Worthington v. Anderson

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
OCT 13 2004
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
GARY WORTHINGTON;
COLLEEN WORTHINGTON,
Plaintiffs-Appellants,
v. No. 03-4233
ROBERT MICHAEL ANDERSON;
ROBERT HENRY ANDERSON;
KNEADERS BAKERY, LC; BAKERS
#1, LC; KNEADERS (HEBER CITY);
KNEADERS #1; BAKERS #2, LC;
KNEADERS (PAYSON); BAKERS
#3, LC; KNEADERS (AMERICAN
FORK); BAKERS #4, LC;
KNEADERS (DRAPER),
Defendants-Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
(D.C. No. 2:01-CV-554-TC)
Submitted on the briefs:
Stephen Quesenberry and J. Bryan Quesenberry of Hill, Johnson & Schmutz, L.C.,
Provo, Utah, for Plaintiffs-Appellants.
John P. Ashton and James W. McConkie III of Prince, Yeates & Geldzahler,
Salt Lake City, Utah, for Defendants-Appellees.
Before HARTZ , McKAY , and PORFILIO , Circuit Judges.
PORFILIO , Circuit Judge.
In this appeal, we consider the scope of the “unclean hands” defense to an
action for trademark infringement. 1
Appellants Gary Worthington and Colleen
Worthington appeal from the district court’s order dismissing, after a bench trial,
their action against the defendants for federal and common law trademark
infringement, deceptive trade practices, misrepresentation and false designation of
origin under the Lanham Act, and conspiracy. 2
The district court concluded that
the Worthingtons’ claims against the defendants (referred to collectively here
as the “Andersons”) were barred by the equitable doctrine of unclean hands.
We affirm.
1
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination
of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument.
2
The district court analyzed only the trademark claim. The Worthingtons
contend that they prevailed on the merits of all their claims, prior to application
of the unclean hands defense. Aplt. Opening Br. at 8. The parties appear to
assume that the unclean hands defense, if successful, would bar all of the
Worthingtons’ claims.
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FACTS
In 1997, the Andersons and the Worthingtons began operating bakery/cafes
in several Utah locations under the name “Kneaders.” To manage these
bakery/cafes, the Andersons (acting through HMA, L.C.) and the Worthingtons
(acting through APB Investments, L.C.) formed Kneaders, L.C., a Utah limited
liability company.
Disputes arose between the parties. Their business relationship began to
deteriorate. By June 1999, the Andersons and the Worthingtons were operating
the various Kneaders establishments separately. The Worthingtons operated the
Kneaders in Orem, Utah. The Andersons operated a number of Kneaders
establishments in other Utah locations.
The operating agreement for Kneaders, L.C. provided that disputes between
the parties would be submitted to final and binding arbitration. Aplt. App. at 162.
In November 2000, the parties agreed to an arbitration to dissolve the Kneaders
business and to determine how to divide its assets and liabilities. The parties
participated in an arbitration proceeding to this end, and on January 1, 2001, the
arbitrator issued an award.
Kneaders trade name
One of the issues in the arbitration was the allocation of the name
“Kneaders.” In 1999, Michael Anderson had obtained trademark registration for
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“Kneaders” in his own name. He did not disclose this action to the Worthingtons.
The arbitrator found that the name “Kneaders” was an asset of Kneaders, L.C.
He further found that it was not practical to split the use of the name between the
Andersons and Worthingtons. He therefore assigned the name “Kneaders” to the
Worthingtons.
On March 27, 2001, the arbitrator issued a second award to resolve further
issues between the parties. In the award, he directed the Andersons to execute
immediately documents relinquishing their trademark rights to the name
“Kneaders.”
On June 28, 2001, a state district court entered an order confirming both
arbitration awards. On that date, Michael Anderson signed a document
relinquishing all right to the trademarks. On July 13, 2001, Kneaders L.C.
assigned the trademark to the Worthingtons. The Worthingtons subsequently
obtained registration from the United States Patent and Trademark Office for the
“Kneaders” trademark.
Assignment of the commissary
The Kneaders trademark was only one of the issues addressed by the
arbitrator’s awards. The arbitrator also required the Worthingtons to assume and
pay certain loans (the Wells Fargo loan; the store equipment lease loan) on which
the Andersons were guarantors. Id. at 166.
