Legal Updates

A Franchisor was found liable for punitive damages for defrauding the landlord at one of its franchise sites. Attorneys fees were awarded the landlord under a clause in the lease, which entitled the prevailing party to recover its attorneys fees. The Franchisor appealed, contending the clause did not apply to claims for punitive damages because they were not relative to the claims under the lease. The Court of Appeals affirmed the award of attorneys fees and also awarded the landlord additional attorneys fees for defending the appeal, under the same lease clause. <>Jannotta v. Subway Sandwich Shops, Inc, et al., (Case No. 99-1975) (2000 WL 1222052) 225 F.3d 815 (7th Cir. 8-29-2000)

A putative class action by borrowers against lenders, alleging violations of the truth in lending act 15 U.S.C. 1601, et seq., and the electronic fund transfer act, 15 U.S.C. 1693 et seq., must be arbitrated pursuant to arbitration clauses in the loan documents, even though the claims could not proceed as a class action in arbitration. The arbitration clauses eliminate the statutory to proceed by class action. <>Johnson v West Suburban Bank, 225 F.3d 366 (3rd Cir., 8-29-2000).

A lender violated the Wash.D.C. Consumer Protection Act by refinancing a mortgage by increasing the total loan amount, loan term and the monthly payments beyond the borrowers’ ability to pay. The new loan increased the monthly payments by more than $100 when the borrower was unable to make the monthly payments under the original loan. Actual damages, statutory treble damages and attorneys fees were affirmed. The lender’s conduct did not violate the Federal Truth In Lending Act. Judgment affirmed, and case remanded to determine if the borrower had any realistic alternatives, for the purpose of establishing a claim under the common law doctrine of unconscionability. <>Williams v. First Government Mortgage and Investors Corp., ___ F.3d ___, 2000 WL 973751, (D.C. Cir. 8-1-2000)
Attorneys and other professionals may be held liable for conspiracy to violate RICO, 18 U.S.C. 1962(d), by knowingly agreeing to perform services of a kind which facilitates the activities of those who are operating the enterprise in an illegal manner, even though the outside professionals did not agree to operate or manage the enterprise, a substantive violation of RICO, 18 U.S.C. 1962(c). The court reconciled<>Reves v Ernst & Young, 507 U.S. 170 (1993) with <>Salinas v United States, 522 U.S. 52 (1997); <>Brouwer et al., v. Raffensperger, Hughes & Co., et al.(Case No. 99-1286), 199 F.3d 961 (7th Cir. 2000). The United States Supreme Court denied review on 6-19-2000

The statute of limitations in the UCC for breach of consumer warranty law, 810 ILCS 5/2-725(1), applies to personal injury claims. A mother’s settlement of her lawsuit for breach of the consumer warranty law, resulting from the purchase of a used car with faulty brakes, which referred to the personal injuries her minor daughter sustained during an accident caused by the faulty brakes, did not bar the daughter’s claim for personal injuries once she reached the age of majority, under the doctrines of collateral estoppel or res judicata. The 4 year statute of limitation in the UCC was also tolled while the daughter was a minor. <>Evans v General Motors Corporation et al., ___Ill.App.3d ___, ___ Ill.Dec. ___, ___N.E.2d ___, 2000 WL 794059 (Ill App. 6-19-2000)

Minority shareholders tacitly consent to any subsequent amendment to the articles of agreement by the majority shareholders of a banking corporation, when when they purchase their stock. As a result a reverse stock split of one new share for each existing 1000 shares, with cash payment to each holder of less than 1000 shares, did not violate the Missouri Constitutional prohibition (Article I, section 28) against taking private property without the owner’s consent. The majority (the bank holding company which owned 95.4% of outstanding shares) acted lawfully in amending the bank’s articles of agreement under R.S.Mo. 362.325., thereby eliminating several minority shareholders owning less than 1000 shares each. <>Smith Gaddy, Jr., et al., v Phelps County Bank et al., ____S.W.3d____, 2000 WL ____(SC82168, 6-13-2000)

A Delaware corporation with its principal place of business in Illinois entered into a products and services agreement with Renaissance Software corporation, a Massachusetts corporation with its principal place of business in Massachusetts. Under the agreement, the software supplier agreed to provide the Illinois corporation with software and related maintenance and support for use in that company’s business as an automobile parts supplier. The Illinois corporation claimed fraud, misrepresentation, and violation of the Illinois consumer act, 815 ILCS § 505/1-12. The Massachusetts corporation moved to dismiss and alternatively to transfer the case to Massachusetts. Both motions were denied. The plaintiff sufficiently alleged a claim for fraud and for violation of the Illinois consumer protection statutes. <>J.C. Whitney & Co. v. Renaissance Software Corporation et el., (unreported), 2000 WL 556610 (Magistrate Schenkier) (No. 99 C 3714) (N.D. Ill. 4-19-2000)

A consumer who had signed an arbitration agreement with an HMO could still sue for injunctive relief on behalf of the public under state consumer protection statutes, even though the consumer’s damage claims must be arbitrated. Public policy precluded enforcement of the arbitration clause for the injunctive relief requested on behalf of the public. <>Broughton v. Cigna Healthplans of California, 90 Cal. Rptr. 2d 334, 988 P.2d 67 (Cal. 1999). Commercial Attorney.

A franchiser which provides nurses to healthcare facilities on a temporary basis entered into a franchise agreement providing the franchisee with an exclusive territory. Florida law applied. The agreement provided that neither the franchiser, nor its parent or affiliated companies, would compete. Adia then acquired the franchiser, as a subsidiary, and also acquired another subsidiary which directly competed with the franchisee. A verdict of $2488,000 for the franchisee was set aside by the district court, which found that Adia neither induced nor otherwise caused an interference with the franchisee’s contract rights. Restatement (Second) of Torts, 766, and 766 comment h; 922 F.Supp. 558 (M.D.Fla. 1997). The 11th Circuit certified this unresolved question of Florida state law to the Florida Supreme Court. <>120 F.3d 1229 (11th Cir. 1997). The Florida Supreme court found that a claim for tortious interference with contract rights was established because Adia acquired the company that competed with the franchisee, with knowledge of franchise agreement terms prohibiting the franchiser or its affiliates from competing. <>723 So.2d 182 (Fla.1998). The 11th Circuit then reversed the judgment for Adia and remanded to the district court to resolve its prior determination that the franchisees had used the wrong method of calculating damages by using a contract, instead of tort, theory. <>Gossard et al., v. Adia Services, Inc., 173 F.3d 825 (11th Cir. 1999)

An automobile dealer which was not liable under the truth in lending act could still be found liable under the Illinois unfair and deceptive practices and consumer protection statutes. <>Pawlikowski v. Toyota Motor Credit Corp., 309 Ill. App. 3d 550, 243 Ill. Dec. 1, 722 N.E. 2d 767 (Ill. App. 1999). Commercial Attorney.

