• Sibling Rivalry

    by  • June 25, 2011 • trademark

    I have sympathy for small businesses. Just working stiffs, plumbers for example, trying make a living day to day. You have to watch the pennies, you’ve got equipment costs, rent and salaries and rising health insurance costs and there’s only so much the market will bear.  Trademarks are going to be really low on the priority list – too low on John C. Flood of Virginia’s list, as it turns out.

    As stated by the lower court, “This case involves two sister companies in the plumbing business that are, in effect, fighting over their ‘inheritance.'”  The marks in dispute are FLOOD and JOHN C. FLOOD for HVAC services. Here is the sequence of events:

    1984 John C. Flood, Inc. (“1984 Flood“) incorporated in Maryland by Davis and Crooks.
    1988 John C. Flood of Virginia, Inc. (“Virginia Flood“) incorporated in Virginia by Davis, Crooks, and two 1984 Flood employees, Haislip and Seltzer.  Verbal license to use the marks.
    1981 1984 Flood files for bankruptcy, but Davis and Crooks continue to operate it in bankruptcy until 1993.
    1993 Trustee appointed for 1984 Flood and the case converted to Chapter 7: the company shut down, it ceased using marks and ceased monitoring Virginia Flood’s use of the marks.
    1993 Davis, Crooks and the Smileys set up four new entities, J.C.F., Inc., J.C. Flood, Inc., John C. Flood of DC, Inc. and John C. Flood of MD, Inc. (“New Flood entities“) and start using the marks.
    1995 The bankruptcy trustee for 1984 Flood enjoins the New Flood entities and appoints a receiver for them.
    1995 Haislip and Seltzer purchase Davis and Crooks’ share of Virginia Flood and become sole owners.
    1995 The bankruptcy court proposed selling the marks to Davis, Crooks and the Smileys. Haislip and Seltzer object and Davis and Crooks drop out, leaving the Smileys. Haislip and Seltzer made a competing bid.
    1996 The marks were conveyed to the Smileys, who incorporated John C. Flood, Inc. (“1996 Flood“) in Maryland.
    1996 1996 Flood tells Virginia Flood it is infringing; Virginia Flood agrees to always use “of Virginia”
    1999 Virginia Flood files applications to register two trademarks.*
    2000 Marks registered.
    2005 Petitions to cancel registrations filed by 1996 Flood (currently suspended).
    2006 Virginia Flood brings trademark infringement suit against 1996 Flood.

    Virginia Flood had two theories why 1996 Flood didn’t own the trademarks: it was senior user because it started using the marks in 1988 and 1996 Flood didn’t start using them until 1996; and 1984 Flood had abandoned the mark through naked licensing to Virginia Flood during the Chapter 7 bankruptcy. The lower court held that 1996 Flood was the owner of the marks by virtue of its acquisition of them from the bankrupt estate and that Virginia Flood was barred by licensee estoppel from raising a naked licensing defense.  Virginia Flood challenged both holdings on appeal.

    Virginia Flood argued that the New Flood entities’ wrongful use of the mark broke the chain of title, but the Court of Appeals didn’t buy it.

    Presumably, Virginia Flood’s unlawful use argument stems from frustration over the fact that 1996 Flood–a business associated with the same people who operated the New Flood entities–now has priority to the disputed marks. 1996 Flood’s priority is derived, however, not from the New Flood entities, but instead from the bankruptcy trustee’s sale of the marks to 1996 Flood. The New Flood entities’ unlawful use of the disputed marks is irrelevant to 1996 Flood’s claim to priority. Priority over the disputed marks originated with 1984 Flood, transferred to the 1984 bankruptcy estate, and was then conveyed to 1996 Flood via a bill of sale with the approval of the bankruptcy court. The district court did not err when it held that 1996 Flood was the successor-in-interest of 1984 Flood and the legal owner of the marks.
    The naked licensing defense was likewise rejected by the appeals court. Various courts of appeal have different legal standards for when licensee estoppel may be applied:

    Although this circuit has never explicitly recognized the equitable doctrine of licensee estoppel, some other circuit courts have held that, in general, trademark licensees are estopped from challenging the validity of the licensor’s title because by agreeing to the license, the licensee has recognized the validity of the licensor’s ownership. More recently, other circuits have permitted licensees to make such challenges, but only based upon facts that arose after the license expired. The Second Circuit has taken an even less restrictive view, holding that every claim of licensee estoppel should be evaluated by balancing the public interest in favor of challenging invalid trademarks against the private interest in the enforcement of contracts.

    (citations omitted). The Court of Appeals for the District of Columbia declined to define its standard, instead holding that no matter what standard was used Virginia Flood was estopped. First was Virginia Flood’s failure to object to the sale by the bankruptcy trustee in 1995.  If it thought it owned the marks because of the naked licensing it should have raised the point then. It didn’t – it objected to the bankruptcy court’s consideration of 1996 Flood’s bid, but that was based on the New Flood entities’ prior misappropriation of the marks, not its own ownership. Making its own bid on the marks was again a concession that it didn’t own the marks. Finally, its failure to claim that it owned the Flood marks when 1996 Flood complained of infringement, instead acquiescing to the demand that “of Virginia” always be used, was also an acknowledgement that it didn’t own the Flood marks.

    There is no suggestion that 1984 Flood didn’t monitor Virginia Flood’s use before the bankruptcy was converted to Chapter 7, so the period of uncontrolled licensing looks fairly short – from 1993, when 1986 Flood actually ceased operation, until 1996, when 1996 Flood began operating.  For that reason alone I think it’s a tough case to win in the bankruptcy context. The facts called out by the court only bolster the point.

    All is not lost for Virginia Flood though. Remaining to be decided is whether Virginia Flood may continue to use the marks with the distinguishing modifier “of Virginia.” The district court had left open the possibility that Virginia Flood could use naked licensing as an estoppel defense against the counterclaims for infringement; the appeals court took it further and remanded for “the determination of the ownership and priority rights of the parties as to the modified trademark ‘John C. Flood of Virginia.'” Those could be very tough questions and, assuming the parties are still up for the fight, we could get some more insight into the law of ownership and estoppel.

    John C. Flood of Virginia home page.
    John C. Flood, Inc. home page.

    The whole time I was writing this I was trying to come up with a punny title involving plumbers and floods.  But I’m just not that clever. Calling John Welch . . .

    *Bonus question for all you fraud fans out there – what do you think of the fraud case for an application to register “John C. Flood” after you bid on the mark in bankruptcy and didn’t win?

    John C. Flood of Virginia, Inc. v. John C. Flood, Inc., No. 10-7098 (D.C. Cir. June 17, 2011).
    John C. Flood of Virginia, Inc. v. John C. Flood, Inc., No. 06-1311 (RJL) (D.D.C. Mar. 31, 2010).

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