Retailer's Calculation of "Gross Receipts" for California Tax Purposes Successfully Challenged by Franchise Tax Board

Case: The Limited Stores, Inc. v. Franchise Tax Board, No. A102915 (Cal. Ct. App. 6/8/07)

The One Sentence Summary: Because national retailer's inclusion of short-term securities' full redemption price as "gross receipts" unfairly represented the extent of its business activity in California, Franchise Tax Board prevailed on challenge to retailer's calculation of California taxes.


What They Were Fighting About:

The Limited, a national retailer based in Columbus, Ohio, filed an action seeking refund of $5.6 million in corporate taxes for the years 1993 and 1994 after California's Franchise Tax Board (FTB) disputed the retailer's methodology for calculating taxes on its California source income. California's Uniform Division of Income for Tax Purposes Act (UDITPA) utilizes apportionment formula to determine the taxes that may be levied on a business that retails within and without California. The "sales factor" of the formula is calculated using a fraction, the numerator of which is taxpayer's total sales (defined only as all "gross receipts") in California and denominator of which is total sales everywhere.

The Limited's treasury department in Ohio invested excess cash flow in short-term financial instruments like commercial paper, certificates of deposit, treasury bills, and money market mutual funds. In calculating the sales factor under UDITPA, The Limited included in the denominator all money received when those investments matured, including return of principal. FTB argued that only income received when the investments matured should be included in the denominator.

Court Holdings:

• Under California Supreme Court authority, taxpayer may treat the full redemption price (including return of principal) from short-term financial instruments held to maturity as "gross receipts" under UDITPA.


• However, UDITPA also contains a provision that enables FTB to require a different apportionment in order to fairly represent the taxpayer's business activity in California.


• FTB has burden to prove by clear and convincing evidence that apportionment provided by standard formula is not a fair representation and that FTB alternative is reasonable. Courts apply two-part test: (1) whether taxpayer's treasury functions are "qualitatively different from its principal business" and (2) whether the quantitative distortion is substantial by including taxpayer's investment receipts in the formula.


• Applying this test, the court held that The Limited's including in "gross receipts" the full redemption price of short-term securities did not fairly represent the extent of its business activity in California.


• First, The Limited's treasury department functions are qualitatively different from its main business, the retail sale of apparel and other merchandise. Second, The Limited's calculation would lead to substantial quantitative distortion of its business activities in California. In the two years at issue, The Limited's short-term investments produced less than 1 percent of its annual income but more than 50 percent of its gross receipts. This distortion was seen in huge disparity between margins for its principal business (46 percent) and treasury functions (less than 1 percent).


• Court concluded that FTB's proposal to included in sales factor denominator only the net income from The Limited's redemptions of short-term securities was reasonable.

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Minimum Price Agreements Between Manufacturers and Retailers Are No Longer Per Se Illegal, Now Subject to "Rule of Reason"

Case: Leegin Creative Leather Products, Inc. v. PSKS, Inc., DBA Kay's Kloset, No. 06-480 (U.S. Sup. Ct. 6/28/07)
The One Sentence Summary: Reversing 96 years of antitrust precedent that made minimum resale price agreements between manufacturers and retailers per se illegal, U.S. Supreme Court held in 5-4 decision that vertical price restraints are to be analyzed under "rule of reason" and not deemed unlawful per se.


What They Were Fighting About:
PSKS, Inc., operating as Kay's Kloset a women's apparel store in Texas, sued Leegin Creative Leather Products, Inc., which manufactures leather goods and accessories, after Leegin stopped selling to Kay's Kloset due to its refusal to agree to a new minimum resale pricing policy. Leegin adopted the policy for its Brighton brand in order to protect the brand's image against what it deemed harmful discounting and to give its retailers sufficient margins to provide a level of customer service that supported the brand. Kay's Kloset had been discounting Brighton products by 20 percent, and it suffered a substantial decline in sales revenues after Leegin stopped selling it Brighton goods.

Jury trial on PSKS's antitrust claims resulted in $3.975 million judgment for the retailer, which the Fifth Circuit affirmed. U.S. Supreme Court granted certiorari to determine whether vertical minimum resale price agreements should still be deemed unlawful per se under Dr. Miles Medical Co. v. John D. Park & Sons, Co., 220 U.S. 373 (1911).

Court Holdings:

• Because vertical minimum resale price agreements can have procompetitive or anticompetitive effects depending on the circumstances, they should no longer be deemed illegal per se under Section 1 of the Sherman Act. Minimum resale agreements should be subject to rule of reason analysis, whereby courts balance procompetitive and anticompetitive effects of a challenged restraint in determining whether or not it violates Section 1 prohibition against unreasonable restraints of trade.


• In reversing Dr. Miles rule that a vertical agreement between a manufacturer and its distributor is unlawful per se, Court relied on economics literature as to two procompetitive effects of minimum resale price agreements.