A credit card application, sponsored by the retailer Best Buy, and lender, Beneficial National Bank, required the consumer to agree in advance to the terms and conditions of the BNB USA cardholder agreement. The consumer did not receive a copy of the agreement until the it was completed and the credit card arrived. The credit card package also sold the consumer insurance on the debt ( at the expense of the consumer, for the benefit of the lender and retailer) without, allegedly, meeting the disclosure requirements of the Truth in Lending Act, 15 U.S.C. 1601, et seq., or the Florida disclosure act, F.S.A. 627.679. The court held that the arbitration clause, requiring arbitration before the National Arbitration Forum, was unenforceable because it was unconscionable in that it was undisclosed and because the defendants failed to establish that the National Arbitration Forum was a neutral, inexpensive and efficient forum for resolving these claims. The consumer argued that the National Arbitration Forum was too closely aligned with the consumer finance industry. This case is now pending on appeal before the United States Eleventh Circuit. Baron v. Best Buy Co., Inc. et al., 75 F. Supp.2d 1368 (S.D. Fla. 1999). Consumer Attorney.

Borrowers brought a putative class action against a mortgage lender alleging that its charges for mortgage assignment recording fees and tax escrow suspension fees violated Illinois consumer protection statutes. The Illinois Supreme Court held that since the lender had complied with applicable banking statutes, including the disclosure requirements of the real estate settlement procedures act , 12 U.S.C. § 2604(c), it did not violate Illinois consumer fraud law, 815 ILCS § 505/1 et. seq. <>Weatherman v. Gary-Wheaton Bank of Fox Valley, N.A., 186 Ill. 2d 472, 239 Ill. Dec. 12, 713 N.E. 2d 543 (Ill. 1999)

The Georgia Pawn Brokers Act, O.C.G.A. § 44-12-130 et. seq. conflicts with the Georgia Criminal Usury Statute, O.C.G.A. § 7-4-18. The two statutes cannot be harmonized; the Criminal Usury Statute is inapplicable to pawn transactions. <>Glinton et el. v. AND R Inc., et.el., 211 F.3d 586, 2000 WL 524826 (11th Cir. 2000); Glinton et al. v. AND R. Inc. et al,. 524 S.E. 2d 481 (Ga. 1999). Business Attorney.

A parent corporation may be held liable under CERCLA, 42 U.S.C. 9601, et seq; 42 U.S.C. 9607(a)(2), for the cleanup of industrial waste at a plant owned or operated by its defunct subsidiary, if the parent corporation operated the plant or if the corporate veil of the subsidiary is pierced under state law principles. The parent operated the polluted plant if the joint officers, directors and employees of the parent and subsidiary were operating the plant for the parent, a necessarily fact intensive question. The parent cannot be held liable for the subsidiary’s ownership or operation of the polluted plant simple because it owned all the subsidiary’s stock. 113 F.3d 572 vacated and remanded. <>United States v Bestfoods et al., 524 U.S. 51 (1998)

Illinois consumer fraud law is intended to protect consumers, borrowers and business persons against fraud, unfair methods of competition and other unfair and deceptive business practices, but does not proscribe conduct which is authorized by federal statutes and/or regulations. <>Cripe v. Leiter, 184 Ill. 2d 185, 234 Ill. Dec. 488, 703 N.E. 2d 100 (Ill. 1998)

A bank was held liable to a safe deposit box holder, under a bailment theory, when flood waters damaged the contents of the box. Specific banking statutes were not at issue. <>Seitz v. Lemay Bank & Trust, 959 S.W. 2d 458 (Mo. banc 1998)

To state a cause of action under Illinois consumer fraud law, a plaintiff must plead and prove either (1) a deceptive act or practice with intent that the plaintiff rely on the deception occurring in the course of trade or commerce or (2) unfair conduct by the defendant (without deception) which must offend public policy, be so oppressive that the consumer has little alternative but to submit and cause the consumer substantial injury. Siegel v. Levy Organization Development Co., 153 Ill. 2d 534, 180 Ill. Dec. 300, 607 N.E. 2d 194 (Ill. 1992); Saunders v. Michigan Avenue National Bank, 278 Ill. App. 3d 307, 214 Ill. Dec. 1036, 662 N.E. 2d 602 (Ill. App. 1996); <>Perez v. Citi Corp. Mortgage, Inc., 301 Ill. App. 3d 413, 234 Ill. Dec. 657, 703 N.E. 2d 518 (Ill.App.1998). Consumer Lawyer.

Bank officers’ and directors’ liability to the FDIC, replacing the RTC, standing in the shoes of the bank, for losses resulting from bad loans caused, allegedly, by the defendants’ gross negligence, simple negligence and breaches of fiduciary duty are governed by state common law principles, limited by 12 U.S.C. 1821(k), which requires gross negligence or similar or greater misconduct to establish liability. Briggs v Spaulding, 141 U.S. 132 (1891), establishing a federal common law rule of simple negligence for liability, has been rendered inapplicable by<>Erie Railway Co. v Tompkins, 304 U.S. 64, 78 (1938). Normally, after Erie, federal courts may fashion federal common law rules only upon a specific showing that the use of state law will create a significant conflict with, or threat to, some federal policy or interest. <>O’Melveny & Myers v. FDIC, 512 U.S. 79, 87 (1994); <>Atherton v. Federal Deposit Insurance Corporation, 519 U.S. 213 (1997). Business Attorney.

Illinois does not recognize the tort of commercial disparagement. Any claims of this kind must be determined on the basis of existing libel and slander law. <>Becker v. Zellner, 292 Ill. App. 3d 116, 226 Ill. Dec. 175, 684 N.E. 2nd 1378 (Ill. App. 1997).

A landlord was permitted to recover under fraud theories where a franchiser employed an assetless alter ego to enter into a commercial lease with the landlord and a corresponding sublease with its franchisees. A submissible claim for punitive damages was also established. <>Jannotta v. Subway Sandwich Shops, Inc., et al., 125 F.3d 503 (Case No. 96-1620) (7th Cir. 1997)

A future royalties clause requiring a franchisee to pay royalties in the future, after it ceases operation, until the end of the term of the franchise agreement, is void and unenforceable as unreasonable, unconscionable and oppressive. <>Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 51 Cal. Rptr. 2d 365 (Cal. App. 1996). Commercial Attorney.

The Illinois Consumer Deceptive Practices Act should be liberally construed in favor of the consumer. An omission or concealment of a material fact in the conduct of trade or commerce constitutes a violation of Illinois consumer fraud law. <>Connick v. Suzuki Motor Co., 174 Ill. 2d 482, 221 Ill. Dec. 389, 675 N.E. 2d 584 (Ill. 1996)

The five-year statute of limitations applies to a cause of action for breach of an implied duty for fiduciary obligations, as opposed to the 10-year statute of limitations for written contracts. <>Armstrong v. Guigler, 174 Ill. 2d 281, 220 Ill. Dec. 378, 673 N.E. 2d 290 (Ill. 1996). Commercial Lawyer.

