Queenie, Ltd. v. Nygard Intern.

• Decision Date: 25 February 2003
• Docket Number: Docket No. 02-7162(CON).,Docket No. 02-7158.
• Parties: QUEENIE, LTD., Plaintiff-Counter-Defendant-Appellant, Marc Gardner, Heavenly Fabrics, Inc., and Joseph Heaven, Counter-Defendants-Appellants, v. NYGARD INTERNATIONAL, Defendant-Counter-Claimant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

321 F.3d 282

QUEENIE, LTD., Plaintiff-Counter-Defendant-Appellant, Marc Gardner, Heavenly Fabrics, Inc., and Joseph Heaven, Counter-Defendants-Appellants, v. NYGARD INTERNATIONAL, Defendant-Counter-Claimant-Appellee.

Docket No. 02-7158.

Docket No. 02-7162(CON).

United States Court of Appeals, Second Circuit.

Argued: December 10, 2002.

Decided: February 25, 2003.

Marc Bogatin, New York, N.Y., for Plaintiff-Counter-Defendant-Appellant Queenie, Ltd., and Counter-Defendant-Appellant Marc Gardner.

Wayne M. Greenwald, Greenwald & Rimberg, L.L.P., New York, N.Y., for Counter-Defendants-Appellants, Joseph Heaven and Heavenly Fabrics, Inc.

John F. Triggs, Greenberg & Traurig, LLP, New York, N.Y., for Defendant-Counter-Claimant-Appellee Nygard International.

Before: NEWMAN, SACK, and SOTOMAYOR, Circuit Judges.

JON O. NEWMAN, Circuit Judge.

This appeal illustrates the pitfalls that can be encountered in the complexities of even routine litigation. Sometimes those complexities result in the forfeiture of a defense that arguably has merit. When that occurs, an appellate court faces a choice between enforcing the forfeiture or burdening parties, witnesses, jurors, and the trial court with a retrial. That choice confronts us on this appeal by Queenie Ltd. ("Queenie") and its president and sole shareholder, Marc Gardner ("Gardner"); and Heavenly Fabrics, Inc. ("Heavenly") and its president and sole shareholder, Joseph Heaven ("Heaven"), from the January 25, 2002, amended judgment of the District Court for the Southern District of New York (Naomi Reice Buchwald, District Judge) in litigation that began as a suit for copyright infringement. The judgment awards Nygard International ("Nygard") attorney's fees for successfully defending a copyright infringement claim and punitive damages on its counterclaim for tortious interference with prospective economic advantage. The punitive damages award is challenged on appeal. Gardner is currently a debtor in a bankruptcy proceeding. We conclude that the automatic bankruptcy stay applies to Gardner and to Queenie, his wholly owned corporation, but not to the other judgment-debtors, Heavenly or Heaven. We also conclude that, in the procedural context of this case, Heavenly and Heaven have forfeited their arguable defense that punitive damages are unavailable for lack of an award of compensatory damages, and we therefore affirm.

Background

In October 1999, Queenie sued Nygard (and others no longer parties to the litigation), alleging infringement of two registered copyrights for fabric designs. In March 2001, Nygard counterclaimed against Queenie, Gardner, Heavenly, and Heaven (collectively "Counterclaim Defendants"). Nygard claimed tortious interference with prospective economic advantage, alleging that the Counterclaim Defendants falsely registered both copyrights and wrongfully prosecuted their infringement claims against Nygard.

Because this appeal concerns primarily procedural aspects of the litigation, we summarize rather briefly the facts that the jury was entitled to find. Queenie is a distributor of women's garments. It obtains fabric designs from a variety of sources, including print mills, design studios, and fabric wholesalers. Queenie uses these designs in creating its clothing, which is manufactured in independent fabric mills overseas, primarily in Korea. Heavenly is a textile importer. It contracts for the manufacture of fabrics for women's apparel and provides designs to its clients, who in turn purchase fabric from Heavenly for the purpose of creating garments that use these designs. Queenie and Heavenly have done business together for approximately eight years. Nygard manufactures and distributes women's apparel.

According to the Counterclaim Defendants, in early 1996, Heaven showed Gardner two fabric designs that Heaven claimed had been created by Heavenly's former employee, Dong Mi Chung. Heavenly assigned what it claimed were its rights in the two designs to Queenie. In August 1997, Heavenly registered copyrights for both designs in the name of Queenie, naming Heavenly as the author of the designs. However, Ms. Chung, the alleged designer, testified that she had not created the two designs. In fact, according to testimony of an executive of Saehwa, a Korean textile print mill, both designs had been created by third parties who had brought the designs to Saehwa in October 1996.

