Pantone, Inc. v. Esselte Letraset, Ltd.

• Decision Date: 28 June 1989
• Docket Number: D,No. 997,997
• Citation: 878 F.2d 601
• Parties: PANTONE, INC., Plaintiff-Appellant, v. ESSELTE LETRASET, LTD., Defendant-Appellee. ocket 88-7775.
• Court: U.S. Court of Appeals — Second Circuit

Page 601

878 F.2d 601

11 U.S.P.Q.2d 1454

PANTONE, INC., Plaintiff-Appellant, v. ESSELTE LETRASET, LTD., Defendant-Appellee.

No. 997, Docket 88-7775.

United States Court of Appeals, Second Circuit.

Argued April 10, 1989.

Decided June 28, 1989.

Steven B. Pokotilow, New York City (Anita K. Young, Blum Kaplan, New York City, of counsel), for plaintiff-appellant.

Morris Relson, New York City (Beverly B. Goodwin, Andrew Baum, Darby & Darby, New York City, of counsel), for defendant-appellee.

Before NEWMAN, CARDAMONE and WINTER, Circuit Judges.

WINTER, Circuit Judge:

This appeal concerns the interpretation of two expressly interrelated agreements executed in 1972 (the "1972 Agreements" between Pantone, Inc. ("Pantone") and Esselte Letraset, Ltd. ("Letraset")). Pursuant to these agreements Pantone granted a license to use its trademark "Pantone" (the "Trademark Agreement") and transferred certain assets to Letraset (the "Purchase Agreement"). These agreements included: (i) a limited covenant by Pantone not to compete with Letraset and (ii) provided Letraset with a qualified right of first refusal concerning the use of the mark on new products developed by Pantone.

In 1987 Pantone entered into negotiations with Daler-Rowney Limited ("Daler-Rowney") concerning the licensing of the Pantone mark to Daler-Rowney for use on a line of products newly developed by Pantone. Upon notification of these negotiations in 1988, Letraset objected that such an agreement would violate the terms of the 1972 Agreements and threatened to seek an injunction. Pantone then initiated the present suit for declaratory relief, to which Letraset counterclaimed. The district court held that the proposed agreement between Pantone and Daler-Rowney violated the covenant not to compete, and accordingly, the district court enjoined Pantone and Daler-Rowney from executing the agreement. Pantone appealed from that decision. We affirm but on somewhat different grounds.

BACKGROUND

1. The 1972 Agreements

The 1972 Agreements concern a group of products known collectively as the "Pantone Matching System" ("PMS"). PMS is a color communication, specification and reproduction system developed by Pantone in the 1960's that affords graphic artists a means to ensure color fidelity when their work is reproduced in final printed form. The system's key element is a copyrighted organizational scheme that matches particular colors with individual identification As of 1972 Pantone had introduced three lines of products into the PMS color system: (i) Pantone Color Paper; (ii) Pantone Color/Tint Overlay; and (iii) Pantone Color Marker. The parties refer to these particular products, as well as any material changes in and material improvements of such products, as "GAM", an acronym for "graphic art materials." In addition, Pantone had also licensed a large number of printing ink manufacturers to produce ink corresponding to and identified by the PMS system.

numbers. This enables graphic artists to select from PMS publications number-coded, tear-out color chips to identify various art materials by color identification number.

Although PMS was a widely used method of specifying color in the graphic arts industry by 1972, Pantone's sales of commercial artist products at that time were relatively modest because of its limited distribution network. Letraset, on the other hand, had manufacturing facilities, an established worldwide marketing organization for commercial artist supplies, and experience in selling products comparable to PMS. Letraset's products were not tied to a color system, however. Letraset and Pantone thus possessed complementary assets and, consequently, they entered into the agreements in question in order to synergize Pantone's color system and Letraset's distributional organization.

Under Article II of the Trademark Agreement "Pantone ... grant[ed] to Letraset ... an exclusive license ... to use ... the mark 'PANTONE' (or any other Licensed Trademark) on or in connection with any GAM." Article I, in turn, defined GAM as "art material products [ (Pantone Color Paper, Pantone Color/Tint Overlay, Pantone Color Marker) ] displaying color or capable of color reproduction, in which said color displayed or reproduced is one of the colors of 'The Pantone Matching System.' " Under Article VI and Exhibit C, Letraset agreed to pay to Pantone a royalty amounting to 7 1/2 percent of Letraset's net sales of GAM bearing the Pantone label.