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In addition, the arbitrator resolved the ownership of the Orem property,
which encompassed a second structure, the commissary used to bake the products
sold at the parties’ stores. The arbitrator awarded the commissary to the
Andersons and instructed the Worthingtons to deed the Orem land underlying the
commissary to them by quit claim deed by June 1, 2001. Until the deed was
completed, the Andersons were to pay the Worthingtons $1,000 per month as rent.
Sometime during the first two months of 2001, the Andersons contacted
Mark Greenwood, a civil engineer, to conduct a survey for the purpose of
dividing the Orem property. In June 2001, Gary Worthington called Greenwood
and told Greenwood that he was the owner of the property and that Greenwood
was to stop all attempts to survey the property.
On June 25, 2001, Gary Worthington gave the Andersons a quit-claim deed
to their portion of the Orem property. When Marc Greenwood examined the deed,
he discovered that it purported to convey two parcels not owned by Worthington:
a parcel owned by the city of Orem, and a parcel to the south of the property that
Worthington also did not own. The district court found that this erroneous legal
description was not the result of an oversight or mistake by Worthington. Id.
at 231.
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Further disputes ensued, leading to further arbitration awards. The
arbitrator ultimately ordered the Andersons to sell the commissary to the
Worthingtons.
Andersons’ financial difficulties
The period of time following the arbitrator’s January 2001 award was a
difficult one financially for the Andersons. Their establishments were losing
money. Because the property on which the commissary was located had not yet
been divided, the Andersons were obligated to pay the Worthingtons $1,000
per month as lease payments. Additionally, the Worthingtons had not paid the
Andersons’ outstanding loan from Wells Fargo, hampering the Andersons’ ability
to obtain financing. The district court found that the Andersons’ failure to
comply timely with the arbitrator’s order to stop using the “Kneaders” trademark
was due in large part to the Worthingtons’ delay in fulfilling financial obligations
and cooperating in the division of the property. Id. at 232.
District court’s determination
The Worthingtons instituted this suit on July 17, 2001, charging that the
Andersons were still using the Kneaders name on their establishments. Testimony
was presented that although the Andersons took down or partially covered the
large outside Kneaders signs on most of their stores in July 2001, they continued
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to employ the Kneaders name to some extent into the fall of 2001 on menus, order
forms, and advertising materials.
After a bench trial, the district court concluded that although the
Worthingtons had established the necessary factors to prove a case of trademark
infringement, they were barred by the doctrine of unclean hands from receiving
any form of relief. Specifically, the court reasoned:
Neither the Worthingtons nor the Andersons complied in good
faith with their obligations under the arbitration awards. The
Andersons contend, and the evidence supports their contention, that
they continued to use the Kneaders trademark because of their
deteriorating financial situation. Gary Worthington’s failure to fully
and timely comply with his obligations under the arbitration awards
was a major cause of the Andersons’ financial problems. The
Andersons could not buy new signs, change their advertising, or
generally begin their new business until they owned the property and
Gary Worthington paid the Wells Fargo loan.
Id. at 238.
The district court dismissed the Worthingtons’ complaint. This appeal
followed.
ANALYSIS
The Worthingtons raise a number of arguments in opposition to the district
court’s dismissal of their complaint. Most of their issues clearly lack merit.
We will deal with these issues quickly, so as to arrive at the only real and difficult
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issue in this case: whether the Worthingtons’ alleged unclean hands sufficiently
relates to the trademark infringement to serve as a defense to it.
1. Collateral estoppel
The Worthingtons contend that collateral estoppel bars the Andersons’
defense of unclean hands. They argue that the Andersons raised the unclean
hands defense in the arbitration proceeding and that it was rejected by the
arbitrator. The arbitrator’s award was then confirmed by the state district court,
creating a disposition that the Worthingtons argue is entitled to full faith and
credit in this action. See 28 U.S.C. § 1738 (stating that state court judicial
proceedings “shall have the same full faith and credit in every court within the
United States . . . as they have by law or usage in the courts of such State.”).
Leaving aside the question of whether the unclean hands defense was actually
presented to or decided by the arbitrator in a fashion entitling it to preclusive
effect in this action, 3
the Worthingtons have waived their collateral estoppel issue
by failing to raise it before the district court. 4
Monreal v. Potter , 367 F.3d 1224,
3
This point is a matter of some dispute and difficulty here, particularly since
the arbitrator specifically excluded trademark infringement issues from his
awards. See Aplt. App. at 205.
4
Worthingtons contend that they did raise this issue before the district court.
