Ausable River Trading Post, LLC v. Dovetail Solutions, Inc.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 17a0236p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
AUSABLE RIVER TRADING POST, LLC, ┐
Plaintiff-Appellant, │
│
> No. 17-1283
v. │
│
│
DOVETAIL SOLUTIONS, INC.; TAWAS AREA CHAMBER │
OF COMMERCE,
│
Defendants-Appellees. │
┘
Appeal from the United States District Court
for the Eastern District of Michigan at Bay City.
No. 1:16-cv-11207—Thomas L. Ludington, District Judge.
Argued: October 5, 2017
Decided and Filed: October 23, 2017
Before: SUTTON, DONALD, and THAPAR, Circuit Judges.
_________________
COUNSEL
ARGUED: Ronald Tyler, TYLER & TYLER, P.C., East Tawas, Michigan, for Appellant.
Robert G. Kamenec, PLUNKETT COONEY, Bloomfield Hills, Michigan, for Appellee Tawas
Area Chamber of Commerce. ON BRIEF: Ronald Tyler, TYLER & TYLER, P.C., East
Tawas, Michigan, for Appellant. Robert G. Kamenec, Michael J. Barton, PLUNKETT
COONEY, Bloomfield Hills, Michigan, for Appellee Tawas Area Chamber of Commerce.
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OPINION
_________________
BERNICE BOUIE DONALD, Circuit Judge. Plaintiff-Appellant AuSable River Trading
Post, LLC (the “Trading Post”) filed this action against Defendants-Appellees Dovetail
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Solutions, Inc. (“Dovetail”) and Tawas Area Chamber of Commerce (the “Chamber”) for a
declaratory judgment as to whether Defendants hold a valid, enforceable trademark for the term
“Perchville,” and for damages under Michigan state law claims. The district court granted
summary judgment in favor of the Defendants, finding that Plaintiff’s trademark challenge is
barred by the doctrine of res judicata and remanding the state court claims. In reaching its
conclusion, the district court determined that Plaintiff was in privity with an hourly employee
who had previously consented to a permanent injunction barring his use of the “Perchville”
mark. Plaintiff challenges the district court’s finding that it is in privity with its employee for
purposes of res judicata. We REVERSE.
I.
Yearly, the city of Tawas, Michigan hosts a winter festival known as “Perchville.” The
Chamber is a non-profit Michigan corporation dedicated to promoting local business, and
Dovetail is a for-profit corporation that oversees and manages the Chamber. In March 2002, the
Chamber applied for federal trademark registration for the term “Perchville,” which was then
registered in May 2003. The trademark was temporarily cancelled in December 2013 for failure
to renew the application, but within three weeks the Chamber reapplied for re-registration, which
it received just over one year later. The Trading Post is a wholesale provider of miscellaneous
products, including mugs, banners, t-shirts, and sweatshirts. It is alleged that the Trading Post
had an order to sell or was actively selling merchandise depicting the term “Perchville.”
On January 29, 2016, the Chamber filed suit in Michigan state court against Salvatore
Agnello, an employee of the Trading Post, seeking to obtain an injunction against his
unauthorized use of the term “Perchville” on t-shirts. The Chamber did not include the Trading
Post in their lawsuit, as it was initially unaware that Agnello was selling the shirts on behalf of
the Trading Post. The state court granted the Chamber an ex parte injunctive order. The
language of the order included, “this order shall be binding upon the parties to this action, their
officers, agents, servants, employees, and attorneys and on those persons in active concert or
participation with them who receive actual notice of this order by personal service [or]
otherwise.”
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A hearing was set for February 2, 2016. Agnello appeared without an attorney. He
indicated that he had spoken to a partial owner of the Trading Post about the lawsuit, but
repeatedly stated that he was unsure why the injunction was issued against him, rather than the
Trading Post. He noted that he had only received notice the Sunday before the hearing date. The
judge indicated that a hearing was unnecessary and concluded that anyone that had notice and
acted in concert would be bound by the injunction. The judge then asked Agnello if he had any
objection to the permanent injunction being entered, to which Angello initially objected, stating
that he did not know exactly what it meant. Specifically, Agnello indicated, “[a]gain, I’m sort of
lost at this time. I would ask that the lawsuit itself be thrown out. Again, there was no harm, no
foul. And the fact of the matter is, why are you – why are they coming after me? It’s not my
company.” Agnello then consented to the permanent injunction. The judge informed Agnello
that the order would be binding on anyone acting in concert with Agnello, stating “just so you
understand, you and everybody in your chain is on the hook. So if there’s – if there is a
violation, you know, then we’re talking about contempt of Court . . . .”
