Office of Strategic Services, Inc. Ex Rel. U.S. Smoke & Fire Curtain, LLC v. Sadeghian

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-2157
OFFICE OF STRATEGIC SERVICES, INCORPORATED, on behalf of US
Smoke & Fire Curtain, LLC,
Plaintiff – Appellant,
v.
STEVEN SADEGHIAN; US SMOKE & FIRE SERVICES, LLC; CYSA
DEVELOPMENT MANAGEMENT CORPORATION,
Defendants – Appellees.
No. 11-2160
OFFICE OF STRATEGIC SERVICES, INCORPORATED; STEWART H.
CHRIST,
Plaintiffs – Appellants,
v.
STEVEN SADEGHIAN; US SMOKE & FIRE SERVICES, LLC; CYSA
DEVELOPMENT MANAGEMENT CORPORATION,
Defendants – Appellees.
No. 12-1082
OFFICE OF STRATEGIC SERVICES, INCORPORATED, on behalf of US
Smoke & Fire Curtain, LLC; STEWART H. CHRIST; OFFICE OF
STRATEGIC SERVICES, INCORPORATED,
Plaintiffs – Appellees,
v.
STEVEN SADEGHIAN; US SMOKE & FIRE SERVICES, LLC; CYSA
DEVELOPMENT MANAGEMENT CORPORATION,
Defendants – Appellants.
Appeals from the United States District Court for the Eastern
District of Virginia, at Alexandria. Claude M. Hilton, Senior
District Judge. (1:11-cv-00195-CMH-JFA)
Argued: January 29, 2013 Decided: June 14, 2013
Before KING, WYNN, and DIAZ, Circuit Judges.
Affirmed in part, vacated in part, and remanded by unpublished
per curiam opinion.
ARGUED: Terrance Gilroy Reed, LANKFORD & REED, PLLC, Alexandria,
Virginia, for Office of Strategic Services, Incorporated, on
behalf of US Smoke & Fire Curtain, LLC, Stewart H. Christ, and
Office of Strategic Services, Incorporated. C. Thomas Hicks,
III, DIMURO, GINSBERG PC, Alexandria, Virginia, for Stewart H.
Christ, and Office of Strategic Services, Incorporated. Joseph
Luchini, REED SMITH, LLP, Falls Church, Virginia, for Steven
Sadeghian, US Smoke & Fire Services, LLC, and CYSA Development
Management Corporation. ON BRIEF: Robert K. Moir, LANKFORD &
REED, PLLC, Alexandria, Virginia, for Office of Strategic
Services, Incorporated, on behalf of US Smoke & Fire Curtain,
LLC. Bernard J. DiMuro, DIMURO, GINSBERG PC, Alexandria,
2
Virginia, for Stewart H. Christ, and Office of Strategic
Services, Incorporated. Edward A. Pennington, MURPHY & KING,
PC, Washington, D.C., for Steven Sadeghian, US Smoke & Fire
Services, LLC, and CYSA Development Management Corporation.
Unpublished opinions are not binding precedent in this circuit.
3
PER CURIAM:
The torrent of claims in these consolidated appeals has its
genesis in smoke and fire curtains. Fire curtains are products
used to compartmentalize fire zones and completely close off an
opening in a wall during a fire. Smoke curtains, on the other
hand, do not completely close off openings, rather they create
smoke reservoirs or direct smoke to an engineered extraction
point.
The litigation fireworks in these cases began with Office
of Strategic Services, Inc. (“OSS”) filing a complaint asserting
eleven shareholder derivative claims against Steven Sadeghian,
U.S. Smoke & Fire Services, LLC, and CYSA Development Management
Corporation (collectively, the “Sadeghian Parties”), alleging
that they usurped corporate opportunities belonging to U.S.
Smoke & Fire Curtain, LLC (“Curtain”) and asserting violations
of Curtain’s intellectual property rights. The Sadeghian
Parties returned fire in their answer to the complaint, lodging
eighteen counterclaims 1 against OSS and Stewart Christ. Not to
be outdone, OSS and Christ replied by filing five counter-
counterclaims against the Sadeghian Parties.
1
The counterclaim purports to list nineteen claims, but
there is no Count 4 in the pleading. The pleading also purports
to lodge claims against an entity named Second Street Web
Design, but that party is not named in the caption.
4
The district court dismissed the counter-counterclaims in
an order entered on August 12, 2011. Following cross-motions
for summary judgment, the district court dismissed all other
claims.
For the reasons that follow, we affirm in part, vacate in
part, and remand. 2
I.
A.
We begin with a brief description of the relationship
between the parties. OSS, a company wholly owned by Christ, and
CYSA Development Management Corporation (“CYSA”), a company
wholly owned by Sadeghian, together own a third company,
Curtain. Christ is Curtain’s President, and Sadeghian its CEO.
Curtain was formed as a Virginia limited liability company on
July 7, 2009. U.S. Smoke & Fire Services, LLC (“Services”) is a
separate corporation wholly owned by CYSA. Bradley Lomas
Electroluk (“BLE”) is a British corporation engaged in the
business of manufacturing smoke and fire curtains.
Between 2003 and 2008, CYSA installed BLE’s smoke curtains
in various projects throughout the United States. According to
2
We also deny the Sadeghian Parties’ separate motion to
amend the caption.
5
the Sadeghian Parties, Sadeghian and BLE also discussed creating
a network of distributors for BLE’s fire curtains as early as
2008, and these discussions led to the formation of Curtain.
The Sadeghian Parties claim that OSS and Christ owned no part of
Curtain until the execution of the Curtain Operating Agreement
(the “COA”) on August 28, 2009. Under the COA, CYSA owned 51%
of Curtain, and OSS owned the remaining 49%.