A real estate broker owes a duty to his clients, as a fiduciary. Summary Judgment in favor of the defendant real estate broker reversed, <>Letsos v. Century 21 New West Realty, 285 Ill. App. 3d 1056, 221 Ill. Dec. 310, 675 N.E. 2d 217 (Ill. App. 1996).

Under the business judgment rule, directors, officers, and corporations are not liable for mere mistakes or errors of judgment, either of law or of fact. Selcke v. Bove, 258 Ill. App. 3d 932, 196 Ill. Dec. 202, 629 N.E. 2d 747 (Ill. App. 1994).

It was not error for the Trial Court to admit evidence that the defendant was a large, international firm where the plaintiff claimed that the defendant’s size and reputation were the basis for its reliance on the defendant’s expertise. Congregation of the Passion, Holy Cross Province v. Touche Ross & Co., 159 Ill. 2d 137, 201 Ill. Dec. 71, 636 N.E. 2d 503 (Ill. 1994).

A principal cannot delegate to an independent contractor (and thereby avoid liability) the manner of performance of duties imposed on the principal by contract, ordinance or statute, such as banking statutes. General Finance Corp. v. Smith, 505 So. 2d 1045 (Ala. 1987); Restatements Second of Torts, § 424; Fulton v. Anchor Savings Bank, 452 S.E. 2d 208 (Ga. App. 1994).

Illinois consumer fraud law requires reasonable reliance by the plaintiff on the alleged misstatements of fact. Where a franchise agreement specifically stated that the plaintiff-franchisee had not relied on or received any guarantees about revenues or profits or prospects for success and that the franchisee had conducted an independent investigation, the franchisee could not claim reasonable reliance on any alleged oral misrepresentations; 815 ILCS § 501/1; Elipas Enterprises, Inc. v. Robert Silerstein, 243 Ill. App. 3d 230, 183 Ill. Dec. 752, 612 N.E. 2d 9 (Ill. App. 1993). Consumer Attorney.

An employer breached its fiduciary duty to its employees by misleading them into believing their ERISA benefits would be paid by another corporation where the other corporation was established as an assetless shell for the purpose of avoiding the obligations of the initial corporation-employer. The Court used common law trust standards to determine the breach of fiduciary duty. Martin v. Heinold Commodities, Inc., 240 Ill. App. 3d 536, 181 Ill. Dec. 376, 608 N.E. 2d 449 (Ill. App. 1992).

Punitive damages may be awarded against a corporate defendant for the acts of its agents and employees under the “Corporate Complicity Rule”, if the acts or omissions which proximately caused the injury were authorized or participated in by a superior officer of the defendant corporation. Kemner v. Monsanto Co., 217 Ill. App. 3d 188, 160 Ill. Dec. 192, 576 N.E. 2d 1146 (Ill. App. 1991).

An employee embezzled money from his employer. Under Missouri law, the employer may maintain an action against a commodities broker who executed trades on behalf of the employee, using the embezzled money, under theories of conversion, violation of the Missouri Uniform Fiduciaries Act and money had and received. Penalosa Cooperative Exchange v. A.S. Polonyi Co., 754 F. Supp. 722 (W.D. Mo. 1990).

A bank which had a reason to believe that a fiduciary had misappropriated money from its principal, which also had a monetary interest in the transaction, was liable in damages to the principal for breach of its “good faith” duty in dealing with the principal’s fiduciary. Both the common law and banking statutes were implicated. Anchor Centre Partners v. Mercantile Bank, 783 S.W. 2d 108 (Mo. App. 1989). Business Attorney.

An oral agreement of a corporation to pay the debts of another corporation it is about to acquire, in exchange for a promise by the creditor to continue to do business with the acquiring corporation, is not barred by the statute of frauds, in that it is an original agreement, not an agreement to pay the debt of another. Autoquip v. Rite-Hite, 740 S.W. 2d 664 (Mo. App. 1987).

There is no cause of action for attempted wrongful foreclosure, either under the common law or for violation of banking statutes. Reese v. First Missouri Bank & Trust Co., 736 S.W. 2d 371 (Mo. banc 1987)

Makers on a promissory note established a cause of action against a bank for fraud and duress, under the common law. It was not necessary to establish a violation of banking statutes. Duress occurs when the threats of the defendant cause the plaintiff to be deprived of the free exercise of his will power. It is not necessary that the misrepresentation constituting fraud in the inducement be the sole inducement into the promissory note. Manufacturers American Bank v. Stamatis, 719 S.W. 2d 64 (Mo. App. 1986)

The maker and guarantors of a demand note did not have a cause of action against the bank for failure to exercise good faith under the Uniform Commercial Code (§ 400.1-203) for failing to disclose the risks associated with the loan. However, potential “lack of good faith” causes of action may exist, under UCC law, if a bank fails to extend credit suddenly and without notice or if a bank acts arbitrarily and capriciously. Centerre Bank of Kansas City v. Distributors, Inc., 705 S.W. 2d 42 (Mo. App. 1985).

Officers and directors of a closely held corporation may be held liable for breach of fiduciary duty to the other shareholders for failure to disclose an offer to purchase controlling ownership in the corporation. Actual and punitive damages awarded. Forinash v. Daugherty, 697 S.W. 2d 294 (Mo. App. 1985).

An issuing bank could not collect from the cashing bank, under the cashing bank’s statutory warranty under UCC law. The husband had forged his wife’s signature, as one of the joint payees of the check, and the issuing bank did not intend for the wife to have an interest in the check. Uniform Commercial Code, R.S.Mo. § 400.3-405(1)(b). American National Bank in St. Louis v. Siedel, 622 S.W. 2d 19 (Mo.App. 1981)

A bank, which entered into a promissory note purchase agreement with a subdivision developer which also took assignments of the lot purchaser contracts for deed and held the deeds of trust on the real estate, owed a fiduciary duty to the lot purchasers, who were paying the bank, to advise them of mechanics lien claims against the real estate. Breach of this duty resulted in an award of actual and punitive damages against the bank in favor of the lot purchasers. As assignee, the bank impliedly accepted the liabilities as well as the rights of the assignor, developer. The bank was also liable for interest on the Judgment from the date of the original Judgment, not from the date on which the Judgment was modified after the first appeal. Senn v. Manchester Bank of St. Louis, 583 S.W. 2d 119 (Mo. banc 1979); Senn v. Manchester Bank of St. Louis, 603 S.W. 2d 551 (Mo. banc 1980).

Breach of contract, which also amounted to breach of a fiduciary duty (owed by an agent to his principal) permitted recovery of both actual and punitive damages. Allabastro v. Cummins, 90 Ill. App. 3d 394, 45 Ill. Dec. 753, 413 N.E. 2d 86 (Ill. App. 1980).

