In Their Opinion : Seventh Circuit Court of Appeals Commentary : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

JAY FRANCO & SONS v. FRANEK (August 11, 2010)

In the late 1980s, Clemens Franek sought and received trademark registration status for his "radical" round beach towel. Almost 20 years later, Franek brought suit under the Lanham Act against Jay Franco & Sons for its unauthorized sale of round beach towels. Franco counterclaimed to invalidate the mark. Judge Dow (N.D. Ill.) granted summary judgment to Franco. Franek appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Evans affirmed. The Court first noted that Franek's long continuous use of the mark made it "uncontestable" – so Franek did not have to show that the mark had acquired a secondary meaning. But the mark is still susceptible to challenge on whether it is merely functional. Patent law provides protection to functional designs -- trademark law does not. The Supreme Court defined functional in TrafFix Devices as "essential to the use or purpose of the device or when it affects the cost or quality of the device." One way of identifying whether a design is useful is with reference to existing utility patents. The Court noted that the round towel’s design was quite similar to a portion of a utility patent granted for a towel-bag. The existence of the patent, under TrafFix, is strong evidence of the functionality of a circular towel. In addition, the Court noted that the Franek's own advertisements focused on the functionality of the shape -- allowing sunbathers to change position without moving the towel. The Court also rejected Franek’s argument that the design was a fashion statement. In most instances, fashion is function. What Franek wants is the exclusive use of a basic round design for a beach towel. Although a distinctive, irregular design may qualify for trademark protection, the simple circle does not.

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SPECIALIZED SEATING v. GREENWICH INDUSTRIES (August 11, 2010)

Greenwich Industries has been manufacturing standard folding chairs for more than 80 years. In 1999, it applied for a trademark registration of one particular design. The Patent and Trademark Office issued its registration in 2004. Specialized Seating also manufactures folding chairs and has one model that is almost identical to Greenwich's trademarked chair. Specialized brought suit under the Lanham Act for a declaratory judgment that its chair did not violate Greenwich's rights -- Greenwich counterclaimed for injunctive relief. Judge Holderman (N.D. Ill.) ruled in favor of Specialized, concluding both that the chair's design was functional and that Greenwich had defrauded the Patent and Trademark Office. Greenwich appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Evans affirmed. The Court applied the clear error test to the district court's finding of functionality. Although functionality happened to be the ultimate issue in the case, it is still a fact specific conclusion subject to the clear error standard of review. The Court noted the difference between patent protection and trademark protection. A purely functional design such as Greenwich's chair can be, and in fact here was, protected for a time with a patent. When the patent expires, however, that protection cannot be extended through trademark application. It is true that certain functional products can receive trademark protection, but only when a nonfunctional aspect of its design creates a distinctive appearance. All of the aspects of Greenwich's chair design are functional -- none contribute to a distinctive appearance. Having affirmed the district court's finding of functionality, the Court did not address its finding of fraud.

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GABBANELLI ACCORDIONS & IMPORTS, L. L. C. v. DITTA GABBANELLI UBALDO DI ELIO GABBANELLI (July 30, 2009)

Gabbenelli Accordions & Imports ("American Gabbenelli") used to be the American distributor for a predecessor of defendant Ditta Gabbenelli Ubaldo Di Elio Gabbenelli ("Italian Gabbenelli"). Disputes arose between the two companies in the 1990s. In 1999, the two companies entered into an agreement under which American Gabbenelli retained the exclusive right to use the Gabbenelli mark in North America and Italian Gabbenelli retained the exclusive right to use it in Italy. The parties further agreed that future disputes would be resolved by arbitration. Notwithstanding the arbitration agreement, Italian Gabbenelli sued American Gabbenelli in an Italian court and American Gabbenelli filed this suit in the United States. American Gabbenelli charged Italian Gabbenelli with trademark infringement. The district court first rejected Italian Gabbenelli's contention that the arbitration agreement deprived the court of jurisdiction. Nevertheless, the court stayed proceedings pending the outcome of the Italian litigation. When no decision was rendered within a few years, the court lifted the stay. American Gabbenelli served Italian Gabbenelli with requests for admissions in May of 2005. Italian Gabbenelli finally appeared through counsel in October of 2005 but did not respond to the requests for admissions. Italian Gabbenelli filed an opposition to American Gabbenelli's motion for summary judgment in June of 2007, and also asked for leave to deny the requests for admissions, which had since been deemed admitted. The court denied that request and granted American Gabbenelli's motion for summary judgment. Italian Gabbenelli appeals.

In their opinion, Judges Posner, Flaum and Wood affirmed in part, reversed in part and remanded. The Court rejected Italian Gabbenelli's appeal on liability. First, it agreed with the district court that the arbitration agreement did not deprive the court of jurisdiction. Second, it concluded that the Italian judgment (since rendered) was irrelevant because it was rendered after the district court judgment. Third, the Court concluded that the district court was within its rights in not allowing Italian Gabbenelli to reopen the requests for admissions after ignoring them for several years. The Court did reverse, however, with respect to damages. The district court awarded damages for lost profits plus statutory damages of $500 for each infringing accordion. The Lanham Act allows statutory damages only for violations on which compensatory damages are not awarded. The district court's award of lost profits and statutory damages with respect to the same accordions was improper. The Court also criticized the district court for awarding statutory damages on each individual item sold. The Act allows statutory damages on each "type of goods," not on individual goods. The Court remanded for a redetermination of damages.

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CAPITOL INDEMNITY CORP. v. ELSTON SELF SERVICE WHOLESALE GROCERS, INC. (March 12, 2009)

Elston Self-Service Wholesale Grocers, Inc. ("Elston") is a wholesale cigarette distributor. Lorillard Tobacco Co. ("Lorillard") filed a complaint against Elston, alleging that it sold counterfeit cigarettes bearing a Lorillard trademark. Elston was insured by Capitol Indemnity Corp. When Elston claimed coverage, Capitol Indemnity disclaimed any duty to indemnify or defend. Capitol Indemnity sought a declaratory judgment that it had no such duty. The district court ruled that Capitol Indemnity had an obligation to defend Elston in the Lorillard litigation. Capitol Indemnity appeals.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Manion affirmed. The Court addressed the policy provisions. At issue was an exclusion to the policy's coverage of "advertising injury." The policy excluded from coverage any injury arising out of the publication of “material” whose first publication took place before the policy period. Capitol Indemnity argued that Elston's years of lawful sales of Lorillard cigarettes before the beginning of the policy term constituted a prior publication. The counterfeit packaging was nearly identical to the Lorillard packaging. The Court rejected Capitol Indemnity’s position. It interpreted the term "material" in the policy exclusion to refer to the same wrongful material alleged in the complaint. Because there was no allegation of counterfeit sales prior to the policy term, there was no prior publication. Under Illinois law, Capitol Indemnity is required to defend Elston if the underlying complaint potentially falls within the scope of coverage. Having found that the prior publication exclusion does not apply, the Court affirmed the district court’s finding of a duty to defend.

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