Under Article IV(10), the Trademark Agreement provided a mechanism for dealing with "new products generally recognized as commercial artist supplies developed by Pantone during the term of [the] agreement." That provision states in pertinent part:

(a) Pantone shall first offer the exclusive right of manufacture and sale to Letraset.

(b) If Letraset fails to accept the offer described in subparagraph (a), above, within the six months following the making of such offer Pantone shall have the right to offer such manufacture and distributorship to any other party, but the product to be encompassed by such offer shall be in the same state of development that it was in when the offer was made pursuant to subparagraph (a) above; provided, however, that the offer of such distributorship and manufacture by Pantone to such other parties shall be upon business terms which shall not be more favorable than those proposed by Pantone pursuant to subparagraph (a) above.

We turn now to the provisions of the Purchase Agreement. It effected a transfer from Pantone to Letraset of the assets or the PMS manufacturing and distribution business. In Paragraph 28(2) of the Purchase Agreement, Pantone agreed to refrain from licensing or allowing anyone else to use the Pantone mark

(i) on or in connection with any products which are in direct competition with GAM,

(ii) on any products generally recognized as commercial artist supplies, except as provided in Article IV(10)(b) of the [Trademark Agreement].

The meaning of this provision and its relationship to Article IV(10) of the Trademark Agreement are central to the present dispute.

2. The PCS System

The 1972 Agreements benefit both parties. Sales of GAM increased from $665,000 in 1972 to approximately $19,000,000 in 1988. Pantone, meanwhile, has sought to expand its product line beyond the printing industry and into other fields such as architecture In addition to the PCGs, Pantone is now offering licenses to dye manufacturers that will permit them to develop dyes coordinated with the PCS color identification system. Finally, in order to complete the PCS system, Pantone is seeking to develop materials tied to the PCS color coding system that can be used by interior designers, fashion designers and architects.

interior design, beauty, fashion and industrial design. In 1982 Pantone began development of a new color communications system, the Pantone Professional Color System ("PCS"), which is designed to provide color selection in every non-print medium, including carpets, paints, fabric, textiles and cosmetics. In 1984, Pantone introduced its first PCS product, the Pantone Professional Color Guide ("PCG"). Pantone offered Letraset the right to be the exclusive distributor of the PCGs in return for an initial order for 10,000 books. Letraset rejected that proposal, and, instead, the parties agreed that Letraset would purchase 1,000 books on a non-exclusive basis. Pantone itself has sold 30,000 PCGs since 1985.

In October 1984 Pantone approached Letraset with a proposal for Letraset to develop and market a PCS marker. Pantone told Letraset that Pantone intended to distribute the marker and other PCS products through home decorating centers and paint stores. In February 1985 Letraset informed Pantone that Letraset was not interested in creating a PCS marker because a PCS marker would compete with Letraset's existing line of PMS markers. Letraset also advised Pantone of its view that the 1972 Agreements prohibited the use of the Pantone label on such markers.

In July 1985 Letraset received reports that Pantone intended to distribute PCG matched paper through art supply stores. Letraset's director of planning, supply and development then sent a letter to Pantone stating that:

On the question of [Pantone's] plans for coated paper matched to the PCG, [Letraset] had felt quite relaxed at the original idea that the product would be sold through home decorating and similar outlets, to be used as consumer colour samples. That did not seem to conflict seriously with [Letraset's] own marketing of the current range of Pantone by Letraset papers. If, however, [Pantone's] current plans are to distribute a range of PCG matched papers through art stores for use by designers, [Letraset] would feel that would be in conflict with the basic principles of our existing agreement and would fall into the same category as PCG matched markers. I may have misunderstood your current plans, but I think it is important that [Pantone] should be clear on this point.

Eventually, however, Pantone and Letraset reached an agreement in July 1986 whereby Pantone granted Letraset an exclusive license to sell PCS matched paper through art supply stores in both the United States and the Caribbean. In January of the next year the two parties reached a similar accord with regard to Italy. Finally, in the spring and summer of 1987, Pantone and Letraset discussed a possible Pan-European agreement to supersede the Italian Agreement. These negotiations failed, however, when the parties were unable to resolve a dispute involving trademark clauses.

Meanwhile, as of February 1987, Pantone had entered into discussions with Daler-Rowney, a British manufacturer of commercial artist supplies, concerning the possibility of Daler-Rowney's producing and distributing products coordinated to the PCS system. On February 22, 1988, Pantone informed Letraset that Pantone intended to grant Daler-Rowney a license to manufacture and distribute...