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Cornaby's LLC v. Carnet, LLC

United States District Court, D. Utah

August 15, 2017

CORNABY'S LLC, Plaintiff/Counterdefendant,
v.
CARNET, LLC and CARMA CHRISTENSEN; Defendants/Counterclaimants.

          MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENTING IN PART MOTIONS FOR SUMMARY JUDGMENT

          JILL N. PARRISH UNITED STATES DISTRICT COURT JUDGE

         This case is centered on a dispute among siblings over the ownership of a trademark. Cornaby's LLC, a company formed by Janet Stocks and her brother David Cornaby, claims ownership of the Ultra Gel trademark. Janet and David's sister, Carma Christensen, and her company Carnet, LLC (collectively, Carnet, LLC) also claims to own the trademark. Cornaby's sued Carnet, LLC for trademark infringement and other causes of action. Carnet, LLC has also filed a number of counterclaims against Cornaby's, including a counterclaim for trademark infringement. As detailed below, both Cornaby's and Carnet, LLC have filed various motions for summary judgment, motions to exclude evidence, and motions to strike defenses that are now before the court.

         BACKGROUND

         Carma Christensen, who lived in Boise, Idaho, and her sister Janet Stocks, who lived in Provo, Utah, created an informal partnership to promote and sell a modified food starch that could be used as a thickening agent in home baking and cooking. The product was sold under the Ultra Gel trademark.

         The partnership formed by Carma and Janet was named Carnet-a portmanteau of the first names of the two sisters. There is a dispute as to when the partnership was formed. Carma has produced evidence that the partnership was formed in late 1992 or early 1993. But it is undisputed that the partnership was in place by May 1993, when Carma and Janet each placed money into a bank account that was used to pay for partnership expenses.

         Janet made some limited uses of the Ultra Gel trademark in the Provo area between February and April 1993. In January 1993, Janet acquired 50 pounds of the modified food starch that she began to call Ultra Gel. Around late January, she introduced the product to her community education cooking class of about 15 students held in the Lehi Junior High School. She acquired some jars and tubs from a local packaging company in early February 1993. Soon thereafter, she filled the jars and tubs with the product and taped homemade Ultra Gel labels to them. She sold the jars and tubs to some of the students in her community education cooking class, to existing customers to whom she had sold other thickening agents in the past, and to local customers whom she met when she did cooking demonstrations at local businesses or church events. She also sold the product to a local pastry shop and to two other local businesses for resale. By April, 1993, Janet's Ultra Gel sales had grown to about $400.

         In early 1993, Janet contacted local grocery chains to see if they would carry the Ultra Gel product. Managers told her that they would carry the product if she would professionally package it. Purchasing professional labels and packaging required a significant capital investment, so Carma and Janet decided to pool their resources and work together. In May, 1993, Carma and Janet each agreed to deposit money into an Idaho bank account dedicated to the joint venture. Carma and Janet both worked on the design for the professional labels. On May 21, 1993, Janet picked up the professionally packaged Ultra Gel product and delivered it to several grocery stores in the Provo area.

         Over the next five years, Carma and Janet worked together as partners to promote and sell Ultra Gel. Carma did the bookkeeping and concentrated on marketing and selling Ultra Gel in Idaho. Janet was in charge of operations and focused on marketing and selling the product in Utah. From 1993 through the end of 1997, most of the Carnet partnership's sales of the Ultra Gel product were concentrated in Idaho and Utah. In 1996 and 1997, Carnet also sustained a modest level of sales in a few western states, such as Arizona, Nevada, Oregon, and Washington. [Docket 59-4].

         In 1993, Carma retained a lawyer to register the Ultra Gel trademark. Carma applied for a registration on July 12, 1993, and the United States Patent and Trademark Office (USPTO) registered the trademark on April 12, 1994. Carma's lawyer told her that because Carnet was a partnership, it could not hold property. Carma, therefore, registered the trademark in her own name. Janet knew that Carma had registered the trademark, but she did not know that the registration listed only Carma as the owner.