• First, allowing a manufacturer and retailer to agree on a minimum resale price tends to eliminate intrabrand price competition (that is, competition among retailers selling the same brand), which can stimulate interbrand competition (that is, competition among manufacturers selling different brands of the same type of product). Vertical price restraints by a manufacturer encourage retailers to invest in customer services and promotions that enhance the manufacturer's position relative to that of a competing manufacturer. If vertical price restraints were illegal per se, discount retailers would "free ride" on the efforts of retailers who provide such demand-enhancing services and undercut their price.


• Second, minimum resale price agreements can increase interbrand competition by facilitating entry into the market by new manufacturers and brands.


• Anticompetitive effects may result from minimum resale price agreements in some cases, such as enabling manufacturing cartels or retailer price fixing. Vertical agreements setting minimum resale prices to enable either type of cartel would be unlawful under the rule of reason.


• Court's majority, unlike the four dissenting justices, did not consider stare decisis to be a sufficient reason to continue the bright-line rule against vertical price restraints.


• Dissenting justices believed that applying the rule of reason to minimum resale price agreement would create an unworkable legal regime, lead to higher retail prices to the detriment of consumers, and make it more difficult for small, price-cutting retailers (both online and brick-and-mortar) to compete with major retailers.

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Credit Card Processors Sued for Knowingly Aiding and Abetting Web Site's Illegal Lottery Were Not Entitled to Dismissal

Case: Schultz v. Neovi Data Corp., No. G033879 (Cal. Ct. App. 6/15/07)

The One Sentence Summary: Complaint alleging that credit card processors had knowledge of and provided substantial assistance to web site's operation of illegal lottery, wherein consumers had to make online purchases for the chance to win expensive home electronics products, stated a cause of action for aiding and abetting unfair competition under California Business and Professions Code section 17200.


What They Were Fighting About:

Plaintiff Schultz alleged that defendant EZ Expo operated a web site "matrix" wherein a consumer could receive expensive home electronics products (such as a 50-inch plasma television) for a fraction of the price, if he paid a $150 fee for three "E-books" and if 50 other consumers also joined the same matrix after him. Defendants PaySystems and Ginix allegedly provided credit card processsing and billing services for EZ and were used by matrix customers to pay for their purchases of E-books.

Plaintiff's complaint pleaded, on behalf of himself and as a representative in a class action, an unfair competition cause of action against all defendants pursuant to California Business and Professions Code section 17200 et. seq. Plaintiff alleged that the credit card processors aided and abetted EZ's operation of an illegal lottery or pyramid scheme in violation of California statutes. Trial court sustained demurrers by PaySystems and Ginix (as well as defendants PayPal and Neovi) on the grounds that the complaint failed to state facts sufficient to constitute a cause of action for aiding and abetting unfair competition. Plaintiff appealed.

Court Holdings: Court of appeal reversed the granting of PaySystems' and Ginix's demurrers (while affirming as to PayPal and Neovi) and held that plaintiff had adequately pleaded facts to support aiding and abetting unfair competition. Court reasoned that:

• The elements of aiding and abetting an intentional tort by another are (1) knowing that the other's conduct constitutes a breach of duty, and (2) giving substantial assistance or encouragement to the other to so act. Plaintiff's complaint contained facts satisfying each.


• Plaintiff alleged that PaySystems and Ginix reviewed EZ's web site and recognized that it was an illegal lottery, that it generated substantial revenue, and that it could be very profitable for them as credit card processors. Plaintiff also claimed that PaySystems and Ginix knew that the money being paid by consumers for E-books was for purposes of participation in the lottery. These allegations satisfied the knowledge element.


• As for the substantial assistance or enouragement element, plaintiff alleged that PaySystems and Ginix authorized EZ to configure its web site so consumers could click on their logos and be linked directly to their sites for credit card payment processing. Plaintiff further alleged that they did this with the intent of aiding and abetting EZ's illegal lottery operation and realized that their services would "lend an aura of respectability" to EZ's operation and encourage consumer participation. These allegations were sufficient to defeat PaySystems' and Ginix's demurrers.


• By contrast, plaintiff's conclusory allegations did not plead sufficient facts to satisfy the elements of knowledge and substantial assistance as to defendants PayPal and Neovi.


• Court of appeal remanded the case as to defendants PaySystems and Ginix and instructed the trial court to give plaintiff the opportunity to amend the complain to plead facts satisfying the standing and class action requirements of section 17200 as amended by Proposition 64 in November 2004 (which added injury-in-fact requirement to section 17200 during pendency of plaintiff's appeal).