Since the entry of the injunction, Agnello and the Trading Post have complied with the
injunction. The Trading Post filed this suit on March 4, 2016, challenging the Chamber’s
trademark of “Perchville,” among other claims for damages under Michigan law.1 The parties
filed cross-motions for summary judgment. Defendants argued that Plaintiff’s trademark
challenge was barred by the doctrine of res judicata because a final determination on the merits
occurred in the state court with parties in privity and that the claims before the district court
could have been brought in the original state court action. The district court granted the
Chamber’s motion as to the challenge to the trademark’s validity on the grounds of res judicata,
finding that Plaintiff’s claims were barred by the prior litigation between the Chamber and
Agnello. Plaintiff appeals on this issue alone.
II.
The Court reviews de novo the district court’s grant of summary judgment. Niemi v.
NHK Spring Co., Ltd., 543 F.3d 294, 298 (6th Cir. 2008). We must determine whether Michigan
1
Defendants removed Plaintiff’s complaint to the district court on April 4, 2016.
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law precludes this appeal because “federal courts are required to give the judgments of state
courts the same preclusive effect as they are entitled to under the laws of the state rendering the
decision.” Exec. Arts Studio v. City of Grand Rapids, 391 F.3d 783, 795 (6th Cir. 2004). Thus,
the Court looks to Michigan law to determine whether Plaintiff’s claims are barred by res
judicata.
Under Michigan law, a “second, subsequent action” is barred by res judicata when
“(1) the prior action was decided on the merits, (2) both actions involve the same parties or their
privies, and (3) the matter in the second case was, or could have been, resolved in the first.”
Adair v. State, 680 N.W.2d 386, 396 (Mich. 2004) (citing Sewell v. Clean Cut Mgmt., Inc.,
621 N.W.2d 222, 225 (Mich. 2001)). Res judicata is applied broadly by Michigan courts,
barring “not only claims already litigated, but also every claim arising from the same transaction
that the parties, exercising reasonable diligence, could have raised but did not.” Id. (citing Dart
v. Dart, 597 N.W.2d 82 (Mich. 1999)).
The parties appear to concede that the first and third elements of res judicata are fulfilled,
and this panel agrees. The Michigan state court’s permanent injunction constitutes a merits
decision, Ludwig v. Twp. of Van Buren, 682 F.3d 457, 460 (6th Cir. 2012), and the challenge to
the validity of the “Perchville” trademark could have been raised by Agnello as a defense in the
original action. Plaintiff challenges whether there is sufficient privity between the Trading Post
and Agnello such that Plaintiff’s claims are barred by res judicata. Privity is defined broadly
under Michigan law:
To be in privity is to be so identified in interest with another party that the first
litigant represents the same legal right that the later litigant is trying to assert. The
outer limit of the doctrine traditionally requires both [1] a ‘substantial identity of
interests’ and [2] a ‘working functional relationship’ in which [3] the interests of
the nonparty are presented and protected by the party in the litigation.
Bates v. Twp. of Van Buren, 459 F.3d 731, 734-35 (6th Cir. 2006) (quoting Adair, 680 N.W.2d at
396) (alteration in original). “[A] perfect identity of the parties is not required, only a
‘substantial identity of interests’ that are adequately presented and protected by the first litigant.”
Adair, 680 N.W.2d at 397.
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In determining that privity exists, the district court relied in part on a finding that the facts
here are parallel to those considered by this Court in Bates, 459 F.3d 731. The Bates Court
affirmed a district court’s determination that an exotic dancer’s challenge to a municipal
ordinance banning nude dancing at liquor establishments was barred by res judicata. The district
court concluded that the dancer’s interests were protected in a previous litigation by her
employer challenging the same ordinance such that she was in privity and barred from asserting
the same challenge. The dancer challenged on appeal the district court’s finding that she was in
privity with her employer. This Court found that the case satisfied the components discussed in
Adair because the relevant parties sought the same relief (“facial invalidation of the ordinance”),
the “substance of [the dancer’s] complaint [was] on all fours with [the club’s previous] defense,”
and the dancer’s employment with the club satisfied the “working functional relationship” test.