A provision in a written night depository agreement between a bank and its customer, exculpating the bank from liability for any lost items except were the loss is attributable to gross negligence or willful misconduct by the bank is invalid as against public policy. A bailment relationship is established and the bank is required to prove that is was without fault when it fails to redeliver the deposit.<>Vilner v Crocker National Bank, 89 Cal. App. 3d 732, 152 Cal. Rptr. 850 (Cal. App. 1 Dist. 1979)

Other parties to a complicated real estate development project may not complain when a National Bank creates a Missouri Corporation, which is a subsidiary of the National Bank (Chase Manhattan) for the purpose of owning the real estate, even though the National Bank did not have the power to do so. Only the sovereign could challenge the action of the National Bank. Norcomo Corp. v. Franchi Construction Co., Inc., 587 S.W. 2d 311 (Mo. App. 1979). Commercial Lawyer.

Failure of a bank to comply with the Truth-In-Lending Act entitled the borrower to rescind the loan provided the borrower tendered the principal amount to the bank. The election of the rescission remedy did not foreclose the borrower from also recovering the statutory penalty. Ehlert v. Ward, 588 S.W. 2d 500 (Mo. banc 1979).

There is an implied covenant of good faith between employers and employees-at-will, which is violated if the employer uses fabricated evidence to justify firing the employee. Du Pont v. Pressman, 679 A. 2d 436 (Del. 1996);Merrill v. Crothall-American, Inc., 606 A. 2d 96 (Del. 1992); Fortune v. National Cash Register, 364 N.E. 2d 1251 (Mass. 1977).

One stockholder, in his individual capacity, may bring suit against another stockholder for breach of fiduciary duty by attempting to force the plaintiff-stockholder out as an equal shareholder. Both actual and punitive damages may be awarded. Zokoych v. Spalding, 36 Ill. App. 3d 654, 344 N.E. 2d 805 (Ill. App. 1976).

The Windfall Defense. A shareholder may not complain of acts of corporate mismanagement if he acquired his shares from those who participated or acquiesced in the allegedly wrongful transaction. This is particularly true where a shareholder purchases all or substantially all the shares of a corporation from the prior shareholders at a fair price, then seeks to have the corporation recover against those prior shareholders for prior corporate mismanagement.<>Bangor Punta Operations, Inc. v. Bangor & Aroostook Railroad, 417 U.S. 703 (1974); REA Express, Inc. v. Private Trouble Damages Antitrust Litigation, 412 F. Supp. 1239 (E.D. Pa. 1976); REA Express, Inc. v. Traveler’s Insurance Co., 406 F. Supp. 1389 (D.D.C. 1976).

Where a depositor established a “special account” for purposes of building a residence, and the account was not an escrow account, the bank was not authorized to make payment to the lumber company for lumber that went into the house without the specific authorization of the depositor. In making the payment, the bank acted as a volunteer and was liable for then wrongfully refusing to honor a subsequent check from the depositor on that account. Wallick v. First State Bank of Farmington, 532 S.W, 2d 520 (Mo. App. 1976). Commercial Lawyer.

A minority stock holder has a direct cause of action against a bank director, for decrease in the value of his bank stock, for improper activities leading to the insolvency of the bank, including the making and ratification of false and misleading reports to the comptroller of the currency. The F.D.I.C. is not entitled to take-over that cause of action. Harmsen v. C. Arnholt Smith and Federal Deposit Insurance Corp., 542 F. 2d 496 (9th Cir. 1976)

Delivering a check to a person who is not the payee of the check, without thoroughly investigating him, does not necessarily constitute negligence under UCC law. The Uniform Commercial Code, R.S.Mo. § 400.3-406, provides that any person who negligently, substantionally, contributes to a material alteration or unauthorized signature is precluded from asserting the alteration, or lack of authority to sign, against a holder in due course or against a drawee. Proximate cause is not an issue, under UCC law. See the Uniform Commercial Code, R.S.Mo. § 400.3-101 to 3-307. Violation of the statute by the paying bank results in liability unless the claiming party negligently contributed to cause the forgery. Uniform Commercial Code, § 400.3-406. Twellman v. Lindell Trust Co., 534 S.W. 2d 83 (Mo. App. 1976)

A president of a corporation has incidental authority to make declarations and admissions binding against his corporation in matters which are within the scope of his ordinary duties and a vice president is clothed with ostensible authority to bind the corporation by his statement. Cline v. Carthage Crushed Limestone Co., 504 S.W. 2d 102 (Mo. 1973).

A lender may be held liable for hazardous wastes on the borrower’s property under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), 42 U.S.C. § 9607 (A) and 42 U.S.C. § 9601 (20)(a).

Notices of Default and Right to Cure must be mailed before a lender can repossess or accelerate payments under a Retail Sales Contract. A default by a borrower on a second mortgage loan may be cured at anytime before foreclosure. R.S.Mo. §§ 408.554, 408.555

Law updates about Engineering and Design Professionals, Engineering Negligence, Architect liability, Professional liability, OSHA construction law, Engineering Claims, OSHA construction standards and more. Engineering Attorney.

These materials are in reverse chronological order. New material is added at the top. Older material is inserted in the correct chronological spot. Overruled, modified and/or obsolete material is deleted, revised, consolidated and/or moved, when appropriate. Citations preceded by <>are linked to the complete court opinion. (NOTE: Some linked court sites are not always available).

An engineering firm, hired by landowners to survey a subdivision, erroneously relied on prior surveys of the exterior boundaries, without verifying them. It would have taken only minutes to verify the prior inaccurate surveys. The engineering firm thereby breached its implied contractual duty to perform with care, skill, reasonable expedience and faithfulness, entitling the landowners to recover damages for attorney’s fees in defending a prior case resulting from the accurate survey of the defendant and for lost profits. <>Bull v. Pinkham Engineering Assocs., Inc., 752 A.2d 26, 2000 WL 426378 ( Vt. 4-21-2000)

Home owners acting as the general contractor could recover economic loss damages (the costs of reconstruction) from an engineer and his employer for gratuitously but negligently testing the foundation concrete and for negligently misrepresenting the results of the test. The economic loss doctrine and the absence of privity of contract between the engineer (and his employer) and the home-owners builders did not preclude recovery. <>Miller v. Big River Concrete, LLC et al., 14 S.W.3d 129 (Mo. App. 2000)

Engineer’s liability to homeowners, insureds, was not established. The engineering firm had advised its employer, the insurer, that hail stones less than one inch in diameter would not cause storm damage to composition shingle roofs. The engineering firm knew the storm in question produced hail stones from to 1/2″ to 3/4″ in diameter. There was no privity of contract between the engineering firm and the homeowners, and the engineering firm did not misrepresent facts, in expressing its opinion to its employer. There was also no actionable claim for wrongful interference with contract (the insurance policies), for negligence, civil conspiracy or for violation of the Texas Deceptive Practices, Consumer Protection Act. <>Dagley et al v Haag Engineering Co., 18 S.W.3d 787, 2000 WL 328389, ( Tex. App. 3-23-2000)

An owner-architect contract to provide an initial analysis of the owner’s design needs, with hourly compensation for services and no express provision for the duration, was terminable at will by either party after reasonable duration and upon reasonable notice. Accordingly, the architectural firm could not recover from another architectural firm, which was hired to design the project, for interference with contract rights or for misappropriation of intellectual property (the plaintiff firm’s initial design work), or for breach of contract against the owner. <>Oliver Design Group, Inc v. Allen-Bradley Co., _____N.E. 2d_____, 2000 WL 235769, (Ohio App. 3-2-2000)