The COA provides that Curtain’s purpose is to “market, sell
and distribute smoke and fire curtains in the United States.”
J.A. 408. Despite this language, the Sadeghian Parties say that
BLE agreed to allow CYSA to continue distributing BLE’s smoke
curtains outside of Curtain’s distribution network.
OSS and Christ, on the other hand, insist that in late 2008
and early 2009, both Sadeghian and Christ began discussions with
BLE to sell “all of BLE’s products in the United States[,]
including both smoke and fire curtains.” J.A. 466 ¶ 34.
Sadeghian and Christ formed Curtain in furtherance of this
arrangement, selecting the term “Smoke & Fire Curtain” based
upon Christ’s marketing analysis and recommendation. J.A. 465.
B.
On July 13, 2009, Sadeghian, acting on behalf of Curtain,
signed a distribution agreement with BLE (the “CDA”). Under the
CDA, Curtain agreed to act “as [BLE’s] exclusive distributor to
import and distribute the Products in [the United States].”
6
J.A. 383 ¶ 2.1. The CDA defined “Products” as including
“Electrically Operated Automatic Smoke and Fire Curtains,”
“Fixed Smoke and Fire Curtains,” and “Associated equipment.”
J.A. 382, 403. In another subsection of the CDA, BLE granted
Curtain “the exclusive rights to sell the BLE fire curtain
products for fire door, fire shutter, and fire door replacement
applications” and “non-exclusive sales and installation rights
for all other fire curtain applications, and all other
associated BLE products.” J.A. 383 ¶ 2.2.
The CDA also included a “Trademarks” section, in which BLE
granted Curtain a license to use its trademarks for the
promotion, advertising, and sale of its products. Per the CDA,
Curtain did not acquire any “right, title or interest in any of
the marks or any additional trademark which may be developed
unless specifically granted such pursuant to the terms of a
separate license agreement.” J.A. 390 ¶ 10.5.
Three days after the CDA was signed, Sadeghian formed
Services as a subsidiary of CYSA. BLE and Services signed a
separate distribution agreement (the “SDA”), in which Services
agreed to act as BLE’s “exclusive distributor to import and
distribute the Products” in the United States. J.A. 244 ¶ 2.1.
“Products” was given the same definition that it had in the CDA.
See J.A. 263. The SDA further provided that “[Services] will
have the rights to sell the BLE smoke & fire curtain products
7
EXCEPT for fire door, fire shutter, and fire door replacement
applications. [Services] will have non-exclusive sales and
installation rights for all other fire curtain applications, and
all other associated BLE products.” J.A. 244 ¶ 2.2. The SDA
also contained a “Trademarks” section identical to that found in
the CDA.
OSS and Christ complain that at no time in 2009 did
Sadeghian disclose to Christ that he was negotiating with BLE
for contractual rights other than those he was pursuing on
Curtain’s behalf. J.A. 361 ¶ 35. To the contrary, Sadeghian
hid the existence of the SDA from Christ until March 2010. The
Sadeghian Parties respond that OSS and Christ were aware of the
SDA from the beginning of their participation in the venture.
C.
The parties agree that smoke and fire curtains were to be
sold online. To facilitate such sales, CYSA purchased the
domain “www.ussmokeandfirecurtain.com” on April 14, 2009. CYSA
later contracted with another company to design a website using
that domain. According to the Sadeghian Parties, when a
customer wanted to purchase a fire curtain through the website,
Curtain processed the transaction, and when a customer wanted to
purchase a smoke curtain through the website, Services did the
honors.
8
On March 12, 2010, Christ filed a trademark application in
Curtain’s name for “U.S. Smoke & Fire Curtain Life Safety,
Accessibility, Design Freedom.” The U.S. Patent and Trademark
Office initially rejected the application because, among other
reasons, the application was incomplete and the proposed mark
was descriptive. The Sadeghian Parties say that the U.S. Patent
and Trademark Office issued a final rejection of the application
on February 2, 2011. OSS and Christ, on the other hand, contend
that Curtain was granted the trademark on March 6, 2012.
On April 5, 2010, Christ filed a trademark application for
“Elevator Shield” without seeking BLE’s consent. This
application was granted and registered as U.S. Reg. No.
3,867,681.
The Sadeghian Parties allege that during March and April
2010, OSS and Christ began operating a “shadow” Curtain company,
using a separate bank account and contact information. The
Sadeghian Parties also allege that OSS and Christ copied the
CYSA website for this purpose and linked it to the
www.ussmokefirecurtain.com domain.
II.
The first three counts of OSS’s derivative complaint
alleges intellectual property claims under the Lanham Act and
the Anticybersquatting Consumer Protection Act. Specifically,
9
OSS alleges that the Sadeghian Parties infringed upon trademarks
belonging to Curtain--including “Elevator Shield” and “U.S.
Smoke & Fire Curtain Life Safety, Accessibility, Design
Freedom”--and copied Curtain’s website and domain name. Counts
four through eleven of the complaint essentially allege (in
eight different ways) that Sadeghian breached his fiduciary duty
to Curtain by using CYSA and Services to usurp Curtain’s
corporate opportunities.
The Sadeghian Parties filed eighteen counterclaims against
OSS and Christ, claiming to assert derivative claims on behalf
of Curtain as well as direct, personal claims. OSS and Christ
responded by filing five counter-counterclaims against the
Sadeghian Parties. The Sadeghian Parties moved to dismiss the
counter-counterclaims, arguing that they were actually
derivative claims on behalf of Curtain, and thus should have
been filed as an amendment to the derivative complaint. The
district court granted that motion.