         Janet decided to leave the Carnet partnership in early 1998. Janet received a sum of money for her interest in the partnership. It is unclear whether this money represented a division of the assets of the Carnet partnership or whether Carma had purchased Janet's interest in the partnership. [Janet Depo. 45, 47-48; Carma Depo. 173]. Carma and Janet made an oral agreement when they separated their business relationship, but the precise terms of this agreement are now in dispute. Janet testified that the sisters agreed that Carma would “take Idaho” and she would “take Utah” and that “wherever else we go, we go from there.” [Janet Depo. 51-54]. Thus, under Janet's version of the agreement, Carma had the exclusive right to sell in Idaho, Janet had the exclusive right to sell in Utah, and customers in the other 48 states were fair game to either sister. Carma, on the other hand, testified that the agreement was that Janet would take all of the existing customers in Utah and that Carma would take the existing customers in Idaho and the other 48 states. [Carma Depo. 173-76; Emory Depo. 18-19].

         After the partnership ended, Carma continued to do business under the Carnet name and formed Carnet, LLC. In October, 1998, Carnet, LLC created a website that it used to promote and sell Ultra Gel online. [Docket 61-4]. Carnet, LLC also placed an ad in a national magazine, “Taste of Home.” [Carma Depo. 178-79] These efforts greatly expanded Carnet, LLC's nationwide sales. In 1999, Carnet, LLC sold Ultra Gel in all 50 states. [Docket 59-4]. Thereafter, it continued to sell the product throughout the United States. [Carma decl. ¶¶ 2, 17].

         After she left the partnership, Janet continued to sell Ultra Gel in Utah. [Docket 58, p. x; Janet Depo 22-23]. Around 2008, Janet went into business with her and Carma's brother, David Cornaby. [Cornaby Depo. 30-31; Docket 61-6]. In 2009, Janet and David formed Cornaby's, LLC, which inherited Janet's trademark rights and continued to market and sell Ultra Gel. [Docket 61-7]. Cornaby's does not point to any evidence that Janet, David, or Cornaby's sold the product outside of Utah.

         In 2005, the USPTO cancelled Carma's registration of the Ultra Gel trademark because she failed to renew the registration. But Carnet, LLC continued to use the circle-R symbol (®) in its advertising and promotional materials after the registration was cancelled.

         In 2012 or 2013, David called Carma to discuss a potential joint response to a competitor that was using a trademark that was similar to the Ultra Gel trademark. During this conversation, David informed Carma that he had discovered that the Ultra Gel trademark registration had been canceled.[1] [Carma Decl. ¶ 18]. Carma responded that she had been concerned that the registration might have been canceled and that she would find a lawyer to renew the registration. Carma expressed her concern about the cost of hiring an attorney because she had a bad experience when a lawyer charged her $200 for a ten-minute phone conversation. David stated that he had a son-in-law who was a patent attorney and that he could handle it for less money. Carma agreed that David's son-in-law could take care of the Ultra Gel registration and offered to split the legal costs. From this conversation, Carma believed that David would act to protect both of their interests in the Ultra Gel trademark. [Carma Decl. ¶ 18].

         On August 8, 2012, Cornaby's filed an application for the Ultra Gel trademark. The application listed Cornaby's as the sole owner of the trademark. As part of the application, David certified that he believed Cornaby's “to be the owner of the trademark/service mark sought to be registered.” He also certified that to the best of his knowledge, “no other person, firm, corporation or association has the right to use the mark in commerce.” The USPTO registered the Ultra Gel trademark to Cornaby's on November 12, 2013.

         In November, 2013, David began to discuss with Carma the possibility of purchasing Carnet, LLC. In January, 2014, David made an offer to buy the business. Carma rejected the offer because she did not think it was reasonable. David then informed Carma that the Ultra Gel trademark had been registered in Cornaby's name only. He threatened to contact Walmart, one of Carnet, LLC's major customers, and demand that it cease selling Ultra Gel supplied by Carnet, LCC due to trademark infringement.