See Aplt. Opening Br. at 1; Reply Br. at 1. None of their record references bears
this out, however. They argued to the district court that the arbitrator’s award
was binding on the issue of ownership rights to the “Kneaders” name. See Aplt.
App. at 35-37, 53-61. They asked for an order in limine prohibiting any
(continued...)
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1231 (10th Cir. 2004). We therefore reject this argument as a bar to the district
court’s application of the unclean hands doctrine.
2. Rooker/Feldman
The Worthingtons next claim that the Andersons’ assertion of unclean
hands is barred by the Rooker/Feldman doctrine. Dist. of Columbia Court of
Appeals v. Feldman , 460 U.S. 462, 486 (1983); Rooker v. Fid. Trust Co. , 263 U.S.
413, 414-16 (1923). Rooker/Feldman typically is employed to bar an action by
the loser in state court seeking review in federal court. See Kenmen Eng’g v.
City of Union , 314 F.3d 468, 473 (10th Cir. 2002). The Worthingtons, however,
arguably the “winners” on the point they wish to assert from the arbitration, are
the driving force behind this federal court trademark action. Their argument
about the preclusive effect of arbitration proceedings is therefore better
characterized as a collateral estoppel argument, not a Rooker/Feldman argument.
There may be a tactical consideration involved with this attempt to drive
the square peg of Rooker/Feldman into the round hole reserved for collateral
estoppel. As we have seen, the Worthingtons’ collateral estoppel argument is
4
(...continued)
discussion of the arbitrator’s award on other issues. Id. at 63-65. There was
testimony at trial about the arbitrator’s decision on the property division issues.
Id. at 109-11, 132-33. In none of these cases, however, did the Worthingtons
raise to the district court the collateral estoppel issue they now seek to raise on
appeal.
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barred in this court by their failure to raise it in the district court. They admit that
they also failed to raise their Rooker/Feldman argument prior to this appeal.
Rooker/Feldman , however, is jurisdictional, and may be raised at any time.
Pittsburg County Rural Water Dist. No. 7 v. City of McAlester , 358 F.3d 694,
705-06 (10th Cir. 2004), pet. for cert. filed (U.S. May 6, 2004). Even if the
Worthingtons are permitted a belated assertion of Rooker/Feldman here, however,
the doctrine does not bar application of the unclean hands defense in this case.
The Rooker/Feldman doctrine protects state court judgments from review
by federal courts other than the United States Supreme Court. Merrill Lynch Bus.
Fin. Servs., Inc. v. Nudell , 363 F.3d 1072, 1074-75 (10th Cir. 2004). We apply
Rooker/Feldman both to those federal claims that were actually decided by a state
court, and to those inextricably intertwined with a state court judgment. Id.
at 1075. The trademark claim in this case, and the unclean hands defense asserted
by the Andersons, do not meet either of these criteria. They were not actually
decided by a state court: the arbitrator refused to address trademark issues and
there is no evidence that the state court addressed them when it confirmed his
award. Nor were the trademark issues inextricably intertwined with the
arbitrator’s confirmed decision; the arbitrator’s decision, in and of itself, created
neither the trademark issues raised by the Worthingtons nor the unclean hands
defense raised by the Andersons. Id. at 1076 (stating that “inextricably
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intertwined” standard asks “whether the state-court judgment caused, actually and
proximately, the injury for which the federal-court plaintiff seeks redress.”)
(quotation omitted). We therefore reject Worthingtons’ Rooker/Feldman
argument.
3. The Worthingtons’ “ tu quoque ” argument 5
The Worthingtons next argue that the Andersons are estopped on equitable
grounds from asserting unclean hands as a defense. The Worthingtons reason as
follows:
“Unclean hands” is an equitable defense. An important equitable maxim
provides that “he who seeks equity must do equity.” It follows that a person who
has behaved inequitably cannot assert unclean hands. The Andersons have
behaved inequitably by violating the Worthingtons’ trademark, by failing to
relinquish promptly the trademark to Worthingtons as ordered by the arbitrator,
and by supporting others’ infringing uses of the trademark. Therefore, they may
not assert the unclean hands defense.
If this argument barred the application of the “unclean hands” doctrine,
then the defense would be unavailable to a defendant, so long as the plaintiff
could prove up his case for trademark infringement. That is not the law, however.
5
“tu quoque (lit. “you also”) = a retort in kind; accusing an accuser of a
similar offense.” Bryan A. Garner, A Dictionary of Modern Legal Usage 893
(2d ed. 1995).