The Sadeghian Parties subsequently moved for summary
judgment on OSS’s derivative complaint, arguing that under the
CDA, Curtain did not have the right to distribute BLE smoke
curtains. As a result, it was impossible for the Sadeghian
Parties to have improperly competed with Curtain or usurped any
corporate opportunity. OSS filed a cross-motion for summary
judgment, and both OSS and Christ moved for summary judgment on
10
CYSA’s derivative counterclaims and CYSA’s request to judicially
dissolve Curtain.
On September 16, 2011, the district court entered a single-
page order stating that the court was “of the opinion that
Summary Judgment should be GRANTED to Defendants on the
Complaint and GRANTED to Plaintiff/Counterdefendants on the
Counterclaims” and ordering the case removed from the court’s
trial docket. J.A. 773. The order indicated that a memorandum
opinion and order would be forthcoming.
On November 29, 2011, the district court entered its
memorandum opinion and order. First, the court granted the
Sadeghian Parties’ motion for summary judgment as to OSS’s
fiduciary duty claims. The court concluded that the CDA gave
Curtain the right to sell and distribute fire curtains only,
whereas the SDA gave Services the right to sell and distribute
smoke curtains. Because Curtain did not have the right to sell
smoke curtains, it was not possible for the Sadeghian Parties to
have taken or diverted such a corporate opportunity from
Curtain.
The district court also granted summary judgment to the
Sadeghian Parties on OSS’s intellectual property claims.
Considering OSS’s claims under the Lanham Act, the court held
that neither OSS nor Curtain owned any of the alleged marks, and
therefore they lacked standing to sue. Moreover, the court
11
noted that the Sadeghian Parties could lawfully use the alleged
marks because they owned the rights to the name “U.S. Smoke &
Fire Curtain.”
The court then evaluated the claims as to each alleged
trademark: First, because OSS sought a trademark for “Elevator
Shield” without BLE’s consent, the trademarks were invalid and
could not be the basis for an infringement claim. Next, the
court evaluated OSS’s claims regarding its then-pending
trademark of “U.S. Smoke & Fire Curtain Life Safety,
Accessibility, Design Freedom” under common law. The court held
that the infringement claims failed because the mark was
descriptive, the Sadeghian Parties had prior use, and there was
no evidence that the Sadeghian Parties had used the phrase apart
from their promotion of Curtain. Finally, OSS’s cybersquatting
claim in count one failed because Curtain did not own the
“www.ussmokeandfirecurtain.com” domain or website.
The court next turned to OSS and Christ’s motion for
summary judgment on the counterclaims. The court noted that,
under Virginia law, entity owners with interests antagonistic to
their entity cannot simultaneously represent it in a derivative
action. Because CYSA was a defendant seeking judgment against
Curtain in OSS’s derivative suit, it could not simultaneously
serve as Curtain’s representative for purposes of the derivative
counterclaims. The court further noted that CYSA did not make
12
the requisite written demand upon Curtain before filing its
derivative counterclaims, and it was too late to cure the
defect. As a result, the court granted OSS and Christ summary
judgment on the Sadeghian Parties’ derivative counterclaims.
The district court’s accompanying order dismissed the
entire action. On December 23, 2011, the Sadeghian Parties
filed a Rule 59 motion to alter or amend the district court’s
judgment. The district court denied the Rule 59 motion on
January 31, 2012, and the Sadeghian Parties gave notice of
appeal on February 6, 2012. OSS and Christ also filed notices
of appeal.
III.
We address the issues raised by OSS and Christ in their
appeals before turning to the Sadeghian Parties’ cross-appeal.
Because the district court disposed of this case at summary
judgment, we review the facts and reasonable inferences
therefrom in the light most favorable to the non-moving party.
Bonds v. Leavitt, 629 F.3d 369, 380 (4th Cir. 2011).
A.
OSS first argues that the district court erred in granting
summary judgment to the Sadeghian Parties on the breach of
fiduciary duty claims in the derivative complaint. OSS contends
that the district court failed to consider Sadeghian’s fiduciary
13
duty not to usurp corporate opportunities properly belonging to
Curtain and his duty to secure intellectual property rights for
Curtain. 3 OSS further contends that the district court did not
credit its evidence, which it claims should have been sufficient
to preclude summary judgment. In addition, OSS claims that the
district court erred in failing to exclude parol evidence and in
relying on that evidence in deciding the motion. 4
3
We reject OSS’s claim that Sadeghian (through CYSA)
breached his fiduciary duty to acquire intellectual property
rights for Curtain. The case cited by OSS, In re Access
Cardiosystems, Inc., 340 B.R. 127 (Bankr. D. Mass. 2006), is
factually inapposite. There, a corporation was formed by its
president in order to design, manufacture, and sell emergency
defibrillators. Id. at 134. Once the product design was
complete, the president filed a patent application in his own
name, contending that he alone had conceived all of the
inventive portions of the product prior to the company’s
incorporation. Id. at 149. The court held that the president
had breached his fiduciary duty to the corporation by failing to
disclose that he intended to assert complete ownership over the
intellectual property. Id. at 150. The court also pointed out
that the corporation had spent millions to develop and
manufacture the product, and therefore ownership of the
underlying intellectual property was essential to its viability.
Id.In contrast, Curtain was engaged in the business of
distributing curtain products, not creating intellectual
property or trademarks. Nor are the marks at issue in this case
essential to Curtain’s viability. In any event, as we explain
later, although there is conflicting evidence regarding the
development and original ownership of Curtain, it is clear that
CYSA used the phrase “U.S. Smoke & Fire Curtain” well before
Curtain’s formation.