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California Supreme Court Upholds City's Zoning Ordinance Restricting Retail Sales in Designated Districts

Case: Hernandez v. City of Hanford, No. S143287 (Cal. Sup. Ct. 6/7/07)

The One Sentence Summary: California Supreme Court held that City of Hanford's zoning ordinance restricting the sale of furniture in shopping mall district in order to protect retail furniture stores deemed vital to economic viability of city's downtown commercial district was not unconstitutional.


What They Were Fighting About: The challenged zoning ordinance generally prohibited the sale of furniture in the city's Planned Commercial (PC district) area, which contained a large shopping mall anchored by several department stores. There was a limited exception that permitted department stores with more than 50,000 square feet of floor space in the PC district to sell furniture within a prescribed area of no more than 2,500 square feet. City of Hanford enacted this zoning ordinance in 2003 to protect the economic viability of its downtown commercial district, which featured many retail furniture stores. Plaintiffs were owners of a home furnishing and mattress store in the PC district who wanted to sell bedroom furniture in their store. Their lawsuit asserted equal protection clause challenges to the validity of the ordinance under the United States and California Constitutions. Although the trial court rejected plaintiffs' constitutional challenges, the court of appeal struck down the ordinance.

Court Holdings: In reversing the court of appeal's decision and upholding the city's zoning ordinance, the California Supreme Court held:

• The legislature had two legitimate purposes in enacting the zoning ordinance: (1) protecting and preserving the economic viability of the city's downtown commercial district, by generally prohibiting in the PC district the retail sale of furniture, and (2) attracting and retaining for the PC district large department stores, which typically carry furniture and which the city deemed essential to the viability of the PC district.


• Limiting the exception for sale of retail furniture within the PC district to only large department stores is rationally related to the legislature's second purpose in enacting the challenged zoning ordinance. Rational basis test applies to such economic legislation. Differential treatment of large department stores and other retailers in the PC district was rationally related to a legitimate governmental purpose.


• The Court also rejected the plaintiffs' sweeping challenge to the ordinance as improperly "regulating economic competition." A zoning ordinance is legal despite affecting economic competition so long as its primary objective is to achieve a valid public purpose such as futhering a city's plan for controlled growth or localized commercial development, rather than an impermissible anticompetitive private purpose such as favoring or disfavoring a particular business or individual. A city may divide land into districts and reasonably regulate the uses permitted therein in exercising its policy power.

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California Statutes Prohibiting Use of Misleading Country of Origin Labels on Retail Goods Upheld Against Manufacturer's Legal Challenges

Case: Benson v. Kwikset Corp., No. G030956 (Cal. Ct. App. 6/29/07)

The One Sentence Summary: Judgment for plaintiff enjoining manufacturer's use of "Made in U.S.A." labels pursuant to California statutes was affirmed, assuming plaintiff can amend the complaint to meet the "injury in fact" and class action requirements of California's Proposition 64.


What They Were Fighting About:

Plaintiff sued Kwikset and its parent company Black & Decker for restitution and injunctive relief under California's unfair competition law (Business & Professions Code section 17200) and false advertising law (section 17500). Plaintiff alleged violations of statutory prohibitions against marketing or sale of merchandise with "Made in U.S.A." or "All American Made" labels when the goods contained foreign-made parts or involved foreign manufacture. Some of defendants' locksets included screws and pins made in Taiwan, a latch assembly sub-assembled in a Mexico plant, or both foreign made parts and assembly. Trial court enjoined the use of misleading country of origin labels and ordered defendants to allow retailers to return mislabeled good for refund or replacement.

During pendency of the appeal, California Supreme Court issued its decision in Branick v. Downey Savings & Loan Assn., 39 Cal. 4th 235 (2006), interpreting Proposition 64 enacted by the state's electorate in November 2004. Proposition 64 requires a private plaintiff under sections 17204 and 17535 who sued for injunctive or restitutionary relief to establish that (1) he "has suffered an injury in fact and has lost money or property" and (2) he also meets the class action requirements of Code of Civil Procedure section 382, in order to maintain a representative action. Branick held that a trial court may consider a plaintiff's motion to amend a complaint to allege facts meeting these standing and representative claim requirements for unfair competition law and false advertising law actions. California Supreme Court directed the court of appeal to reconsider its earlier decision vacating trial court's judgment, in light of Branick.

Court Holdings:

• Court of appeal remanded the case to the trial court with directions to allow plaintiff an opportunity to amend the complaint to satisfy Proposition 64 requirements. If plaintiff succeeds in doing so, the remainder of the appellate court's opinion will provide the resolution of the other substantive issues raised by the parties' cross-appeals.


• On the merits of plaintiff's unfair competition and false advertising claims, the court of appeal upheld the trial court's rejection of defendants' constitutional challenges and its determinations that their conduct violated California statutes regarding misleading country of origin labels.