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The key defect in the Worthingtons’ argument lies in their confusion of an
equitable maxim that requires a plaintiff to behave equitably (“he who seeks
equity must do equity”) with a defense available to a defendant who has behaved
inequitably (“unclean hands”). The difference between these doctrines is
significant:
In applying the maxim, He who seeks equity must do equity, as
a general rule regulating the action of courts, it is necessarily
assumed that different equitable rights have arisen from the same
subject-matter or transaction, some in favor of the plaintiff and some
of the defendant; and the maxim requires that the court should, as the
price or condition of its enforcing the plaintiff’s equity and
conferring a remedy upon him, compel him to recognize, admit, and
provide for the corresponding equity of the defendant, and award to
him also the proper relief. . . . On the other hand, the maxim, . . . He
who comes into equity must come with clean hands, . . . assumes that
the suitor asking the aid of a court of equity has himself been guilty
of conduct in violation of the fundamental conceptions of equity
jurisprudence, and therefore refuses him all recognition and relief
with reference to the subject-matter or transaction in question.
2 John Norton Pomeroy & Spencer W. Symons, A Treatise on Equity
Jurisprudence § 397, at 91 (5th ed. 1994) (emphasis in original).
The doctrine of “unclean hands” in trademark cases is designed “to protect
the court from granting relief to a plaintiff no better than the defendant he is
suing.” 5 J. Thomas McCarthy, McCarthy on Trademarks & Unfair Competition
§ 31:45, at 31-92.3 (4th ed. 2004). Use of the doctrine in the manner contended
for by the Worthingtons would defeat its purpose, which is to “close[] the doors
of a court of equity to one tainted with inequitableness or bad faith relative to the
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matter in which he seeks relief, however improper may have been the conduct of
the defendant.” Id. at 31-92.4 (quotation omitted). We conclude that the
Andersons’ own misconduct does not bar the assertion of the unclean hands
defense. 6
4. District court’s factual finding concerning Wells Fargo loan
As part of the factual underlay for its unclean hands determination, the
district court determined that the Worthingtons had failed to pay the Wells Fargo
loan on which the Andersons were guarantors, making it more difficult for the
Andersons to obtain financing. The Worthingtons challenge this finding on
factual grounds. 7
The Worthingtons have not supplied us with an adequate and
complete record on this issue, however, which involves a factual dispute. We
must therefore accept the district court’s finding as correct. See, e.g., Trujillo v.
Grand Junction Reg’l Ctr. , 928 F.2d 973, 976 (10th Cir. 1991).
6
Some decisions require a defendant seeking to assert “unclean hands,” to
establish that his own misconduct did not outweigh that of the plaintiff, or that
the public interest would not be harmed by application of the doctrine. See
Republic Molding Corp. v. B.W. Photo Utilities , 319 F.2d 347, 350 (9th Cir.
1963). The Worthingtons do not argue for such a weighing here, however; they
simply assert that the Andersons are completely barred from relying on the
doctrine by their own unclean hands.
7
The Worthingtons also contend that the Andersons’ financial difficulties
are irrelevant to their ability to cease infringing behavior. Aplt. Opening Br. at
28-29. Given the district court’s disposition of this case, this argument is relevant
only to the question of whether the Andersons’ financial difficulties could
legitimately be considered part of the “unclean hands” determination, the question
we undertake in the final section of this opinion.
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5. Relation of Worthingtons’ inequitable conduct to their trademark
claim
We have now arrived at the key issue in this case: whether the
Worthingtons’ allegedly inequitable conduct is sufficiently related to the
substance of their trademark claim to give rise to an “unclean hands” defense.
This issue is significant because the “unclean hands” doctrine does not empower
a court of equity to deny relief for any and all inequitable conduct on the part of
the plaintiff. Instead, the inequitable conduct must be related to the plaintiff’s
cause of action. McCullough Tool Co. v. Well Surveys, Inc. , 395 F.2d 230, 238
(10th Cir. 1968).
Historically, courts have recognized two types of “related conduct” that
will permit application of the unclean hands doctrine in a trademark case. The
first involves inequitable conduct toward the public, such as deception in or
misuse of the trademark itself, resulting in harm to the public such that it would
be wrong for a court of equity to reward the plaintiff’s conduct by granting relief.
See, e.g., Clinton & Worden v. Cal. Fig Syrup Co. , 187 U.S. 516, 528 (1903).