Substantial evidence supported the finding of the State Board of Architects’ finding that an individual was practicing architecture without a license, by preparing construction documents, and was not working under the supervision of a licensed architect. The Board, however, was arbitrary and capricious when it fined the individual $20 per calendar day, for each of three projects, from the initial violation until the hearing (totaling $48,000). Case remanded to the Board to reduce the penalty. <>McQuay v.Arkansas State Board of Architects, 989 S.W.2d 499 (Ark. 1999)

The owner of a townhouse complex brought suit against an architectural firm, soils engineer and structural engineer after cracks developed the foundations. A professional who is in the business of supplying information for the guidance of others may be held liable for purely economic losses (not resulting from personal injury or property damage) for negligent misrepresentations, as an exception to the economic loss rule. However, the architectural firm and soils engineer were retained to build a structure rather than provide information, and thus did not come within the exception to the economic loss rule. The case was remanded as to the structural engineer because additional evidence was required to determine if he was engaged for the purpose of supplying information. <>Tolan and Son, Inc. v. KLLM Architects, Inc, et al., 308 Ill.App.3d 18, 241 Ill.Dec. 427, 719 N.E.2d 288 (Ill. App. 1999)

Individuals professional engineers may be held liable to homeowners for negligently inspecting a house, even though the inspection services contract is between the homeowners and the professional engineering corporation which employs the individual engineers. The statutes regulating professional engineering do not permit the individual engineers to escape responsibility for their conduct, and they may not contractually limit their common law and statutory duties. The economic loss rule also does not preclude the homeowners from recovering purely economic losses (there were no personal injuries or property damage) in tort. The economic loss rule is limited to products liability contexts and similar circumstances. <>Moransais v. Heathman et al., 744 So.2d 973 (Fla. 1999)

A project engineer, which contracted with Harrison county, Miss. to provide design and project administration services for a public wastewater treatment plant, was entitled to the same sovereign immunity as the county, for a subcontractor’s tort claims. The engineer’s liability, under design professional law, was not reached. The delay damages clause was not superceded by federal regulations, and therefore also applied to deny such claims, and the subcontractor’s claims did not flow though the general contractor to the owner. The liquidated damages assessed by the owner were enforced. A previous decision in the same case is reported at 81 F.3d 1412, (5th Cir. 1996); <>PYCA Industries, Inc, et al., v. Harrison County Waste Water Management District, et al., 177 F.3d 351 (5th. Cir. 1999)

A Condominium Association could maintain an action against an Architect for negligently misrepresenting that the project met the state’s minimum building codes, when it did not. The economic loss rule does not bar negligence claims against professionals in Florida, even though the damages are purely economic in nature. <>Stone’s Throw Condominium Association, Inc. v. Sand Cove Apartments, Inc, et al., 749 So. 2d 520 (Fla. 1999)

A judgment against the designing architect for more than $5,800,000 (with interest), under design professional law, was affirmed by the Missouri Supreme Court, which found that the damages occurring when marble panels fell from the side of a building were not capable of ascertainment until then. As a result the 5 year statute of limitations for negligence actions began from the date the marble panels fell, not the date on which the design work was performed. An earlier opinion in the same case is reported at 891 S.W.2d 438; <>Business men’s Assurance Company of America v. Graham, representative for Skidmore, Owings, & Merrill, et al., 984 S.W.2d 501 (Mo. banc 1999)

A construction firm used improper electrical equipment during tunnel construction resulting in a methane gas explosion and the death of three employees. The engineering services contract between the owner and engineering firm had the usual clauses imposing no responsibility on the engineers for the safety practices of the contractors and permitting only the owner to stop work. The engineer was required to redesign work, when requested by the owner, which was underway at the time of the explosion. OSHA issued a citation to the engineering firm, finding that it was actually involved in construction activities at the time of the explosion under OSHA construction law. The Court of Appeals vacated the citation, finding that while the engineering services and other contracts do not per se exclude design and other professionals from liability for OSHA construction standards, in this case the engineering firm was not engaged in construction work and thus was not subject to OSHA construction standards, under OSHA construction law. <>CH2M Hill, Inc v. Alexis Herman, Secretary of Labor, et al., 192 F.3d 711 (7th Cir. 1999)

An architect’s license in California was properly revoked for conduct in other states before he was admitted in California, even though no violations occurred in California and no California clients were harmed. <>Hughes v. Board of Architectural Examiners, 68 Cal. App.4th 685, 80 Cal Rptr.2d 317, (Cal. App., 3rd dist., 1998)

The claims of individual (union member) employees, against the general contractor and project operator, of a subcontractor, which was terminated by the general contractor in a dispute about which would pay for the employees’ break time, were preempted by the National Labor Relations Act, 29 U.S.C. 157, 158. The employees claimed wrongful interference with their employment contracts and intentional infliction of emotional distress. Volentine et al., v. Bechtel, Inc and Mobil Chemical Co., 27 F. Supp.2d 728 (E.D.Tex. 1998)

An architect did not aid and abet the unlicensed practice of architecture by reviewing drawings prepared by a draftsman who was not licensed as an architect, where the architect had direct professional knowledge and direct supervisory control over the drawings. Thus, the architect did not violate the professional ethics code, or design professional law, by placing his seal on the drawings. <>The State Board of Architects v. Clark, 689 A.2d. 1247 ( Md. App. 1997)

Forensic engineers (expert witnesses) who perform tests, testify, advertise their services or otherwise hold themselves out as professional engineers in Illinois, must first be licensed as professional engineers by the State of Illinois, under the Professional Engineering Act, 225 ILCS 325/1 et seq., to avoid charges of unlicensed practice. The practice of forensic engineering in Illinois for 20 years before the act was amended (in 1989) to include forensic engineering does not fall within the grandfather clause. Licensing is still required to practice forensic engineering after the effective date of the amended act. Miller v. Department of Professional Regulation, et al., 276 Ill.App.3d 133, 213 Ill.Dec. 53, 658 N.E.2d 523 (Ill App. 1995); Charles Van Breeman v. Zollar, Director of the Department of Professional Regulation et al., (unreported) 96 C 7095, 1997 WL 124266 (N.D. Ill 3-14-1997)

A letter from an engineer to prospective purchasers of a home, indicating that there were significant water leakage problems in the basement, and the estimated cost of repairs, expressed the opinion of the engineer, did not misrepresent facts and did not employ the “improper means” required for establishing the engineer’s liability for tortious interference with a business expectancy. <>Baldwin Properties, Inc v. Sharp, 949 S.W.2d 952, (Mo. App. 1997)

The Board of Regents issued a valid administrative regulation in deleting from the definition of “unprofessional conduct” the delegation of design work from one licensed professional to another, under the design professional law. The regulation was in harmony with the statute regulating the professions of engineering, architecture and land surveying. The challenge to the rule by an association of professional contractors was rejected. In the Matter of General Building Contractors of New York State, Inc v. New York State Education Department, et al., 670 N.Y.S.2d 697, 175 Misc. 2d 922, ( N.Y. 1997)