Id. at 736. This Court later affirmed a similar finding involving a similar challenge by a dancer
to the same ordinance on the basis of privity in Ludwig v. Twp. of Van Buren, 682 F.3d 457, 461
(6th Cir. 2012). Significantly, in Ludwig, this Court noted that “[a]lthough ordinarily an
employee is not bound by litigation brought by an employer . . . a special problem arises when an
employer is subject to prospective relief. That is because an employer can only act through its
employees, so prospective relief must bind employees to have any effect.” Id. The Ludwig
Court was thus focused on the “special problem” of an employer subject to prospective relief.
This case is distinguishable from Bates and Ludwig, beginning with the obvious factual
differences. First, the employer-employee factual scenario is inversed here. This Court does not
face an employee seeking not to be bound by an injunction against his employer, but rather, an
employer seeking to litigate its rights despite an injunction having been entered against an
employee. Practically speaking, an injunction against an employer must apply to its employees
for it to have any effect. See Ludwig, 682 F.3d at 461. The inverse is not necessarily true.
Further, unlike the employer in Bates and Ludwig, Agnello did not challenge the
underlying claim—here, the trademark—that was at issue in the first litigation. The record
indicates that Agnello did not have an attorney, did not understand why the injunction was
served on him (he describes himself as a “salesman”), and did not oppose the entry of a
permanent injunction. The district court erroneously concluded, without legal support, that the
No. 17-1283 AuSable River Trading Post v. Dovetail Solutions Page 6
Trading Post’s notice of the first litigation and continued compliance with the injunction implied
that its interests were adequately represented by Agnello.
While there may be circumstances when an employee’s interests are so aligned with his
or her employer as to be in privity for the purposes of res judicata, there is no support for that
here. For example, Plaintiff might be in privity with Agnello had he substantively defended the
initial action and represented the Trading Post’s interests. Cf. ADF Intern., Inc. v. Steelcon, Inc.,
409 F. Supp. 2d 836, 840 (E.D. Mich. 2005) (finding privity where a plaintiff’s claims were
substantively the same as the defense asserted by its surety in a previous action). Given the
posture of the two cases here, the Trading Post’s claims here would not constitute a “reward [to]
litigants who failed, intentionally or not, to include all relevant parties in an action and . . . permit
two (or possibly many more) attempts to try the same cause of action.” Fleming v. City of
Detroit, No. 04-74081, 2006 WL 2559862, at *6 (E.D. Mich. 2006) (internal citations omitted).
Ultimately, Agnello was an hourly employee given a few days’ notice of an injunction.
He was clearly confused in the first action, wherein he repeatedly said he did not understand why
the action was brought against him, rather than his employer. While he may have a functional
working relationship with the Trading Post, it is clear that he lacks an “identity of interests” with
the Trading Post. The district court’s inference that Agnello wanted to sell t-shirts, and that
“[l]ost business for the Trading Post had the potential to impact his job security or financial
compensation” is not sufficient to show a substantially similar interest to the Trading Post. The
Trading Post’s interest here, the ability to sell merchandise geared toward a popular town event,
is much more significant than that of Agnello, who was merely an hourly employee and likely
unconcerned with whether the Trading Post could sell a particular type of product. Further, it is
equally clear that Agnello did not present or protect any interest of his or the Trading Post’s, nor
was he actually given an adequate chance to, given the short notice, lack of an attorney, and lack
of a full hearing.
While the Trading Post may have had actual notice of the injunction, it did not appear at
the scheduled hearing and the Chamber seems to have made no effort to include it. The facts
here are distinguishable from previous questions of privity between employers and employees
that this Court has addressed, and Defendants fail to meet their burden of showing that Agnello
No. 17-1283 AuSable River Trading Post v. Dovetail Solutions Page 7
and the Trading Post are in privity such that the doctrine of res judicata would bar Plaintiff’s
claims as a matter of law. Consequently, summary judgment on the basis of the doctrine of res
judicata was inappropriate.
III.
Accordingly, we REVERSE and REMAND for proceedings in accordance with this
opinion.