         On March 17, 2014 David sent an email to Carma, which stated in part:

We need to resolve the Ultra Gel Trademark situation so that our respective rights in the Ultra Gel mark are not lost. . . . The family has “manufactured” and distributed modified food starch under the name Ultra Gel since about 1993. About 1998, the business was split up into two separate businesses with you selling the starches in Idaho and Janet selling in Utah. . . . Recently you started to offer Ultra Gel food starch in areas outside of Idaho in regions where Cornaby's has been selling Ultra Gel. . . . If this situation continues where both of our companies are marketing the same product in the same territories, then the trademark laws make it clear that rights in the mark “Ultra Gel” may be lost. For these reasons, Cornaby's has no other choice but to require that Carnet Foods stop all sales of modified food starch under the name Ultra Gel outside of Idaho. If you do not agree to stop the infringing and confusing uses outside of Idaho, then Cornaby's may be left with no choice but to file a lawsuit to protect the public from confusion and to protect the Ultra Gel mark. We will, of course, ask to have the court order that you pay our attorney's fees as there is really no reasonable basis for your actions. Once again, this is purely a business issue and is not at all personal.

         On April 11, 2014, Carma filed a petition with the USPTO to cancel the Cornaby's registration. In June, 2014, Cornaby's sued Carnet, LLC and Carma, claiming that they had infringed its trademark rights. The operative complaint alleges causes of action for federal and common law trademark infringement, federal false advertising, unjust enrichment, and deceptive trade practices under Utah law. [Docket 20]. After filing this lawsuit, David told one of Carnet, LLC's major distributors, Amazon.com, that it should not do business with Carnet, LLC because Cornaby's held the federal registration for the Ultra Gel trademark. Amazon.com stopped carrying Carnet, LLC's Ultra Gel product based upon Cornaby's federal registration.

         Carnet, LLC and Carma filed a counterclaim against Cornaby's, asserting causes of action for declaratory relief; cancelation of the Cornaby's registration under various theories, including fraud before the USPTO; common law trademark infringement; fraud; and tortious interference with a business relationship. [Docket 26].

         Both Cornaby's and Carnet, LLC filed multiple motions for summary judgment. Cornaby's filed motions for summary judgment on Carnet, LLC's counterclaims for trademark infringement, fraud before the USPTO, and fraud. Carnet, LLC filed two overlapping motions for summary judgment on all of the claims asserted by Cornaby's. Carnet, LLC also filed a separate motion for summary judgment in which it argued that it should prevail as a matter of law on its fraud before the USPTO claim.

         The parties also filed several other motions. Cornaby's filed two motions to exclude evidence as a discovery sanction. Carnet, LLC also filed a motion to exclude evidence as a discovery sanction. Carnet, LLC filed motions to strike Cornaby's affirmative defenses of naked licensing and prior use of the trademark. Finally, Carnet, LLC filed a motion for leave to file an additional declaration.

         LEGAL STANDARD

         “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “A fact is material if, under the governing law, it could have an effect on the outcome of the lawsuit. A dispute over a material fact is genuine if a rational jury could find in favor of the nonmoving party on the evidence presented.” Schneider v. City of Grand Junction Police Dep't, 717 F.3d 760');">717 F.3d 760, 767 (10th Cir. 2013) (citation omitted). On a motion for summary judgment, the court “consider[s] the evidence in the light most favorable to the non-moving party.” Conroy v. Vilsack, 707 F.3d 1163, 1170 (10th Cir. 2013) (citation omitted). However, “[w]hen the moving party has carried its burden under rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts . . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.'” Scott v. Harris, 550 U.S. 372, 380 (2007) (alterations in original) (citation omitted).