Nygard bought fabric imprinted with the two designs from Saehwa and used them in its manufactured garments. That use precipitated Queenie's suit against Nygard for copyright infringement. Nygard defended on the ground that Queenie had obtained its copyrights by fraud on the Copyright Office. Nygard's theory, evidently accepted by the jury, was that Queenie had somehow learned that Nygard was going to use the Saehwa designs on its products and then fraudulently obtained copyright registrations in order to sue Nygard when its products came on the market. Nygard counterclaimed against Queenie for tortious interference with prospective economic advantage and named as additional counterclaim defendants Gardner, Heavenly, and Heaven. The theory of the counterclaim was that Nygard had been damaged in its relationships with its customers by the threatened and ultimately filed copyright infringement suit. Nygard sought damages including its attorney's fees in defending against the infringement claim.

Litigation procedure. Prior to trial, the parties agreed to a somewhat unusual bifurcation of issues, one that would plant the seeds for the principal issue on this appeal. They agreed that, if the jury found in favor of Nygard on its counterclaim, the amount of compensatory damages would be determined by the Court and the amount of any punitive damages would be determined by the jury.¹ As far as we can tell from the rather imprecise way the parties proceeded at trial and their equally imprecise briefs on appeal, this agreement stemmed from the parties' shared understanding that attorney's fees in defense of the infringement claim would count as compensatory damages on the tortious interference counterclaim and Nygard's position that such fees were the only item of quantifiable compensatory damages that it could prove. Apparently, the parties believed that determining the amount of such fees would be appropriate for the Court.

As a result of the agreed bifurcation, Nygard did not present any evidence of the amount of its compensatory damages, but did present evidence to show the fact that it had sustained some damages. Nygard pointed to the attorney's fees it had incurred in defending against the infringement claim and testimony from a Nygard employee, Fiona Duncan, that Nygard had changed the way it did business as a result of the tortious conduct of the Counterclaim Defendants. Duncan acknowledged that she could not put a dollar value on the impact of Nygard's changed business practices.

After both sides rested, no party moved for judgment as a matter of law ("JMOL") under Rule 50 of the Federal Rules of Civil Procedure.

The jury charge correctly explained the elements of tortious interference with prospective economic advantage, including the element "that Nygard sustained damages as a result of" the tortious conduct of the Counterclaim Defendants. The jury was told that, if it found in favor of Nygard on its counterclaim, the jury need not determine the amount of compensatory damages; the amount of these damages would be determined later by the Court. The jury was also told that, if it found that the Counterclaim Defendants were liable for Nygard's injuries, it could award punitive damages and determine their amount.

During its deliberations, the jury sought clarification of the meaning of "economic advantage" with respect to the tortious interference counterclaim, specifically asking whether this phrase "pertain[s] to legal fees, loss of sales and settlements."

Judge Buchwald responded to the jury's inquiry as follows:

The answer to the question is that it could refer to all of those things, but as this case has been structured, you have not been asked to place a dollar value on those damages or losses. I will do that if you find that Nygard prevails on its counterclaim of tortious interference.

What you have been asked to do — again, if you find that Nygard has proven its counterclaim of tortious interference — is to determine whether punitive damages are appropriate in that context and, if so, for how much.

Does that clarify what you need to know? Your job is the punitive damage side, if you find liability. Mine is the actual damage side. OK?

The Counterclaim Defendants did not object to any of the relevant instructions.

The jury rejected Queenie's copyright infringement claim and found the Counterclaim Defendants liable to Nygard for tortious interference with economic advantage. The jury awarded punitive damages of $250,000 each against Queenie and Heavenly and $500,000 each against Gardner and Heaven.

The Counterclaim Defendants moved for JMOL, for a new trial, and for remittitur of the jury's punitive damages award.² Recognizing that, because of the bifurcation, Nygard was to present its evidence as to the amount of compensatory damages to the Court, the Counterclaim Defendants argued in support of JMOL that Nygard had not submitted proof that it had incurred any damages. Still under the impression that attorney's fees in defense of the infringement claim were compensable as tort damages, the Counterclaim Defendants argued that it was "not outside the realm of possibility" that the lawyer defending Nygard at trial "would work for free." No mention was made of Duncan's testimony concerning the changes in Nygard's business practices. A new trial was sought on the ground that the District Court should not have permitted Nygard to call Chung as a rebuttal witness because she had not been included on Nygard's witness list. The punitive damages award was challenged for lack...