4
OSS also argues that the district court erred in granting
the Sadeghian Parties’ motion in light of the court’s finding
that they had a conflict of interest. The court, however, found
(Continued)
14
The Sadeghian Parties respond that they alone owned Curtain
when the opportunity to distribute smoke curtains first arose
and thus were free to exploit it for themselves. They also say
that Curtain never had the right to distribute smoke curtains
because all parties understood that it was formed for the sole
purpose of distributing fire curtains.
We are constrained to agree with OSS that the district
court erred in granting summary judgment on the breach of
fiduciary duty claims.
A corporate officer owes the duties of “utmost good faith”
and loyalty to his corporation. Feddeman & Co. v. Langan
Assocs., 530 S.E.2d 668, 673 (Va. 2000). 5 An officer breaches
his fiduciary duty to his company if he diverts corporate
opportunities to himself. Today Homes, Inc. v. Williams, 634
S.E.2d 737, 742-43 (Va. 2006). An officer also cannot compete
with his own company. Williams v. Dominion Tech. Partners, LLC,
576 S.E.2d 752, 757 (Va. 2003). The duty of loyalty is enforced
by imposing upon officers the burden of: (1) disclosing
only that CYSA had a conflict of interest in filing derivative
counterclaims on Curtain’s behalf and rectified it by dismissing
those claims.
5
The COA is governed by Virginia law.
15
corporate opportunities to the company, and (2) obtaining its
consent to exploit them. Today Homes, 634 S.E.2d at 743.
The district court was wrong to grant summary judgment to
the Sadeghian Parties on the breach of fiduciary duty claims.
To begin with, the court said nothing about the Sadeghian
Parties’ contention that Sadeghian owed no duty of loyalty to
Curtain when the opportunity to sell smoke curtains arose
because the Sadeghian Parties’ alone owned Curtain at the time.
That contention, however, is refuted by the record, which
includes a July 8, 2009, e-mail from Sadeghian to Christ in
which Sadeghian acknowledges that OSS is in fact a part owner of
Curtain. See J.A. 500. We note further that the distribution
agreement with BLE--where the opportunity to sell smoke curtains
first arose--was not signed until July 13, five days after the
email in question. Thus, we have before us a classic factual
dispute on an issue that matters.
And because the issue matters, the district court’s stated
reason for granting summary judgment fails. The district court
based its decision on the distribution agreements themselves,
concluding that their language showed that Curtain could not
distribute smoke curtains. The district court, however, failed
to consider Sadeghian’s fiduciary duty to Curtain prior to the
execution of the distribution agreements and OSS’s argument that
the CDA may not have given Curtain the right to distribute smoke
16
curtains precisely because Sadeghian failed to disclose the
opportunity. Moreover, although the Sadeghian Parties contend
that Christ understood that Curtain was created to distribute
fire curtains only, both the name of the company (“U.S. Smoke &
Fire Curtain, LLC”) and the statement in the COA that Curtain
was formed to “market, sell and distribute smoke and fire
curtains in the United States” suggest otherwise.
In sum, on this record, a jury could find that that OSS
owned part of Curtain when the opportunity to sell smoke
curtains first arose. A jury could further find that Sadeghian
was bound to disclose that opportunity to Curtain before
exploiting it for himself. Accordingly, we vacate the district
court’s judgment as to counts four through eleven of OSS’s
derivative complaint and remand them for further proceedings. 6
6
In light of our decision, we need not reach OSS’s argument
that the district court improperly relied on parol evidence in
granting summary judgment to the Sadeghian Parties. Nor need we
decide whether (as the district court concluded) BLE’s alleged
refusal to allow Curtain to sell smoke curtains constitutes an
exception to the corporate opportunity doctrine. We note that
Virginia courts have not yet addressed this particular issue.
The general rule though is that a refusal to deal does not, by
itself, constitute an exception: “Where an officer claims the
reason he or she appropriated the opportunity is that the other
party would not have dealt with the corporation anyway, the
business transaction will not be immune from attack unless the
officer unambiguously discloses to the corporation the fact of
the other party’s refusal to deal, along with a fair statement
of the reasons for that refusal.” 3 Fletcher Cyclopedia of
Corporations § 862.10; see also Energy Res. Corp., Inc. v.
Porter, 438 N.E.2d 391, 394 (Mass. App. Ct. 1982). We leave
(Continued)
17
B.
OSS also challenges the district court’s grant of summary
judgment to the Sadeghian Parties on the intellectual property
claims (counts one through three) in the derivative complaint.
We address each claim separately.
1.
OSS argues that the district court erred in granting
summary judgment on the intellectual property claims related to
Curtain’s alleged trademark of “Elevator Shield.” The district
court held that Curtain violated the CDA by filing its trademark
application without BLE’s consent, and thus the trademark is
invalid. OSS contends that the Sadeghian Parties lack standing
to invoke BLE’s rights. OSS also contends that the CDA does not
prevent Curtain from registering its own trademarks.
The Sadeghian Parties respond that OSS’s derivative claim
for infringement of the “Elevator Shield” trademark fails
because Curtain could not validly obtain the mark in the first
place. They contend that the terms of the CDA prevent Curtain
from registering a trademark for any BLE product.
In order to assert a claim for trademark infringement or
unfair competition under the Lanham Act, a plaintiff must prove,
this question (as well as the parol evidence issue) for the
district court to consider anew on remand.
18
among other things, that he or she possesses the mark at issue.