• Section 17200 proscribes any "unlawful, unfair or fraudulent business act or practice" and makes violations of other predicate statutes actionable. Here, defendants were found to have violated two predicate statutes: (1) Business & Professions Code section 17533.7 of the false advertising law, and (2) Civil Code section 1770(a)(4).


• Section 17533.7 makes it unlawful to sell or offer for sale merchandise that is labeled with "Made in U.S.A.," "Made in America," "U.S.A." or similar words when it "or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States." Court rejected defendants' freedom of speech and vagueness challenges.


• Court also held that section 17533.7 prohibits "Made in U.S.A." or similar labels on merchandise where (1) it is entirely made, manufactured, or produced outside the United States, or (2) it is substantially so, meaning "where the foreign operation, process, or activity employed to create the merchandise is found to be considerable in either amount, value, or worth." Mere use of foreign raw materials to make a product domestically does not violate section 17533.7.


• More controversial (and prompting dissenting opinion) is the court's holding that "when merchandise consists of two or more physical elements or pieces, section 17533.7 also applies to any distinct component of merchandise that is necessary for its proper use or operation." Thus, section 17533.7 would be violated if a product is labeled "Made in U.S.A." or similar where any distinct component was entirely or substantially made, manufactured, or produced outside United States.


• Applying these legal principles to the facts, court of appeal upheld the trial court's determination that defendants violated section 17533.7 because Kwikset's "Made in U.S.A." locksets used screws and pins made in Taiwan, and part of the lockset latch assembly occurred at its Mexico plant.


• Civil Code section 1770(a)(4), the other predicate statute cited by plaintiff, makes unlawful the use of "deceptive representations or designations of geographic origin in connection with goods or services." This statute is part of California's Consumer Legal Remedies Act.


• Court of appeal held that the trial court properly applied a "reasonable person" standard to section 1770(a)(4) and evaluated the defendants' labeling from the perspective of consumers for whom geographic designation is important. Trial court's application of that standard to find defendants' conduct violated section 1770(a)(4) was upheld.

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Trial Court Rejects Property Owners' Challenge to Condemnation of Land for Brooklyn's Atlantic Yards Arena and Development Project

Case: Goldstein v. Pataki, 488 F. Supp. 2d 254 (E.D.N.Y. 6/6/07)

The One Sentence Summary: District court in Brooklyn rejected property owners' claim that condemnation of property for mixed-use development project consisting of sports arena for New Jersey Nets basketball franchise, housing units, offices, retail space, and a hotel violated public use requirement of eminent domain law.


What They Were Fighting About: Plaintiffs, owners and renters of real estate in Brooklyn on land intended for use in the Atlantic Yards Arena and Development Project, brought lawsuit against New York state's urban development agency, developer Forest City Ratner Companies, city development agency, as well as business, city, and state officials. After the state's urban development agency published its findings and determination to proceed with condemnation to acquire plaintiffs' properties, plaintiffs sought judicial review before the federal district court and alleged constitutional challenges to the condemnation and violation of New York's Eminent Domain Procedure Law (EDPL). Defendants moved to dismiss all of plaintiffs' claims on grounds including that plaintiffs had failed to state a claim.

Court Holdings: In granting motion to dismiss, district court held:

• The takings at issue did not violate the "public use" requirement of the Fifth Amendment's Takings Clause.
• Applying Supreme Court precedent including Kelo v. City of New London, 545 U.S. 469 (2005), district court concluded that a taking fails the public use requirement only if the uses offered to justify it are "palpably without reasonable foundation" such as (1) where sole purpose of taking is to transfer property to a private party, or (2) where asserted purpose of taking is a mere pretext for an actual purpose to bestow a private benefit.
• District court found that neither category of impermissible "public use" justification applied to the Atlantic Yards Arena and Development Project. First, plaintiffs' allegations disputed only the extent of the public benefit to be derived from taking their properties, not the existence of any public benefit. Second, plaintiffs' allegations that the stated purposes of the project were dubious were not sufficient to plead "mere pretext" to bestow a private benefit. Thus, plaintiffs' allegations did not suffice to state a claim for violation of the "public use" requirement of the Fifth Amendment's Takings Clause.
• The court also held that the takings did not violate equal protection or due process. Having dismissed the three federal constitutional claims over which it had original jurisdiction, the court then declined to exercise supplemental jurisdiction over the state law claim alleging a violation of the EDPL, dismissing that claim without prejudice to its being refiled in state court.
• The district court's decision is currently on appeal before the Second Circuit.

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California Court Refuses to Enforce Cell Phone Provider's Contractual Arbitration Provision Waiving Class Action Relief

Case: Gatton v. T-Mobile USA, Inc., Nos. A112082, A112084 (Cal. Ct. App. 6/22/07)

The One Sentence Summary: Class action waiver in arbitration clause of T-Mobile's service agreement was both procedurally and substantively unconscionable and therefore unenforceable.