That kind of conduct is not at issue here.
The second type of related conduct arises when the plaintiff has acted
inequitably toward the defendant in relation to the trademark. As a leading
treatise explains:
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The maxim [of “unclean hands”], considered as a general rule
controlling the administration of equitable relief in particular
controversies, is confined to misconduct in regard to, or at all events
connected with, the matter in litigation, so that it has in some
measure affected the equitable relations subsisting between the two
parties, and arising out of the transaction; it does not extend to any
misconduct, however gross, which is unconnected to the matter in
litigation, and with which the opposite party has no concern.
5 Pomeroy & Symons, supra , § 399, at 94-95. See also id. § 402b at 124-25;
5 McCarthy, supra §§ 31:48 - 31:51, at 31-95 to 31-102.
That is the type of unclean hands at issue here. An illustration of how
unclean hands can develop from equitable relations between the parties is Federal
Folding Wall Corp. v. National Folding Wall Corp. , 340 F. Supp. 141 (S.D.N.Y.
1971). The licensee of a trademark brought an action for trademark infringement
against the trademark’s former licensee. The plaintiff was a corporation, formed
by a former employee of the defendant who, in violation of a non-compete
agreement, arranged for the trademark’s licensor to withdraw the mark from the
defendant and award it to the plaintiff. The former employee had engaged in a
scheme to prevent the defendant from achieving the required minimum sales
under its licensing agreement so the defendant would lose the license and plaintiff
could obtain it. The district court denied relief because the plaintiff’s own
machinations had prevented the defendant from meeting the conditions of its
licensing agreement and hence from preserving its own right to use the trademark.
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The complaint was dismissed because the plaintiff came into court with unclean
hands. Id. at 146.
Another case illustrating this principle, this time in the patent law context,
is Saudi Basic Industries Corp. v. Exxonmobil Corp. , 194 F. Supp. 2d 378 (D.N.J.
2002), vacated in part on other grounds , 364 F.3d 102 (3d Cir. 2004), petition
for cert. filed (U.S. Jun. 22, 2004). The plaintiff brought an action for patent
infringement. The district court refused to strike the defendant’s unclean hands
defense, even though (1) it was based on the plaintiff’s alleged overcharging of
royalties to a joint venture formed between plaintiff and a subsidiary of
defendant, and (2) the royalty payments were governed by an agreement separate
from the one under which the patent infringement claim had been raised. The
district court reasoned that
there is a close enough relationship between the inequitable conduct
and the claims in the lawsuit to give [defendant] the opportunity to
assert the defense. . . . The allegation by [defendant] that [plaintiff]
has overcharged the joint venture in violation of the Joint Venture
Agreement is conduct related to the breach of the same Joint Venture
Agreement. [Plaintiff’s] alleged unclean hands in overcharging the
joint venture . . . are directly relevant to its effort . . . to invoke this
Court’s equitable powers and enforce obligations supposedly owed
by [defendant]. This alleged conduct by [plaintiff] could be
considered unconscionable conduct that permeates the transaction as
a whole.
Id. at 392.
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In the present case, neither party has behaved equitably. Repeated
decisions by the arbitrator were necessary to settle the issues in dispute. Prior to
the arbitrator’s rulings, both parties had legitimate use of the “Kneaders”
trademark and had invested in signs, menus and printed materials bearing that
name. It should have been obvious that the Andersons would incur considerable
expense in divesting themselves of the trademark. Their economic ability to
comply with the arbitrator’s decision was therefore crucial. The Worthingtons
threw economic obstacles in the way of the Andersons’ compliance with the
arbitrator’s decision awarding the trademark to the Worthingtons.
The Worthingtons argue that the cost of compliance is irrelevant to the
issue of whether the Andersons violated the trademark. We disagree. Where a
plaintiff interferes with the defendant’s ability to comply with his or her
responsibilities, a court of equity will not turn a blind eye to the net effect on the
parties’ equitable relationship. See Fed. Folding Wall Corp., 340 F. Supp. at 146;
cf. J Bar H, Inc. v. Johnson , 822 P.2d 849, 861-62 (Wyo. 1991) (rejecting, on
equitable grounds, plaintiff’s case for breach of non-compete clause where
defendant had been shut out of participation in jointly-held corporation). We
conclude that the conduct cited by the district court was sufficiently related to the
trademark case to justify the application of the unclean hands doctrine, and that
the doctrine was properly applied.
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The judgment of the district court is AFFIRMED.
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