The testimony of two foundation repair experts (nonengineers) was sufficient to establish the applicable standard of care for a professional engineer, because the homeowner’s claim of negligence was based on the standard of care of foundation specialists ( not engineers), the foundation repair experts were qualified to engage in the same line of work, and the foundation expert had corrected the problem. Yantzi v. Norton, 927 S.W.2d 427 (Mo. App. 1996)

An excavation company worker was killed when a trench collapsed at a sewer installation site. The engineer could be held liable in negligence where its contract imposed responsibility for the progress of the work, but not for safety conditions. Here the engineer was aware that the trench was unsafely constructed. The contract clauses under which the general contractor and owner indemnified the engineer were also void as against public policy. <>Carvalho v. Toll Brothers and Developers, et al., 675 A.2d 209 (N.J. 1996)

The Owner retained an engineering firm to provide engineering services for a $105,000,000 plant expansion. The engineering firm sent its standard engineering services contract to the owner, which was not signed. It required the firm to follow “good engineering practices”. The owner sent the firm a purchase order, which not rejected by the firm. The purchase order imposed a higher standard on the engineering firm, requiring the materials and other articles covered by it to be free from “defects in material and/or workmanship, and merchantable”. The parties then signed an amendment that modified the engineering firms unsigned standard contract “as referenced” in the owner’s purchase order. Since this contractual arrangement was ambiguous about the standard of care imposed on the engineering firm, the intent of the parties was submitted to the jury, which found for the owner. The resulting judgment was affirmed. <>Chesapeake Paper Products Co. v. Stone & Webster Engineering Corp. 51 F.3d 1229, (4th Cir. 1995)

Property owner and joint venture could be third party beneficiaries of contract between general contractor and subcontractor only if the intent to confer such benefit is established with clear evidence, which did not exist here. The engineering firm could not be held liable in tort for economic losses to the property which was the subject of the contract, under the economic loss rule, but could be held liable for negligently causing economic losses to other property. The statute of limitations for negligence claims against the engineer was tolled by the “discovery rule” until the owner discovered the resulting damage. Thomson v. Espey Huston & Associates, Inc, 899 S.W.2d 415 (Tex. App. 1995)

A General Contractor could recover purely economic damages from the engineer which designed and administered the project under negligent design, negligent administration and breach of implied warranty theories notwithstanding the absence of a contract between them. The engineer owed a duty to the contractor to refrain from negligently designing or administering the project. The economic loss rule did not bar the claim. Tommy L. Griffin Plumbing & Heating Co. v Jordan, Jones & Goulding, Inc. 463 S.E.2d 85 (S.C. 1995)

In 1990 the Copyright Act, 17 U.S.C. 102(a)(5), was amended to specifically protect “pictorial, graphic, or sculptural works,” including technical drawings, architectural plans, diagrams, and models. Engineering drawings are also protected by the act. Guillot-Vogt Associates, Inc. v. Holly & Smith, 848 F.Supp. 682 (E.D. La. 1994); an “architectural work” for purposes of copyright protection is a design as embodied in a tangible medium of expression, including architectural plans or drawings, and includes overall form as well as arrangement and composition of spaces, elements, and design, but does not include individual standard features. CSM Investors, Inc. v. Everest Development Ltd., 840 F.Supp. 1304 (D.Minn. 1994); in order for a designer to be considered the owner of a copyright and thereby protected by the act, the work must be a work “made for hire” under a written agreement or by an employee. Bryce & Polazzola Architects, Inc. v. A.M.E. Group, 865 F.Supp. 401 (E.D.Mich. 1994)

The construction manager/contractor on the Admiral reconstruction project did not have a cause of action for tortious interference with contract rights against the architect. The contracts between the architect and owner and between the owner and construction manager/contractor required the architect to perform the activities which the construction manager/contractor claimed to be a tortious interference with its rights under its contract with the owner. Fleischer-Seeger Construction Co. v. Hellmuth, Obata, & Kassabaum, 870 S.W. 2d 832 (Mo. App. 1993). Engineering Lawyer.

Architectural Design Law, Professional Design Liability, Engineering Design Law, Architects Malpractice, Architects Negligence, Engineers Negligence, Engineering Malpractice, Engineers Liability, architectural malpractice, engineers malpractice.

An architect could be held liable to the project developer, under an indemnification clause, for claims against the developer based upon economic loss (not for injury to person or property). An Illinois Statute bars indemnification for injuries to persons or property on construction projects. Granville Beach Condominium Ass’n v. Granville Beach Condominiums, Inc., 227 Ill. App. 3d 715, 169 Ill. Dec. 673, 592 N.E. 2d 160 (Ill. App. 1992)

A subcontractor who has been fully paid by the owner for performance of the construction contract may, despite the lack of contractual privity, recover in tort from the construction manager for economic losses caused by negligent misrepresentations by the construction manager and its on-site superintendent. The negligent misrepresentations may be in the form of either directions or supervision. John Martin Co., Inc. v. Morse/Dielsel, Inc., 819 S.W. 2d 428 (Tenn. in banc 1991)

The licenses of structural engineers and their firm to practice engineering in Missouri were properly suspended where the engineers put their seal on plans and specification, under R.S.Mo. § 327.401.2 (2), certifying that the design work was performed under their immediate and personal supervision, without reviewing and approving the shop drawings for the structural steel, the failure of which resulted in the collapse of the Hyatt Regency Hotel in Kansas City on July 17, 1981. The engineer’s liability was also established in a personal injury, wrongful death, civil action. The Missouri statute governing the licensing of engineers and architects was not unconstitutional. Holding the engineer in charge subject to discipline, for affixing his seal to the plans of a suspended walkway, when the plans were submitted to him by the engineer in charge of that subproject, was not an imposition of vicarious liability. Under Missouri statutes, an engineer who affixes his seal to plans is responsible for any errors within those plans, since he certifies that the plans were prepared under his immediate and personal supervision. Here the general engineer failed to include a disclaimer when he sealed the defective plans. Duncan et el. v. Missouri Board of Architects, Professional Engineers and Land Surveyors, 744 S.W. 2d 524 (Mo. App. 1988)

An architect is not obligated to verify the authenticity of lien waivers before approving payment to the general contractor. Fabe v. W.V. P. Corp., 760 S.W. 2d 490 (Mo. App. 1988)

An architect may be found liable to a contractor for economic loss not-withstanding the absence of a contract between the architect and the contractor. The architect’s duty of due care extends to the contractors who reasonably rely on the proper performance of the architect’s duties under the architect’s contract with the owner. Forte Bros., Inc. v. National Amusements, Inc., 525 A.2d 1301 (R.I. 1987); Milton J. Womack, Inc. v. House of Representatives of the State of Louisiana, 509 So. 2d 62 (La. App. 1987), writ denied, 513 So. 2d 1208 (la. 1987)