What They Were Fighting About: Plaintiffs filed class action claims challenging T-Mobile's practice of (1) imposing fee for termination of service agreement before its expiration date, and (2) installing a locking device in T-Mobile handsets that prevented subscribers from switching cell phone providers without purchasing a new handset. T-Mobile's service agreement contained an arbitration provision that included language waiving any right to seek classwide relief. T-Mobile moved to compel arbitration of the plaintiffs' claims pursuant to the service agreement provision. The trial court denied the motion on the grounds that the arbitration provision was unconscionable and therefore unenforceable.

Court Holdings:

• The court of appeal affirmed and held that the arbitration provision waiving class action relief was both procedurally and substantively unconscionable.


• Under the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), a waiver of classwide relief found in a consumer contract of adhesion will be deemed unconscionable and unenforceable if it is alleged that the party with superior bargaining power cheated large numbers of consumers out of individually small amounts of money. The reason is that a classwide waiver in that situation will operate to exempt the responsible party from liability for its fraud or willful injury to the property of another, in violation of Civil Code section 1668, because individual consumers will not sue for such small amounts.


• Procedural unconscionability focuses on the manner in which the contract was negotiated. Substantive unconscionability focuses on overly harsh or one-sided results.


• The court found T-Mobile's arbitration provision waiving classwide relief to be at least minimally procedurally unconscionable as a contract of adhesion, notwithstanding the consumer's option to obtain mobile phone service from other providers whose service agreements did not contain class action waivers. T-Mobile prepared the service agreement and required its customers to accept it entirely or else forego T-Mobile's service. Despite being a contract of adhesion, if the challenged provision did not have a high degree of substantive unconscionability, it should be enforced.


• However, T-Mobile's class action waiver was substantively unconscionable enough to render the arbitration provision in its service agreement unenforceable. The California Supreme Court's decision in Discover Bank was directly on point in that regard. Trial court properly denied T-Mobile's motion to compel arbitration of plaintiffs' claims.

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Supreme Court Interprets Fair Credit Reporting Act's "Willful" Standard to Include Reckless Conduct

Case: Safeco Ins. Co. of America v. Burr, No. 06-84 (Sup. Ct. 6/4/07)

The One Sentence Summary: The Supreme Court's holding that "willful" violations of the Fair Credit Reporting Act include reckless conduct is relevant to pending lawsuits in California and elsewhere alleging that retailers violated 15 U.S.C. section 1681c(g), enabling consumers to seek statutory damages if electronic receipts for credit or debit card transactions disclose the card's expiration date or more than the last five digits of the card number.


What They Were Fighting About: In Safeco and companion case GEICO General Ins. Co. v. Edo, at issue were the Fair Credit Reporting Act's (FCRA) requirements of sending notification to a consumer when adverse action is taken based on information contained in a consumer credit report. The Supreme Court granted certiorari to resolve a conflict in the federal circuit courts of appeal on whether the FCRA provision, 15 U.S.C. section 1681n(a), permitting statutory damages ranging from $100 to $1,000 against anyone who "willfully fails to comply" with the FCRA reached reckless disregard of FCRA obligations.

Court Holdings:

• The Supreme Court held that reckless disregard of a requirement of FCRA would qualify as a willful violation within section 1681n(a), the statutory damages provision.
• Recklessness is defined as it is understood in the common law: conduct entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known. The Court stated: "It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law."
• The Court distinguished reckless disregard from mere negligence or carelessness, for which the FCRA requires proof of actual damage per 15 U.S.C. section 1681o(a): "Thus, a company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute's terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless."
• The Court's decision will impact cases pending against retailers for alleged violations of section 1681c(g) of FCRA, which is known as the Fair and Accurate Credit Transactions Act (FACTA) of 2003. FACTA went into effect on December 4, 2006 as to any cash registers already in use before January 1, 2005. FACTA provides that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." This prohibition only applies to electronically printed receipts, and "shall not apply to transactions in which the sole means of recording a credit card or debit card account number is by handwriting or by an imprint or copy of the card."
• Given that retailers had three years to prepare existing cash registers for compliance with FACTA, plaintiffs may be able to prove "reckless disregard" of the law against printing electronic receipts containing more than a credit or debit card number's last 5 digits or the card's expiration date.
• However, a recent decision by a federal district court in California suggests that retailers may be able to defeat class certification for FACTA claims, particularly when the alleged violation involves only the printing of a card's expiration date. In Soualian v. International Coffee & Tea LLC, Judge R. Gary Klausner of the Central District of California denied class certification on FACTA claims in a June 11, 2007 ruling. The court held that a class action was not "superior to other available methods for fair and efficient adjudication of the controversy" under Rule 23(b)(3) of the Federal Rules of Civil Procedure, reasoning that "massive damage awards would be disproportionate to any actual damage caused by the alleged violations."
• In Soualian and another recent decision by the Central District of California, Spikings v. Cost Plus, Inc., the retailers allegedly violated FACTA by including customer credit card or debit card expiration dates on electronically printed receipts. Both decisions found that disclosure of a card's expiration date by itself would be highly unlikely to result in identity theft. Given the availability of statutory damages of $100 to $1,000 for each violation, the courts deemed it inappropriate to certify class actions where damages would be potentially disastrous to the retailer's business and where no harm was actually suffered by the putative class of customers.
• Even if a retailer's violation of FACTA might be deemed "reckless" under Safeco and subject the retailer to statutory damages under FCRA, defeating class certification as in Soualian would seriously disable a lawsuit. Plaintiffs' attorneys will not want to litigate individual claims for statutory damages of $100 to $1,000 on a case-by-case basis.