See 15 U.S.C. §§ 1114, 1125(a); see also, e.g., People for the
Ethical Treatment of Animals v. Doughney, 263 F.3d 359, 364 (4th
Cir. 2001). A party may assert the invalidity of the mark as a
defense to an infringement claim. 15 U.S.C. § 1115; see also
Hiram Walker & Sons v. Penn-Maryland Corp., 79 F.2d 836 (2d Cir.
1935).
In general, a nonparty to an agreement may not enforce the
contract against one of the signatories. See Food Lion, Inc. v.
S.L. Nusbaum Ins. Agency, Inc., 202 F.3d 223, 229 (4th Cir.
2000); see also General Cigar Co. v. GDM Inc., 988 F. Supp. 647,
661-62 (S.D.N.Y. 1997) (applying the rule in a trademark
action). There is an exception to this rule when a contractual
relationship exists between the defendant in a trademark action
and the third party, which would give the defendant (usually a
licensee of the third-party’s mark) superior trademark rights if
the third party’s rights were vindicated. Lapinee Trade, Inc.
v. Paleewong Trading Co., 687 F. Supp. 1262, 1264 (N.D. Ill.
1988). Here, there is no evidence that Services licensed
Elevator Shield from BLE, and therefore the general rule
applies, meaning that only Curtain and BLE have the right to
enforce the CDA against one another. To the extent the
Sadeghian Parties are attempting to enforce the CDA as a third-
party beneficiary, Virginia law requires that they show that the
19
contracting parties clearly and definitely intended to confer a
benefit upon them. Food Lion, 202 F.3d at 229. Because the
record does not so show, the Sadeghian Parties are barred from
asserting a defense to the trademark claim based upon BLE’s
rights.
Accordingly, the district court erred in dismissing the
“Elevator Shield” claims in counts two and three of the
derivative complaint.
2.
OSS argues that the district court erred in granting
summary judgment on the claims regarding the
“www.ussmokeandfirecurtain.com” website and domain name. OSS
argues that the court ignored evidence showing that Christ
created the marks. The Sadeghian Parties respond that both the
website and the domain name belong to CYSA, and therefore OSS
lacks standing to assert the claims on behalf of Curtain.
OSS has alleged violations of the Anticybersquatting
Consumer Protection Act (“ACPA”) in count one of the derivative
complaint, and of the Lanham Act in counts two and three. Both
the ACPA and the Lanham Act obligate a plaintiff to show
ownership of a valid protectable trademark, among other
requirements. See 15 U.S.C. § 1125(d)(1)(A) (“A person shall be
liable in a civil action by the owner of a mark . . . .”); Lone
Star Steakhouse & Saloon, Inc. v. Alpha of Va., Inc., 43 F.3d
20922, 930 (4th Cir. 1995) (holding that a “valid, protectable
trademark” is necessary to establish a claim of trademark
infringement or unfair competition under the Lanham Act).
The uncontroverted evidence shows that CYSA developed the
ussmokeandfirecurtain.com website and owns a registered
copyright for the site. Although OSS contends that Christ
created the domain name, it presented no evidence supporting
this allegation. Christ’s affidavit regarding the website says
only that he helped select the domain name, see J.A. 465-66, and
any legal conclusions in the affidavit were properly ignored by
the district court, see J.A. 466 ¶ 33; see also, e.g., Avrigan
v. Hull, 932 F.2d 1572, 1577 (11th Cir. 1991).
Because OSS does not own the intellectual property at
issue, it lacks standing to state claims under the Lanham Act or
the ACPA. Accordingly, we affirm the district court’s grant of
summary judgment to the Sadeghian Parties on these claims.
3.
OSS next argues that the district court erred in dismissing
its Lanham Act claims related to its trademark of “U.S. Smoke &
Fire Curtain Life Safety, Accessibility, Design Freedom.” OSS
argues that the district court erroneously found that the
trademark application was rejected, as the trademark has been
registered with the U.S. Patent and Trademark Office.
21
The trademark registration, however, does not change the
fact that OSS failed to show that the Sadeghian Parties actually
used the mark. A cause of action for trademark infringement or
unfair competition under the Lanham Act requires a plaintiff to
prove, inter alia, that the defendant used the mark. Doughney,
263 F.3d at 364. The district court concluded that there was
“no evidence to support the proposition that [the Sadeghian
Parties] used [‘U.S. Smoke & Fire Curtain Life Safety,
Accessibility, Design Freedom’] apart from business conducted on
behalf of Curtain.” 7 J.A. 803-04. Our review of the record
confirms that the district court was correct, and we therefore
affirm the grant of summary judgment to the Sadeghian Parties on
these claims.
C.
Finally, in their supplemental brief, OSS and Christ assert
that the district court erred in dismissing their counter-
counterclaims. OSS and Christ argue that the court erroneously
characterized the claims as derivative, and that they had the
7
At the time of the district court’s writing, Curtain had
not yet been granted a trademark of the phrase, and therefore
the court evaluated only that part of the alleged mark that had
not been previously rejected as “descriptive.” As a result, the
district court’s holding refers only to the “Life Safety,
Accessibility, Design Freedom” part of the alleged mark. See
J.A. 803.
22
right, under Fed. R. Civ. P. 13, to file the claims without
requesting leave of court.
The district court found that although the claims asserted
by OSS and Christ were nominally direct and personal, they were
in fact derivative claims that could only be asserted by
Curtain. In the court’s view, the proper vehicle for pursuing
these claims was via an amendment to the derivative complaint.
Rule 13(a)(1)(A) states that counterclaims must be included
in responsive pleadings if they arise out of the same
transaction or occurrence. Rule 15, on the other hand, allows
for amendment of existing pleadings as a matter of course within
twenty-one days of service. Fed. R. Civ. P. 15(a)(1). After
such time has expired, a pleading may only be amended with the
opposing party’s consent or with leave of court. Fed. R. Civ.