An architect or engineer has a conditional privilege to interfere with a construction contract of its principal (owner), under design professional law. A contractor claiming tortious interference by the architect or engineer must establish that the architect or engineer acted with actual malice, to establish a claim. Certified Mechanical Contractors, Inc. v. White & Co., 162 Ill App. 3d 391, 113 Ill. Dec. 888, 515 N.E. 2d 1047 (Ill. App. 1987)

Economic losses are recoverable from an engineer upon establishing the engineer’s liability for tortious interference with contract rights, although a professional has a conditional privilege, under design professional law, to protect the interests of its principal (owner) which justifies an interference that would otherwise be improper. Claims for tortious interference are among the exceptions to the economic loss doctrine established in Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 61 Ill. Dec. 746, 435 N.E. 2d 443 (Ill. 1982). The Economic Loss Doctrine precludes the recovery of “contracts type” damages under tort theories where there is no cataclysmic occurrence, property damage or physical injury. Santucci Const. Co. v. Baxter & Woodman, Inc., 151 Ill. App. 3d 547, 104 Ill. Dec. 474, 502 N.E. 2d 1134 (Ill. App. 1986)

Builders and architects were held liable to condo unit owners, despite the absence of privity, for economic harm (the cost of precautionary repairs) resulting from defective construction that threatened the owners with physical injury and with violation of the building codes. Council of Co-owners Atlantis Condominium, Inc. v. Whitting Turner Contracting Co. et el., 517 A. 2d 336 (Md. App. 1986)

A contractor’s deviation from the plans will relieve the design engineer from liability for a negligent design of a walkway only if the deviations served independently to break the causal connection between the negligent design and the damages, by completely removing the effects of any negligence by the design professionals. The evidence established questions of fact for the jury on these issues. A new trial was ordered because of error in the jury instructions. Cincinnati Riverfront Coliseum, Inc. v McNulty Co., et al., 504 N.E.2d 415 (Ohio 1986)

The engineer was a third party beneficiary of the contract between the owner and the contractor and the no delay damages clause contained therein. Subcontractors could not claim damages against the owner or the engineer where the subcontracts incorporate by reference the terms of the prime contract. Bates & Rogers Construction Corp. v. Greeley & Hansen, 109 Ill. 2d 225, 93 Ill. Dec. 369, 486 N.E. 2d 902 (Ill. 1985)

Architectural Design Law, Professional Design Liability, Engineering Design Law, Architects Malpractice, Architects Negligence, Engineers Negligence, Engineering Malpractice, Engineers Liability, architectural malpractice, engineers malpractice.

The architect was denied indemnification from the contractor, under AIA Document A-201¶ 4.18.1, for injuries to a third party resulting from the architect’s negilgence in approving non-conforming shop drawings. Henningson, Durham & Richardson, Inc. v. Swift Brothers Construction Co. 739 F. 2d 1341 (8th Cir. 1984)

The architect’s certification of the date of completion was binding, under a clause in the contract, absent fraud or bad faith by the architect. Transamerica Ins. Co. v. Housing Authority of Victoria, 669 S.W. 2d 818 (Tex. App. 1984)

Liability could be established for an architect’s negligence while interfering with a tenant’s right to use and enjoy a leasehold. Chubb Group of Ins. v. C.F. Murphy & Assoc., 656 S.W. 2d 766 (Mo. App. 1983)

Construction company employees recovered for an architect’s negligence in failing to detect and correct errors in shop drawings for steel stairs, which collapsed and injured the employees. Since the claim arose from the architect’s negligence in supervising the project, expert testimony on the appropriate standard of care was not required. Jaeger v. Henningson, Durham & Richardson, Inc., 714 F. 2d 773 (8th Cir. 1983)

An architect’s duty imposed by contract or a statute is generally non-delegable. An express warranty by the contractor, in a contract to build a waste water treatment plant, was not a defense to the architect-engineer, which was charged with professional negligence. Mayor & City Council of Columbus v. Clark-Dietz Associates Engineers, Inc., 550 F. Supp. 610 (N.D. Miss. 1982)

An engineer which negligently certifies payments to the bonded contractor may be held directly liable to the contractor’s surety, in negligence, for permitting the overpayment, where the surety was required to complete the project and/or correct the deficiencies. The duty owed to the surety is the same as the duty owed to the owner. American Fidelity Fire Insurance Co. v. Pavia-Byrne Engineering Corp., 393 So. 2d 830 (La. 1981)

A no delay damages clause in a contract between the contractor and owner was a bar to the contractor’s suit against the owner for delay damages, but did not bar the contractor’s suit against the architect/engineer for negligently delaying the contractor. The “Economic Loss” Doctrine was not applied to professional malpractice negligence claims. Bates & Rogers Construction Corp. v. Northshore Sanitary District et al, 92 Ill. App. 3d 90, 47 Ill. Dec. 158, 414 N.E. 2d 1274 (Ill. App. 1981)

The decisions of the architect on whether the work complied with the plans and specifications will be upheld, where there is no evidence that the architect acted in bad faith or with gross negligence. The contract provided that the decision of the architect on these issues would be final. Gold v. National Savings Bank, 641 F. 2d 430 (6th Cir. 1981)

Architectural Design Law, Professional Design Liability, Engineering Design Law, Architects Malpractice, Architects Negligence, Engineers Negligence, Engineering Malpractice, Engineers Liability, architectural malpractice, engineers malpractice.

Expert testimony is admissible to explain plans and specification or other written documents of a technical nature. Busch & Latta Painting v. Missouri State Highway Commission, 597 S.W. 2d 189 (Mo. App. 1980)

Damages for “economic loss” in tort actions may not be recovered from a design professional, such as an architect, except for negligent misrepresentation or intentional misrepresentation (fraud). 2314 Lincoln Park West Condo Assoc. v. Mann, Gin, Ebel & Frazier, 136 Ill. 2d 302, 144 Ill. Dec. 227, 555 N.E. 2d 346 (Ill 1990); Soules v. General Motors Corp., 79 Ill. 2d 282, 37 Ill. Dec. 597, 402 N.E. 2d 599 (Ill. 1980)

A subcontractor was permitted to recover damages against the structural engineer for negligent interpretation of the plans and specification. Lane v. Geiger-Burger Associates, P.C. 608 F. 2d 1148 (8th Cir. 1979)

A professional engineering corporation which failed to obtain the annual authorization to practice from the Missouri Board of Architects and Professional Engineers, was not authorized to pursue its claim for a mechanic’s lien for professional engineering services rendered. Maran-Cooke, Inc. v. Purler Excavating, Inc, 585 S.W. 2d 38 (Mo. 1979)

A construction contract provided that the engineer’s decisions were controlling on issues concerning the performance of the contract. The decisions of the engineer are binding unless the contractor establishes that the engineer acted in bad faith. Bernard McMenamy Contractors, Inc. v. Missouri State Highway Commission, 582 S.W. 2d 305, (Mo. App. 1979)

