Original Appalachian Artworks, Inc. v. S. Diamond Associates, Inc.

• Decision Date: 25 January 1995
• Docket Number: No. 93-9077,93-9077
• Parties: 1995 Copr.L.Dec. P 27,404, 33 U.S.P.Q.2d 1606 ORIGINAL APPALACHIAN ARTWORKS, INC., a Georgia Corporation, Plaintiff-Counter-Defendant, Appellee, Schlaifer Nance & Company, Inc., Intervenor-Plaintiff, v. S. DIAMOND ASSOCIATES, INC., an Illinois Corporation, Defendant-Counter-Claimant, Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 925

44 F.3d 925

1995 Copr.L.Dec. P 27,404, 33 U.S.P.Q.2d 1606

ORIGINAL APPALACHIAN ARTWORKS, INC., a Georgia Corporation Plaintiff-Counter-Defendant, Appellee Schlaifer Nance & Company, Inc., Intervenor-Plaintiff, v. S. DIAMOND ASSOCIATES, INC., an Illinois Corporation Defendant-Counter-Claimant, Appellant.

No. 93-9077.

United States Court of Appeals Eleventh Circuit.

Jan. 25, 1995.

Charles A. Laff, Martin L. Stern, Lawrence R. Robins, Diana Flynn, Laff, Whitesel, Conte & Saret, Chicago, IL, E.J. Van Gerpen, Van Gerpen, Hoffman & Harris, Marietta, GA, for appellant.

Christopher P. Bussert, Jerre B. Swann, Kilpatrick & Cody, Atlanta, GA, for appellee.

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

Before EDMONDSON and CARNES, Circuit Judges, and HENDERSON, Senior Circuit Judge.

PER CURIAM:

S. Diamond Associates, Inc. ("Diamond") appeals from the judgment of the United States District Court for the Northern District of Georgia in this action brought by Original Appalachian Artworks, Inc. ("OAA") seeking a declaratory judgment that Diamond was not entitled to recover a portion of the proceeds of a settlement agreement made between OAA and Topps Chewing Gum, Inc. ("Topps"). For the reasons set forth below, we affirm.

I. BACKGROUND

This is the second appearance of this case in our court after an earlier remand to the district court. See Original Appalachian Artworks, Inc. v. S. Diamond Assocs., Inc., 911 F.2d 1548 (11th Cir.1990) ("OAA I "). The relevant facts are as follows.

OAA owns the copyright registration and trademark for the Cabbage Patch Kids, soft sculptures designed by Xavier Roberts, which made their debut in 1980 as the "Little People from Babyland General." OAA's principal licensee, Coleco Industries, began mass marketing Cabbage Patch Kids dolls in 1983. ¹ Also in 1983, OAA entered into a licensing agreement with Diamond through OAA's exclusive licensing agent, Schlaifer Nance & Co., Inc., to manufacture and sell certain puffy sticker products related to its dolls. ² The contract gave Diamond an "exclusive license to utilize the name, character, symbol, design, likeness and visual representation" of Cabbage Patch Kids, "solely and only in connection with the manufacture, distribution and sale of the article or articl[es] specified in Schedule 'B.' " (Plaintiff's Trial Exhibit 1, p 1). Schedule "B" stated:

Schedule "B" LICENSED PRODUCTS

1. Self adhesive character and/or logo stickers as follows ...

ACCESSORIES MAY BE INCLUDED THAT DO NOT CONFLICT WITH COLOR FORMS.

a. puffy vinyl stickers

b. "color-me" fuzzy stickers with accessory markers

c. puffy, scratch 'n sniff stickers

d. flat, scratch 'n sniff stickers on cards or rolls

2. Waxed-page sticker collection book

3. Waxed-page sticker baby book in book form.

(Id. at Schedule "B"). Under the terms of the agreement, OAA retained exclusive rights to the goodwill associated with the Cabbage Patch name. (Id. at p 11). The contract also reserved for OAA "the sole right to determine whether or not any action shall be taken on account of any infringements or imitations" of the licensed products and prohibited Diamond from taking any such action without first obtaining OAA's written consent. (Id. at p 7(a)).

In 1985, Topps began distributing a sticker type of bubble gum trading card under a trademark it obtained for Garbage Pail Kids. See Original Appalachian Artworks, Inc. v. Topps Chewing Gum, Inc., 642 F.Supp. 1031, 1032 (N.D.Ga.1986) ("Topps "). The stickers "derisively depict dolls with features similar to Cabbage Patch Kids dolls in rude, violent and frequently noxious settings." Id.; see also OAA I, 911 F.2d at 1549 (describing Garbage Pail Kids as "strikingly similar to the Cabbage Patch Kids, but depicted in less than flattering situations"). In response, OAA filed a lawsuit against Topps for copyright and trademark infringement and unfair competition, in which it successfully sought the right to a preliminary injunction against Topps. See Topps, supra. ³ Later, in settlement of the litigation, Topps agreed to pay OAA seven million dollars in damages. In return, OAA agreed that it would not authorize any of its licensees, including Diamond, to sue Topps for copyright or trademark infringement connected with the Garbage Pail Kids. After learning of the settlement, but prior to the dismissal of the case, Diamond moved to intervene on the ground that it too had suffered damages from Topps' conduct. The district court denied Diamond's motion. See OAA I, 911 F.2d at 1549.