P. 15(a)(2). We review the court’s denial of leave to amend a
complaint for abuse of discretion. Balas v. Huntington Ingalls
Indus., 711 F.3d 401, 409 (4th Cir. 2013).
The first question presented, therefore, is whether OSS and
Christ’s claims were direct and personal or whether they were
truly amendments to the derivative complaint. We find that the
claims were derivative in nature and therefore could only be
pursued via an amendment to OSS’s complaint.
OSS and Christ attempted to bring claims against the
Sadeghian Parties for (1) breach of the COA, (2) tortious
23
interference with Curtain’s rights and business expectancies
under the COA and CDA, (3) statutory conspiracy to harm Curtain
by diverting contractual and business rights and breaching
fiduciary duties, (4) common law conspiracy to do the same, and
(5) unjust enrichment via revenues belonging to Curtain. See
J.A. 1071-76. Despite their artful pleading, these claims all
deal with harm allegedly inflicted upon Curtain. For example,
the revenues that are referred to in the unjust enrichment claim
belonged to Curtain; in the same way, if Sadeghian breached the
COA, he could do so only in his role as CEO of Curtain.
Corporate shareholders cannot bring direct individual suits
against officers and directors for breaches of fiduciary duty;
their remedy is derivative on behalf of the corporation.
Simmons v. Miller, 544 S.E.2d 666, 674 (Va. 2001). Virginia has
declined to adopt the exception to this rule allowing individual
suits in cases of closely held corporations. Id. at 675. 8
We agree with the district court that the counter-
counterclaims were in fact derivative and therefore should have
been asserted as amendments to the derivative complaint. Nor
did the district court err in denying leave to amend. The
8
We deal here with a limited liability company, but the
analysis remains the same.
24
counter-counterclaims were filed late in the trial schedule--the
Sadeghian Parties’ responses to the claims would have been due
after discovery had closed and just days before exhibits and
witness statements were due to the court. See J.A. 339-40. We
have previously upheld a denial of leave to amend because its
timing would have unduly prejudiced the opposing party. See,
e.g., Intown Props. Mgmt., Inc. v. Wheaton Van Lines, Inc., 271
F.3d 164, 170 (4th Cir. 2001). We find no abuse of discretion
and therefore affirm the district court’s ruling.
IV.
We turn now to the cross-appeal, which presents three
issues for our review. First, the Sadeghian Parties argue that
the district court erred in granting summary judgment to OSS and
Christ on CYSA’s derivative counterclaims due to CYSA’s conflict
of interest. Second, the Sadeghian Parties contend that the
district court erred in dismissing sua sponte their direct
counterclaims with prejudice. Finally, they assert that the
district court erred in granting without explanation OSS and
Christ’s motion for summary judgment on CYSA’s claim to
judicially dissolve Curtain.
We first dispose of a challenge to our jurisdiction over
the cross-appeal, before turning to the merits.
25
A.
OSS and Christ question our jurisdiction over the cross-
appeal, arguing that the Sadeghian Parties failed to file a
timely notice of appeal. OSS and Christ say that the September
16, 2011 order was the district court’s final judgment and that
the Sadeghian Parties’ Rule 59 motion, filed on December 23,
2011, could not have tolled the deadline for filing a notice of
appeal because it was filed more than twenty-eight days after
the final judgment.
The Sadeghian Parties respond that the district court did
not enter its final judgment in this case until it filed the
November 29, 2011 memorandum opinion and order. As a result,
the Sadeghian Parties assert that their Rule 59 motion
successfully tolled the deadline for filing the appeal.
We hold that we have jurisdiction to consider the cross-
appeal. Under Rule 4 of the Federal Rules of Appellate
Procedure, a notice of appeal must be filed within thirty days
of entry of the judgment or order. Fed. R. App. P. 4(a)(1)(A).
A timely Rule 59 motion, however, serves to toll the time
requirement, and the time to file a notice of appeal runs from
the entry of the order disposing of the motion. Fed. R. App. P.
4(a)(4)(A)(iv). Rule 59 motions to alter or amend a judgment
must be filed within twenty-eight days of the entry of judgment.
Fed. R. Civ. P. 59(e).
26
“[A]n order is final if it ends the litigation on the
merits and leaves nothing for the court to do but execute the
judgment.” Penn-America Ins. Co. v. Mapp, 521 F.3d 290, 294
(4th Cir. 2008) (internal quotations omitted). In determining
whether an ambiguous judgment is final, “the intention of the
judge to dispose of all the business before him or her” provides
valuable insight. Vaughn v. Mobil Oil Exploration & Producing
Se., Inc., 891 F.2d 1195, 1197 (5th Cir. 1990). Additionally,
“removal of a case from a court’s ‘active docket’ is the
functional equivalent of an administrative closing, which does
not end a case on its merits or make further litigation
improbable.” Mapp, 521 F.3d at 295. Therefore, “an otherwise
non-final order does not become final because the district court
administratively closed the case after issuing the order.” Id.We conclude that the November 29, 2011 order, rather than
the September 16, 2011 order, is the final judgment in this
case. The September 16 order did not constitute a final
judgment for two reasons: First, the order did not “leave
nothing for the court to do but execute the judgment” as the
court still had to prepare and file the opinion and order.
Second, the order did not unequivocally grant either motion.
Rather, the court said only that it was “of the opinion that
Summary Judgment should be GRANTED.” J.A. 773 (emphasis added).
In our view, this language did not foreclosure the possibility
27
that the district court could decide differently. In fact, the
district court’s only definitive action on September 16 was to
remove the case from the trial docket, which by itself did not
end the case on the merits.