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Ninth Circuit Affirms Preliminary Injunction for Albertson's Restraining Competing Retail Grocer from Using "Lucky" Trademark

Case: Grocery Outlet Inc. v. Albertson's Inc., No. 06-16380 (9th Cir. 8/9/07)

The One Sentence Summary: Ninth Circuit affirmed the district court's granting of a preliminary injunction to Albertson's, based on the possibility of irreparable injury and the strong likelihood of its prevailing on the merits despite competitor Grocery Outlet's asserted defense of abandonment of "Lucky" trademark by nonuse.


What They Were Fighting About: Grocery Outlet, a competitor of Albertson's in the retail grocery industry, contended that Albertson's abandoned the "Lucky" trademark by publicly announcing after a 1999 merger that "Lucky" stores were being converted to Albertson's stores. Albertson's sought a preliminary injunction for trademark infringement in the Northern District of California to restrain Grocery from using the "Lucky" mark. The district court granted the motion, finding at the preliminary injunction stage that Albertson's legally owned the "Lucky" mark and rejecting Grocery's abandonment defense. Grocery appealed.

Court Holdings:

• Ninth Circuit held that the district court did not abuse its discretion in finding that Albertson's demonstrated a strong likelihood of success on its trademark infringement claim and the possibility of irreparable injury in the absence of a preliminary injunction.
• On appeal, Grocery did not dispute that its use of the "Lucky" mark for retail grocery services was likely to cause consumer confusion. Thus, whether Albertson's was likely to succeed on the merits turned on whether Grocery's abandonment defense would be successful.
• Abandonment by nonuse is a defense under the Lanham Act that requires proof of both the mark owner's discontinuance of trademark use and intent not to resume such use.
• Ninth Circuit concluded that Albertson's offered sufficient evidence of its intent, during the short period of alleged nonuse, to resume use of the "Lucky" mark within the reasonably foreseeable future. Accordingly, the district court did not abuse its discretion in rejecting Grocery's defense of abandonment at the preliminary injunction stage.
• On the standard of proof for the abandonment defense, Grocery adopted the clear and convincing evidence standard in its briefing in the district court. The Ninth Circuit found Grocery to have waived any challenge on this point and decided not to resolve the disputed issue of whether the standard of proof is preponderance of the evidence or clear and convincing evidence.
• Two circuit judges agreed with the court's per curiam opinion but wrote separate concurring opinions to express their divergent views on the standard of proof for an abandonment defense under the Lanham Act. While the court's per curiam opinion did not discuss the issue, the concurring opinions provide future litigants in Ninth Circuit courts with their legal arguments for either a preponderance of the evidence or a clear and convincing evidence standard of proof.

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California's Unruh Civil Rights Act Prohibits Gender-Based Price Discrimination, Whether or not Customer Demands and Is Refused Equal Treatment

Case: Angelucci v. Century Supper Club, 41 Cal. 4th 160 (May 31, 2007)

The One Sentence Summary: The California Supreme Court held that a plaintiff is not required to allege that he or she requested equal treatment and the retailer refused in order to state a claim under the Unruh Civil Rights Act for gender-based price discrimination.


What They Were Fighting About: The plaintiffs were male patrons of a club that offered discounted admission to women, charging $20 admission for men and $15 for women. They paid the male admission price on several occasions and then sued alleging that the club's pricing policy violated California's Unruh Civil Rights Act. Civil Code section 52(a) contains a private right of action to enforce the Act. Section 51.6(b) provides: "No business establishment of any kind whatsoever may discriminate, with respect to the price charged for services of similar or like kind, against a person because of the person's gender." The trial court granted (affirmed by the court of appeal) defendant's motion for judgment on the pleadings on the grounds that plaintiffs' failure to allege that they requested and were refused the discounted admission price precluded any claim for price discrimination.

Court Holdings:

• The California Supreme Court reversed and held that plaintiffs stated a cause of action for unlawful price discrimination based on gender.