         ANALYSIS

         I. OWNERSHIP OF THE ULTRA GEL TRADEMARK

         “Rights in a trademark are determined by the date of the mark's first use in commerce. The party who first uses a mark in commerce is said to have priority over other users.” Hana Fin., Inc. v. Hana Bank, 135 S.Ct. 907, 909 (2015). “The right to a trademark only extends to the area in which it is used . . . .” Okla. Beverage Co. v. Dr. Pepper Love Bottling Co. (of Muskogee), 565 F.2d 629, 633 (10th Cir. 1977). The owner of a trademark may obtain constructive nation-wide rights to the mark by obtaining a registration from the USPTO. 15 U.S.C. § 1057(c). Constructive registration rights, however, do not extinguish common law rights to a trademark that have been established in a particular region before the application for the registration was filed with the USPTO. Id.

         Cornaby's and Carnet, LLC both claim to have superior rights to the Ultra Gel trademark. Several of Cornaby's causes of action-namely, federal trademark infringement, common law trade mark infringement, unjust enrichment, and deceptive trade practices under the Utah Code[2]-rest entirely or in part upon proving Cornaby's has superior rights to the trademark. Similarly, Carnet, LLC's counterclaim for common law trademark infringement requires it to prove that it has superior rights to the trademark.

         Cornaby's has moved for summary judgment on Carnet, LLC's trademark infringement counterclaim, [Docket 58], while Carnet, LLC has moved for summary judgment on Cornaby's federal and common law trademark infringement claims, unjust enrichment claim, and Utah deceptive trade practices claim, [Docket 59, 60]. In order to resolve these competing motions for summary judgment, the court must determine whether either party can establish ownership of the trademark as a matter of law.

         A. Janet's Use of the Trademark in February-April 1993

         It is undisputed that Carma and Janet formed the Carnet partnership to promote and sell Ultra Gel. While Carnet, LLC asserts that a partnership was in place earlier, Janet testified in her deposition that the partnership had been formed by the time that she and Carma pooled their money in May 1993 to pay for professional packaging for their Ultra Gel product. [Janet Depo. 13-16, Janet Decl. 14, 16]. It is therefore undisputed that a partnership was in place by at least May of 1993. Cornaby's provided evidence that Janet used the Ultra Gel trademark in the months prior to May 1993, leading to the question of whether Cornaby's can establish that Janet acquired any rights to the trademark in the Provo area prior to forming a partnership with her sister.

         In order to answer this question, the court must examine Janet's use of the Ultra Gel trademark in commerce before the undisputed start date of the Carnet partnership. For approximately three months, Janet sold jars and tubs of product bearing homemade Ultra Gel labels in the Provo area. She sold the product to individuals she had met while teaching a community cooking class and through cooking demonstrations she performed at local businesses and at church events. She also sold the product to a pastry shop and two other local businesses for resale. By April, 1993, Janet's Ultra Gel sales had grown to about $400.

         A relatively modest commercial use of a trademark may be sufficient to establish trademark rights in a particular geographic region, so long as these initial efforts are followed by continuous use of the mark. 2 McCarthy on Trademarks and Unfair Competition § 16:6 (4th ed. 2016). However, a limited initial use of a trademark that is not followed by continued efforts is either insufficient to establish a trademark right or leads to an abandonment of any inchoate rights to the mark. Id. § 16:9; Menendez v. Holt, 128 U.S. 514, 521 (1888) (where a mark was occasionally used for a period of three years followed by 20 years of disuse, “[t]he use thus proven was so casual, and such little importance apparently attached to it, that it is doubtful whether [the first user of the mark] could at any time have successfully claimed the words as a trade-mark; and, at all events, such use was discontinued before [the second user of the mark] appropriated the words to identify their own flour, and there was no attempt to resume it.”); Airs Aromatics, LLC v. Opinion Victoria's Secret Stores Brand Mgmt., Inc., 744 F.3d 595, 599-600 (9th Cir. 2014) (holding that a litigant had no right to a trademark that it had not used during a seven year period, while noting that “[t]o establish a protectible ownership interest in a common law trademark, the owner must ‘establish not only that he or she used the mark before the mark was registered, but also that such use has continued to the present.'” (citation omitted)); La Societe Anonyme des Parfums le Galion v. Jean Patou, Inc., 495 F.2d 1265, 1271-72 (2d Cir. 1974) (“To prove bona fide usage, the proponent of the trademark must demonstrate that his use of the mark has been deliberate and continuous, not sporadic, casual or transitory . . . .”).