The Sadeghian Parties filed their Rule 59 motion on
December 23, 2011, well within the twenty-eight days allowed
from the date of the district court’s entry of final judgment,
which we conclude occurred on November 29, 2011. Accordingly,
we have jurisdiction over the cross-appeal.
B.
Turning to the merits, the district court found that CYSA’s
interests were antagonistic to Curtain, as evidenced by the
Sadeghian Parties’ motion for summary judgment on OSS’s
derivative complaint as well as the Sadeghian Parties’
counterclaims. As a result, the court held that CYSA had a
conflict of interest in representing Curtain in the derivative
counterclaims. In addition, the court noted that CYSA had
failed to make demand upon Curtain, as required by both Fed. R.
Civ. P. 23.1 and Va. Code § 13.1-1042B. Although this error was
curable, the court noted that Virginia law afforded a company
ninety days to respond to a demand, and trial was less than
ninety days away. Accordingly, the court granted OSS and Christ
summary judgment and dismissed the Sadeghian Parties’
counterclaims.
28
As an initial matter, a review of the Sadeghian Parties’
counterclaim reveals that the parties intended to assert direct
as well as derivative claims. The pleading explicitly states
that CYSA brought certain claims “on its own behalf and
derivatively.” J.A. 86. In addition, certain claims could only
have been brought directly, such as the copyright infringement
and cybersquatting claims regarding ussmokeandfirecurtain.com,
based upon the fact that CYSA, rather than Curtain, owned the
website. As a result, we will consider the court’s dismissal of
the derivative and direct claims separately, beginning with the
former.
The Sadeghian Parties contend that CYSA had standing to
pursue the derivative counterclaims because Curtain was
improperly aligned with OSS and Christ, rather than with them.
Second, the Sadeghian Parties say that there were no procedural
defects in the derivative counterclaims. They assert that the
statute cited by the district court was not in effect at the
time of their pleading, and that, in any event, the court’s
decision to dismiss the derivative counterclaims is an abuse of
its discretion and conflicts with its earlier denial of a motion
to dismiss these very same claims. We find no error in the
district court’s decision as to these claims.
In a derivative suit, the corporation (or as here, the
limited liability company) is initially named as a defendant to
29
ensure its presence, after which it may be aligned according to
its real interests. Smith v. Sperling, 354 U.S. 91, 97 (1957);
see also Lewis v. Odell, 503 F.2d 445 (2d Cir. 1974). The
question of whether to realign the corporation as a plaintiff is
“a practical not a mechanical determination and is resolved by
the pleadings and the nature of the dispute.” Smith, 354 U.S.
at 97.
Thus, if the complaint in a derivative action alleges
that the controlling shareholders or dominant
officials of the corporation are guilty of fraud or
malfeasance, then antagonism is clearly evident and
the corporation remains a defendant. On the other
hand, if the individual plaintiff is the majority
stockholder or a controlling officer, then the
corporation cannot be deemed antagonistic to the suit
and it should be realigned as a plaintiff.
Liddy v. Urbanek, 707 F.2d 1222, 1224-25 (11th Cir. 1983)
(internal quotations and citations omitted).
Some courts have, however, acknowledged the potential
conflict of interest that may arise when the corporation, on
whose behalf the suit has been filed, and the individual
defendants are represented by the same counsel. See, e.g., Bell
Atl. Corp. v. Bolger, 2 F.3d 1304, 1316 (3d Cir. 1993); Lewis v.
Shaffer Stores Co., 218 F. Supp. 238 (S.D.N.Y. 1963). In Bell
Atlantic, the Third Circuit held that, frivolous cases aside,
when a derivative action alleges breaches of the duty of
loyalty--including allegations of directors’ fraud, intentional
misconduct, or self-dealing--a conflict of interest arises, and
30
the corporation should be represented by separate counsel. 2
F.3d at 1317.
We need not decide here whether Curtain was improperly
aligned or required separate representation, as we conclude that
the district court correctly identified a conflict of interest
between CYSA and Curtain and granted summary judgment on that
basis. Not only did OSS allege that Sadeghian had breached his
fiduciary duty to Curtain and usurped Curtain’s business
opportunities, but the Sadeghian Parties’ responses to the
allegations asked the district court to invalidate Curtain’s
intellectual property and contractual rights. See J.A. 806.
This created an actual conflict of interest between Curtain’s
interests and the Sadeghian Parties’ interest in prevailing in
the lawsuit. See Jennings v. Kay Jennings Family Ltd. P’ship,
659 S.E.2d 283, 289-90 (Va. 2008).
The district court also correctly held that Fed. R. Civ. P.
23.1 barred CYSA’s derivative counterclaims in light of the
conflict of interest. Rule 23.1 states that a “derivative
action may not be maintained if it appears that the plaintiff
does not fairly and adequately represent the interests of
shareholders or members who are similarly situated in enforcing
the right of the corporation or association.” In Davis v.
Comed, Inc., 619 F.2d 588 (6th Cir. 1980), the Sixth Circuit
listed several factors that weigh against a plaintiff satisfying
31
the fair and adequate representation test, including “economic
antagonisms between representative and class,” “indications that
the named plaintiff was not the driving force behind the
litigation,” “other litigation pending between the plaintiff and
defendants,” and “plaintiff’s vindictiveness toward the
defendants.” Id. at 593-94; see also Jennings, 659 S.E.2d at
288 (applying Davis factors to determine fair and adequate
representation under Virginia law).