OAA subsequently filed this action founded upon diversity of citizenship, 28 U.S.C. Sec. 1332, seeking a declaratory judgment that Diamond had no right to share in the settlement proceeds. Diamond filed a counterclaim, alleging that it suffered economic injury from the marketing of the Garbage Pail Kids cards and that OAA had a fiduciary duty under its licensing agreement with Diamond to protect Diamond's interests as a licensee. Diamond sought to have the court impose a constructive or resulting trust or an equitable lien on the settlement funds and for an accounting to determine the amount of the damages to which it was entitled. Both parties moved for summary judgment. The district court granted judgment to OAA holding that (1) Diamond had no right to compensation under the licensing agreement because the contract reserved to OAA the exclusive right of suing infringers; and (2) OAA's settlement with Topps constituted a recovery solely for the damage caused to the goodwill associated with the Cabbage Patch Kids name, which was the sole property of OAA, and did not reflect any decrease in licensing revenues received from Diamond as a result of the marketing of Garbage Pail Kids (i.e., it did not diminish Diamond's sales). (R5-90 at 7-10); see also OAA I, 911 F.2d at 1550.

Diamond appealed. A panel of this court reversed, finding that Diamond had two possible grounds for recovering a portion of the settlement proceeds which the district court failed to consider. First, Diamond could recover the amount that represented "damages for Topps' appropriation of Diamond's exclusive license." OAA I, 911 F.2d at 1552. The court observed that "Diamond's licensing agreement expressly gave it the exclusive right to manufacture Cabbage Patch stickers. If, in marketing its Garbage Pail Kids stickers, Topps appropriated Diamond's exclusive license to manufacture stickers, then Diamond is entitled to the proportion of the settlement representing that appropriation." Id. Second, Diamond could recover

the proportion of the settlement representing Diamond's injuries as a result of Topps' sales, even if that injury did not relate to a right that the licensing agreement expressly granted to Diamond. OAA has a fiduciary obligation not to allow its own copyright to be used to the detriment of its licensees. Thus, if Diamond was injured by Topps' conduct--even if that conduct did not constitute an appropriation of Diamond's exclusive license--Diamond is entitled to the proportion of the settlement representing that injury. The present case, therefore, turns on a single issue: did Diamond suffer injury as a result of Topps' conduct? If so, Diamond is entitled to a proportion of the settlement whether or not Topps' conduct constituted an appropriation of Diamond's exclusive license.

Id. (emphasis added).

The panel also held that the district court's grant of summary judgment to OAA could not be affirmed on the alternative basis that there was no genuine issue of material fact with respect to whether Diamond had been injured by Topps' conduct. Id. The court stated that

[i]n bringing its infringement action against Topps, OAA heavily relied on the injury suffered by Diamond to support its claim for injunctive relief and damages. For example, OAA's proposed findings of fact and conclusions of law in the Topps case emphasizes throughout that Topps stickers directly competed with Diamond's stickers. As the transcript of the preliminary injunction hearing also demonstrates, OAA based its case in large part on the similarity between the Topps and Diamond stickers. Additionally, OAA had begun to prepare Diamond's owner to testify at trial in the Topps case regarding the company's injuries. In effect, therefore, OAA has conceded that Diamond suffered injury as a result of the direct competition between Topps' stickers and Diamond's own stickers. At the very least, that concession raises a genuine issue of material fact.

Id. at 1552-53 (footnotes omitted); see also id. at 1552 n. 4 and 1553 n. 5.

The case was therefore remanded to the district court to determine "whether, and to what extent, Diamond suffered injury as a result of Topps' conduct." Id. at 1553.

On remand, the district court conducted a bench trial. In its findings of fact and conclusions of law, it first considered the scope of Diamond's exclusive license. The court found that the licensing agreement unambiguously granted to Diamond the exclusive right to market the items listed in Schedule "B"; thus, Diamond's license extended only to the specific types of stickers listed in Schedule "B" rather than to the whole category of stickers. The court noted that even if the contract were ambiguous it would still conclude, on the basis of the evidence demonstrating the parties' intent, that Diamond had only a limited item license which did not extend to the type of bubble gum trading card stickers marketed by Topps. Consequently, the court ruled that Topps did not appropriate Diamond's exclusive license.

In accordance with this court's directive, the district court then determined whether Diamond had been damaged even though Topps' conduct did not constitute an appropriation of Diamond's license. In its consideration of this issue, the court found that Diamond failed to carry its burden of proof and that the evidence introduced at the trial demonstrated there was no direct competition...