         If Janet had continued her individual effort to promote the Ultra Gel trademark, her use of the mark in February through April 1993 may have been sufficient to establish trademark rights in early 1993. But Janet abandoned her individual efforts to use the trademark when she entered the Carnet partnership. From May 1993 to early 1998, her use of the Ultra Gel mark was as an agent and fiduciary of that partnership. See Thomas v. Schmelzer, 796 P.2d 1026, 1032 (Idaho Ct. App. 1990) ([“E]very partner is a fiduciary and a trustee. . . . ‘One partner will not be permitted to obtain secretly any right that should belong to the partnership and put it to his own individual profit.'” (citation omitted)).[3] Janet could not use her efforts within the scope of the partnership to covertly perfect a personal trademark right to the exclusion of the partnership as a whole.

         Given her modest use of the Ultra Gel Trademark for about three months in early 1993, followed by a cessation of her individual efforts for five years, Janet's pre-partnership use of the mark was too “sporadic, casual or transitory” to establish ownership of the mark in 1993. See La Societe Anonyme des Parfums, 495 F.2d at 1271-72. Moreover, even if she had established an individual right to the trademark, she abandoned it when she became a member of a partnership that promoted Ultra Gel. Therefore, Janet did not establish an individual right to the Ultra Gel trademark in the Provo area prior to joining the Carnet partnership.

         B. Trademark Rights Transferred upon the Dissolution of the Carnet Partnership in 1998

         Because there are no valid pre-partnership rights to the Ultra Gel trademark, ownership of the mark must be traced back to the Carnet partnership's use of the mark from May 1993 through early 1998. During this period of time, the partnership consistently used the Ultra Gel mark in Idaho and Utah, creating common law trademark rights in those states. In 1996 and 1997, the partnership also sustained a modest level of sales in a few other states, such as Arizona, Nevada, Oregon, and Washington. Thus, the Carnet partnership arguably established common law rights in a handful of other states as well.[4]

         In order to resolve the present ownership of the trademark rights obtained by the Carnet Partnership, the court must determine how those rights were transferred when the partnership was dissolved in early 1998. Carnet, LLC first argues that Carma obtained all of the rights held by the Carnet partnership because she purchased Janet's interest in the partnership. [Docket 64, p.2; Docket 71, p. 12]. In her deposition, Janet appears to testify that she received a small sum of money when she left the partnership. [Janet Depo. 45, 47-48]. But Janet's testimony does not establish that this sum of money represented a negotiated buyout of her interest in the partnership's assets. There is a dispute of material fact as to whether Carma bought out Janet, or whether the partnership assets were distributed to the partners as part of the dissolution of the partnership. Therefore, the court may not grant summary judgment based upon Carnet, LLC's buyout theory.

         Assuming that the trademark assets of the Carnet Partnership were not purchased by Carma, but instead were distributed in some manner between the two sisters, the court must determine whether there is undisputed evidence as to how the rights were divided. Carma and Janet's accounts of the oral agreement regarding the division of territory upon the dissolution of the partnership differ. Resolving all disputes of fact in favor of Janet and Cornaby's, the evidence shows that, at most, Janet obtained exclusive Ultra Gel trademark rights in Utah.