• Nothing in the statute requires a customer to specifically demand nondiscriminatory treatment and be denied same by a retailer in order to state a claim for violation of the Unruh Civil Rights Act. The plaintiffs were injured within the meaning of the Act when they presented themselves for admission and were charged the club's nondiscounted male-only price. The defendant's interpretation of the statute would be inconsistent with the Act's policy of eliminating arbitrary discrimination in places of public accommodation.


• While acknowledging there might be some instances in which a compelling public policy justified differential treatment of male and female patrons, the court made clear that a retailer's policy of offering gender-based price discounts would ordinarily constitute unlawful price discrimination.


• The court concluded by stating that nothing in its opinion should be construed as restricting potential equitable or constitutional defenses to any damages sought by a plaintiff under Civil Code section 52(a). This statement was a response to defendant's argument that plaintiffs made repeated unannounced visits to the club on Ladies Day as a "shakedown" tactic to increase the statutory damages they could seek for violation of the Act.

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Retailers Prohibited from Selling in California Athletic Shoes Made with Kangaroo Hide from Australia

Case: Viva! Int'l Voice for Animals v. Adidas Promotional Retail Operations, Inc., No. S140064 (Cal. Sup. Ct. 7/23/07)

The One Sentence Summary: California Supreme Court rejected Adidas' argument that federal law not prohibiting importation of kangaroo products preempted California's ban on products made from any part of a kangaroo.


What They Were Fighting About: California Penal Code section 653(o) prohibits the importation into or sale within the state of products made from kangaroo. Defendants Adidas Promotional Retail Operations, Inc., Sports Chalet, and Offside Soccer (collectively Adidas) are California retailers that sell athletic shoes made from the hides of three kangaroo species that exist only in Australia: the red kangaroo, the eastern grey kangaroo, and the western grey kangaroo. Plaintiff Viva! International Voice for Animals sued Adidas for engaging in an unlawful business practice under Business & Professions Code section 17200, by importing and selling athletic shoes made from kangaroo leather in violation of Penal Code section 653(o). Both the trial court and court of appeal ruled in favor of Adidas, concluding that federal law preempted California's statutory ban.

Court Holdings:

• In a unanimous decision, the California Supreme Court held that the federal Endangered Species Act of 1973 did not preempt California's ban on products made from any part of a kangaroo.


• The court's opinion discussed four types of preemption and found that none existed in this case: express, conflict, obstacle, and field preemption.


• The Endangered Species Act of 1973 established a cooperative federal-state approach to wildlife preservation. Section 6(f) of the Act contains a preemption clause and a savings clause that allow states to enact more stringent regulations regarding endangered or threatened species. The only exception to the preservation of state power is for activities specifically "authorized" by the Act or its implementing regulations.


• California Supreme Court rejected Adidas' argument that the 1995 removal of the three kangaroo species from the Endangered Species Act's list of endangered or threatened species established a federal policy against state regulation. The Act does not preempt state efforts to protect the three kangaroo species by prohibiting importation of kangaroo products. Section 6(f) of the Act only preempt states from prohibiting what is "authorized" under the Act or its regulations, not anything that federal law has failed to prohibit.

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Lost Profits Award for Breach of Franchise Agreement Reversed As Too Speculative By Appellate Court

Case: Parlour Enterprises, Inc. v. The Kirin Group, Inc., No. G036525 (Cal. Ct. App. 6/19/07)

The One Sentence Summary: Lost profits awarded by jury for breach of franchise agreement were reversed due to speculative expert testimony based on unreliable proforma financial projections and market data for other restaurants not shown to be sufficiently similar to plaintiffs' restaurants.


What They Were Fighting About: Defendant Kirin Group bought the trademarks and trade names to Farrell's Ice Cream Parlours in 1996 and entered into written agreements in 2000 giving plaintiff Parlour Enterprises the exclusive right to develop Farrell's subfranchises in California. Parlour would receive some up-front fees as well as royalties based on a percentage of net sales. Unable to find enough investors to finance the opening of the minimum number of California restaurants required by the agreements (only one restaurant had been opened), Parlour set up limited partnerships to fund the construction of additional Farrell's restaurants. Prior to their completion, Kirin terminated the agreements. Parlour (along with the limited partnerships) filed suit alleging causes of action including breach of contract, fraud, negligent misrepresentation, and interference with prospective business advantage. Jury trial resulted in judgment for Parlour and the limited partnerships and a damages award of $6.6 million for lost profits, lost franchise fees, and additional expenses incurred.

Court Holdings:

• Court of appeal reversed all but $130,000 of the jury's $6.6 million damages award on the grounds that the evidence on which it was based was speculative expert opinions that should have been excluded by the trial court. Most significant is the part of the court's written decision regarding lost profits.


