant of summary judgment and remand the case for further proceedings.

II.

The district court properly acknowledged that "OAA was under an implied good faith obligation not to do anything that would impair or destroy the value of an exclusive licensee's rights." (Citing Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 188 N.E. 163 (1933); Zim v. Western Publishing Co., 573 F.2d 1318 (5th Cir.1978); 3 Nimmer on Copyright Sec. 10.11[A], at 10-94 (1987).) The court, however, held that this obligation did not require OAA to share the Topps' settlement proceeds with Diamond. In so concluding, the district court distinguished McClintic v. Sheldon, 269 A.D. 356, 360-61, 55 N.Y.S.2d 879, 882 (N.Y.App.Div.1945), aff'd, 295 N.Y. 682, 65 N.E.2d 328 (1946), a case on which Diamond relied. We first analyze the McClintic case and then consider the extent of OAA's good faith obligation.

In McClintic, the defendants, who had authored a play, granted McClintic the exclusive right to present the play. Pursuant to the agreement, the plaintiff received an interest in all profits derived from the play, including fifty percent of all profits from the sale or disposition of motion picture rights. The authors expressly retained all rights, title, and interest in the play's copyright. Metro-Goldwyn-Mayer Corp. (MGM) subsequently attempted to acquire the movie rights from the authors, but the negotiations failed. MGM nevertheless produced a movie that rather closely resembled the play. In fact, the movie so closely resembled the play that the authors sued MGM for copyright infringement and won. McClintic, however, asserted a right to fifty percent of the authors' recovery. The authors refused to pay, and McClintic brought suit. The trial court denied the plaintiff recovery, holding that the defendants had recovered against MGM solely "for damages for the unauthorized appropriation of defendants' copyright and not of the motion picture rights granted to plaintiff." 55 N.Y.S.2d at 880. The supreme court, appellate division, however, reversed.

The supreme court held that, although the defendants' recovery in their suit against MGM "represented damages for infringement of [their] copyright in the play, it also constituted damages for the appropriated motion picture rights." Id. at 882. Pursuant to the licensing agreement, the plaintiff had a right to fifty percent of the profits derived from any disposition of the motion picture rights. As the McClintic court explained:

It is not...