         Under Janet's version of the oral agreement, she received the right to sell Ultra Gel in Utah while Carma received the right to sell in Idaho. [Janet Depo. 51-54]. Janet's version of the oral agreement makes no mention of trademark rights. But because the goodwill associated with a product and the trademark assigned to the product are inseparable, it is reasonable to infer that the oral agreement conveyed the Carnet partnership's Utah trademark rights to Janet. See Vittoria N. Am., L.L.C. v. Euro-Asia Imports Inc., 278 F.3d 1076, 1082 (10th Cir. 2001) (“A trademark symbolizes the public's confidence or ‘goodwill' in a particular product. However, it is no more than that, and is insignificant if separated from that confidence. Therefore, a trademark ‘is not the subject of property except in connection with an existing business.'” (citation omitted)). Janet and Cornaby's have continuously used the Ultra Gel trademark in Utah to maintain this trademark right. Cornaby's, therefore, has produced evidence that may support an exclusive right to use the Ultra Gel trademark in Utah.

         Janet also testified that the sisters agreed that each of them would have equal rights to sell Ultra Gel in the 48 states outside of Idaho and Utah. [Janet Depo. 51-54]. Thus, if the Carnet partnership had acquired any trademark rights in these 48 states, Janet represented that the sisters agreed to a coequal right to use the Ultra Gel trademark in those states.[5] But any joint right to use the trademark that Janet may have inherited from the Carnet partnership had to be perfected by actual use.

         In a closely analogous Tenth Circuit case, two brothers formed a partnership in which they used the “Love” Beverage trademark for their soft drink bottling company. Okla. Beverage Co., 565 F.2d at 630. The brothers later decided to go their separate ways. The first brother continued to use the “Love” Beverage trademark, while the second brother adopted a different trademark to represent his product. Id. There was evidence, however, that the two brothers considered the “Love” Beverages trademark to be their joint property even after the dissolution of their partnership. Id. at 630-31. Many years later, the successor in interest to the second brother's bottling company sued to establish its right to use the “Love” Beverage trademark, arguing that the second brother retained a coequal right to use the trademark after the dissolution of the partnership. Id. at 631. The Tenth Circuit acknowledged, but did not explicitly endorse, authority “for the proposition that absent agreement on the dissolution of a partnership, all partners have an equal right to use the goodwill and the trademark of the former partnership.” Id. The court noted, however, that these authorities also hold that each partner's trademark rights may only be perfected by continuous use after the dissolution of the partnership. Id. Because the business entity established by the second brother did not use the “Love” trademark for at least 26 years, any rights the second brother inherited from the partnership were abandoned. Id. at 631- 32.

         In this case, Janet likewise abandoned any joint trademark rights that she may have obtained upon the dissolution of the Carnet partnership. She does not cite evidence of any post-dissolution uses of the Ultra Gel trademark in any of the states outside of Idaho and Utah where the Carnet partnership may have acquired rights. Thus, even if the sisters had agreed to share the trademark rights the Carnet partnership obtained in some states (or if Tenth Circuit law presumes such a division upon the dissolution of a partnership), Janet never perfected her trademark rights through use of the mark in these states. Moreover, under Janet's version of the oral dissolution agreement, the sisters obtained co-equal rights in these states, preventing Janet or her successors from suing for infringement unless Carma or her successors in interest abandoned her rights. Cornaby's presented no such evidence of abandonment. [Docket 69, p. ix]. Nor did it present evidence to contradict Carnet, LLC's proof that it sold Ultra Gel in all 50 states by 1999. [Docket 68, p. xii; 70, p. xi].

         In sum, resolving all disputed facts in favor of Cornaby's, the most that it can prove is that Janet obtained exclusive trademark rights in Utah when she left the Carnet partnership.

         C. Trademark Rights Established After the Dissolution of the Carnet Partnership

         Although it is difficult to say precisely where the Carnet partnership had established trademark rights outside of Idaho and Utah, it is safe to say that the partnership could claim to have common law trademark rights in only a handful of states. Most states were up for grabs when the partnership ended, leading to the question of whether ...


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