• Lost profits for an unestablished business may be recovered if the evidence makes reasonably certain both their occurrence and extent. Expert testimony may provide a sufficient basis for a damages award of lost profits if it is supported by a substantial factual basis rather than mere speculation and hypothetical scenarios.


• Applying these legal principles, the court of appeal concluded that plaintiffs' expert opinions on lost profits were based on unreliable proforma financial projections from an offering circular prepared by Parlour and given to potential investors. Such projections were mere assumptions, not based on operational results of an actual business substantially similar to the lost opportunity.


• In addition to unreliable projections, plaintiffs' expert relied on market data for a dozen smaller ice cream parlours and for the "Friendly's" restaurant chain. However, because both Friendly's and the smaller ice cream parlours had different business models than Farrell's, they were not sufficiently similar businesses upon which to base a calculation of plaintiffs' alleged lost profits.

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Ninth Circuit Reverses Denial of Retailer's Motion for Preliminary Injunction in Trademark Infringement Case

Case: Abercrombie & Fitch Co. v. Moose Creek, Inc., No. 06-56774 (9th Cir. 5/22/07)

The One Sentence Summary: District court erred in denying Abercrombie & Fitch's motion for a preliminary injunction against Moose Creek's use of new marks by (1) misapplying the doctrine of judicial estoppel, and (2) erroneously concluding that the parties' trademarks were more different than similar.

What They Were Fighting About: Abercrombie & Fitch filed suit in August 2005 against Moose Creek for alleged trademark infringement, unfair competition, and false designation of origin under the Lanham Act and various California common law claims, one year after the parties settled a 2004 trademark infringement suit brought by Moose Creek. In the later action Abercrombie contended that Moose Creek's two new logos, a moose silhouette and a moose outline, infringed on Abercrombie's similar marks. Abercrombie moved to enjoin Moose Creek's use of its new marks pending resolution of the lawsuit. District court denied Abercrombie's motion because it concluded that (1) a number of Abercrombie's arguments were contrary to its positions in the prior litigation and therefore barred by judicial estoppel, and (2) differences between the parties' marks outweighed the similarities.

Ninth Circuit Holdings: The Ninth Circuit reversed and remanded the case to the district court for reconsideration of Abercrombie's motion for a preliminary injunction, because:

• Applying the Sleekcraft factors regarding likelihood of confusion, the district court abused its discretion in finding that Abercrombie was judicially estopped to assert arguments about the strength of Moose Creek's marks and the degree of care likely to be exercised by the purchaser.


• The district court also erred in estopping Abercrombie from arguing post-purchase confusion as a ground for trademark infringement.


• Judicial estoppel does not apply where the party's later litigation position is not "clearly inconsistent" with its earlier litigation position.


• With respect to the third Sleekcraft factor - similarity of the marks - the district court clearly erred in concluding that differences between the parties' marks outweighed similarities. District court erroneously relied on comparisons to Moose Creek's marks as they appeared in a catalog, rather than as they appeared embroidered on the company's apparel in the marketplace. Ninth Circuit noted that "marks must be considered in their entirety and as they appear in the marketplace."

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California Court Rejects Claim that Cable Television Provider's Facially-Neutral Policy Violated Americans with Disabilities Act

Case: Belton v. Comcast Cable Holdings, LLC, No. A112591 (Cal. Ct. App. 6/8/07)

The One Sentence Summary: California court of appeal rejected blind customer's claim that Comcast's policy requiring purchase of television cable services in order to obtain cable FM or music services violated the Americans with Disabilities Act, because the plaintiff was not denied access to a place of public accommodation.


What They Were Fighting About: Plaintiff was a legally blind resident of Sonoma County, California and a subscriber to Comcast cable services. Defendant Comcast offered FM or music services to Sonoma County residents only as part of a basic cable package that included television cable service. Plaintiff did not wish to purchase the television cable service, since his blindness prevented him from using it. The complaint alleged various causes of action including violation of California's Unruh Civil Rights Act (Civil Code section 51 et. seq.), based on Comcast's practice of packaging music service together with television programming and refusing to provide music service by itself. A violation of the right of any individual under the Americans with Disabilities Act of 1990 (ADA) also constitutes a violation of the Unruh Act. The trial court granted Comcast's motion for summary judgment on all causes of action.

Court Holdings:

• The court of appeal affirmed the trial court's granting of judgment in favor of Comcast on the Unruh Act claim and all other causes of action.


• Although Civil Code section 51(f) provides that "[a] violation of the right of any individual under the Americans with Disabilities Act of 1990 . . . shall also constitute a violation of [the Unruh Act]," the court held that plaintiff could not establish any violation of the ADA.


• To state a claim under the ADA, plaintiff must show he has been denied access to "a place of public accommodation." The court held that, as a matter of law, cable services are not a place of public accommodation. Because the facts could not establish a violation of plaintiff's rights under the ADA, the Unruh Act claim failed as a matter of law.

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