In this case, the Sadeghian Parties’ defenses to the
derivative complaint sought to invalidate Curtain’s trademark
and contract rights, creating an economic antagonism between
CYSA and Curtain. Moreover, although CYSA filed the derivative
counterclaims as a member of Curtain, the interests represented
were likely to be that of its sole owner, Sadeghian, who was
named in the original suit as an officer of Curtain. Finally,
given the pending litigation between the parties--i.e., the
derivative suit between OSS and the Sadeghian Parties--it was
reasonable for the district court to conclude that the
derivative counterclaims were likely filed as a vindictive
response.
In sum, because of the conflict of interest between Curtain
and CYSA, as well as CYSA’s failure to pass the “fair and
adequate representation” test, the district court correctly
32
granted summary judgment to OSS and Christ on the derivative
counterclaims. 9
C.
The Sadeghian Parties also contend that the district court
erred in sua sponte dismissing their direct counterclaims, or,
in the alternative, that the district court should have
dismissed these claims without prejudice. They note that OSS
and Christ did not move for summary judgment on the claims, and
the district court said nothing substantive about them in either
its final order or its memorandum opinion. OSS and Christ
respond that the district court properly granted summary
judgment on the claims after finding that CYSA had a conflict of
interest in representing Curtain.
The district court’s finding that CYSA had a conflict of
interest prevented CYSA from representing Curtain in a
derivative suit. That finding has no bearing, however, on the
Sadeghian Parties’ right to file direct claims against OSS and
Christ. And although the district court has the power to
dismiss claims sua sponte, it gave no reason for taking such
9
Because we find support for the district court’s holding
in Rule 23.1, we need not reach OSS and Christ’s arguments that
the derivative counterclaims were also flawed as a matter of
Virginia state law. Nor need we consider whether the district
court abused its discretion in granting the motion for summary
judgment after previously denying a motion to dismiss on the
same grounds.
33
action here, nor did it give notice to the Sadeghian Parties of
its intention to do so. See Chase Bank USA, N.A. v. City of
Cleveland, 695 F.3d 548, 558 (6th Cir. 2012) (requiring that a
party be given notice before the court dismisses the party’s
claims on its own motion).
It may be that the district court assumed all of the claims
to be derivative, particularly because the scattershot pleading
does little to make the relevant distinction. Some of the
claims are clearly derivative, see Count VIII (alleging
conversion/embezzlement of Curtain's funds), XI (alleging breach
of fiduciary duty), XIV (alleging breach of the COA and CDA), XV
(seeking a declaratory judgment as to Curtain’s rights to its
ongoing business), and XVI (alleging tortious interference with
the COA, CDA, and various dealer agreements). On the other
hand, certain claims could only have been brought directly, such
as Counts I and II, alleging copyright infringement and
cybersquatting as to ussmokeandfirecurtain.com, because CYSA,
rather than Curtain, owned the website. Rather than parse the
claims ourselves, we will vacate the district court’s dismissal
of the counterclaims and remand for the court to determine (1)
on which side of the ledger (direct or derivative) each claim
falls; and (2) if direct, whether the claims may nonetheless be
disposed of at summary judgment.
34
D.
Finally, the Sadeghian Parties argue that the district
court erred in granting OSS and Christ summary judgment on their
counterclaim seeking judicial dissolution, and that the court
should have instead granted summary judgment to CYSA. In
support of their motion for summary judgment on the claim, OSS
and Christ argued that an application for judicial dissolution
should be filed in state, rather than federal, court. In
addition, OSS and Christ noted that the COA prevented judicial
dissolution absent unanimous written agreement of all parties.
The Sadeghian Parties respond that although unanimous
consent is required for dissolution of Curtain under the COA, no
such agreement is necessary for judicial dissolution. See Va.
Code § 13.1-1047 (providing that a claim for judicial
dissolution of a limited liability company may be brought by any
of its members). They also contend that the judicial
dissolution claim is properly in federal court because the
district court had supplemental jurisdiction over the claim, and
principles of judicial economy support adjudicating all of the
claims together.
The district court gave no explanation for why it chose
to grant summary judgment to the OSS and Christ on this claim.
Although we may “affirm on any legal ground supported by the
record,” Jackson v. Kimel, 992 F.2d 1318, 1322 (4th Cir. 1993),
35
we generally do so only when remand “would be an unnecessary
waste of judicial and litigant resources,” O’Reilly v. Bd. of
Appeals of Montgomery Cnty., 942 F.2d 281, 284 (4th Cir. 1991).
Because we have already determined that remand is appropriate,
few, if any, resources would be saved by de novo consideration
of the propriety of judicial dissolution, a question we think
best left to the district court in the first instance. See Ross
v. Commc’ns Satellite Corp., 759 F.2d 355, 363-64 (4th Cir.
1985) (refusing to independently determine whether summary
judgment may be affirmed in a case “involv[ing] a complex array
of subsidiary claims” when remand would “promote an informed
decision, better frame the contentions of the parties, and
ensure a proper record for review”), abrogated on other grounds
by Price Waterhouse v. Hopkins, 490 U.S. 288 (1989). Therefore,
we vacate the district court’s grant of summary judgment on the
judicial dissolution counterclaim and remand it for further
proceedings.
V.
In sum, we vacate and remand the district court’s dismissal
of OSS’s breach of fiduciary duty claims (counts four through
eleven of the derivative complaint) and intellectual property
claims regarding the “Elevator Shield” trademark (counts two and
three of the derivative complaint). We also vacate and remand
36
the district court’s dismissal of the Sadeghian Parties’
counterclaims against OSS and Christ, as well as their separate
request for judicial dissolution of Curtain. We affirm the
district court’s dismissal of all other claims.
AFFIRMED IN PART,
VACATED IN PART,
AND REMANDED
37