A school board-owner recovered from the architect for breach of the architect’s implied duty, in the contract between the school board and the architect, to specify the use of reasonably good materials. Board of Education v. Del Biano & Associates, Inc., 57 Ill App. 3d 302, 14 Ill. Dec. 674, 372 N.E. 2d 953 (Ill. App. 1978)

An engineering company which designed a telephone cable system, which had the right to inspect the work as it progressed and to make sure that the work conformed to plans and specifications, but which did not exercise control over the contractor’s methods of performing the work, was not liable to the contractor’s employee injured in a trench cave-in. There was no duty. Smith v. Enter-City Telephone Co., 559 S.W. 2d 518 (Mo. Banc. 1977)

Where the construction documents gave the architect authority to reject work and the architect was required to keep the owner informed of the progress of the work based upon his “on-site observations”, the architect had a duty to exercise reasonable care and skill in supervision of the construction. Dickerson Construction Co., Inc. v. Process Engineering Co., Inc., 341 So. 2d 646 (Miss. 1977)

An architect owed no duty to a contractor’s employee (and his personal representatives) who died after falling through a hole in the roof of a building under construction. The hole in the roof was not a defect in the plans or specifications. The architect had no contractual, or other, duty to supervise construction. Brown v. Gamble, 537 S.W. 2d 685 (Mo. App. 1976)

A general contractor can recover in negligence against a supervising engineer which breaches its duty to avoid negligently causing additional expense in the completion of a construction project, even though there is no privity of contract between the supervising engineer and the general contractor. There was no issue about the applicability of a no delay damages clause. Subsequent cases have afforded the benefits of such clauses in the Prime contract to Architects and Engineers employed by the owner. Normoyle-Berg & Associates, Inc. v. Village of Deer Creek et el., 39 Ill. App. 3d 744, 350 N.E. 2d 559, (Ill. App. 1976)

An architect has a duty to exercise the ordinary and reasonable skill usually exercised by one in his profession in preparing plans and specifications. His duties depend upon the particular agreement between him and his employer. In the absence of a special agreement, he does not imply or guarantee a perfect plan or satisfactory result. He is liable only if he fails to exercise reasonable care and skill. Mississippi Meadows, Inc. v. Hodson, 13 Ill. App. 3d 24, 299 N.E. 2d 359, (Ill. App. 1973)

The architect is the agent of the owner for the purposes of receiving progress reports, where the contract provides that the reports shall be delivered to the architect. Consumer’s Construction Co. v. County of Cook, 1 Ill. App. 3d 1087, 275 N.E. 2d 696 (Ill. App. 1971)

Expert testimony is required to prove that an architect or engineer breached his duty of care for supervising a project and his administrative activities as well as the preparation of plans and specifications. Chicago College of Osteopathic Medicine v. George A. Fuller Co. et el., 719 F. 2d 1335 (7th Cir. 1983); Peerless Ins. Co. v. Cerny & Associates, Inc., 199 F. Supp. 951 (D. Minn. 1961); Nauman v. Harold K. Beecher & Associates, 467 P. 2d 610 (Utah 1970)

A surveyor was held liable to third party purchasers of real estate (with whom he did not have a contract) for negligently misrepresenting the boundaries for the real estate. The purchasers were permitted to recover the damages resulting from the inaccurate survey, even though there was no privity of contract between them and the surveyor. This is an exception (negligent misrepresentation and fraudulent misrepresentation) to the “Economic Loss” Doctrine which precludes recovery of “contract type” damages under tort theories where there was no cataclysmic occurrence, property damage or physical injury. Rozny v. Marnul, 43 Ill. 2d 54, 250 N.E. 2d 656 (Ill. 1969)

A surety may recover for damages caused by an architect’s negligence in failing to properly supervise construction, notwithstanding the lack of privity between the surety and the architect. The surety was required to pay for the defective and incomplete work of its bonded contractor. Upon payment to the owner, it was subrogated to the owner’s claims against the engineer/architect. Aetna Insurance Co. v. Hellmuth, Obata & Kassabaum, (H.O.K.), 392 F. 2d 472 (8th Cir. 1968)

An architect may be liable to an injured workman for negligently requiring sufficient steel scaffolding to support a roof during removal of a proscenium truss, where the architect contractually agreed with the owner to perform supervisory duties on the project. Miller v. DeWitt, 37 Ill. 2d 273, 226 N.E. 2d 630 (Ill. 1967)

An indemnitor of the prime contractor’s surety also has the right to recover from the architect for negligently certifying overpayment to the bonded contractor through its rights of subrogation to the surety’s position which is subrogated to the owner’s rights against the architect. Westerhold v. Carroll, 419 S.W. 2d 73 (Mo. 1967)

The contractors acceptance of final payment amounted to an accord and satisfaction, preventing the contractor from suing the city, owner and the engineer who allegedly negligently created a delay damaging the contractor. Cox v. City of Freeman, Mo., 321 F. 2d 887 (8th Cir. 1963)

An architect owes a duty of due care to the owner, and through the owner to the contractor’s surety, with respect to his contractual obligations to certify the contractor’s applications for progress payments. The owner and the surety may recover for the architect’s negligence in certifying excessive payments to the contractor. State f/u/o National Surety Corp. v. Malvaney, 72 So. 2d 424 (Miss. 1954)

An architect may be held liable to the owner, and through the owner to its surety, for certifying for payment monthly “estimates” of the contractor, instead of approving payment for the work actually performed. Overpayment to the contractor occurred, the contractor defaulted and the contractor’s surety was required to complete the project at its cost since the remaining contract balance was insufficient to pay for the remaining, incomplete, work. Hall v. Union Indemnity Co., 61 F. 2d 85 (8th Cir. 1932)

A Missouri Statute immunizes design professionals from liability for failure to comply with safety standards on a construction project for claims covered by the Workers’ Compensation Act, unless responsibility for safety practices is specifically assumed by the contract of the design professional. R.S.Mo. § 287.150.5

In Missouri, tort actions against architects, engineers and builders of allegedly defective improvements to real property must be brought within 10 years of completion of the improvement, irrespective of the date of discovery of the alleged damages. R.S.Mo. § 516.097.

Actions against engineers for alleged negligence or alleged breach of contract and resulting damages, must be brought within 5 years from the date of discovery. R.S.Mo. § 516.120.

Law updates about Copyright infringement law, Trademark cancellation law, Copyright law, Trademark law, Internet property law, Domain name law, Intellectual Property Law, Trademark infringement law, The Lanham act and Trade Secret misappropriation. Internet Attorney.

These materials are in reverse chronological order. New material is added at the top. Older material is inserted in the correct chronological spot. Overruled, modified and/or obsolete material is deleted, revised, consolidated and/or moved, when appropriate. Citations preceded by <>are linked to the complete court opinion. (NOTE: Some linked court sites are not always available).

Six freelance writers brought claims under copyright infringement law against several print publishers including the New York Times, News Day and Time, as well as several electronic publishers. The plaintiffs alleged their copyrights were infringed when the print publishers licensed their publications (which incorporated individual articles in which the freelance writers owned copyrights) to the electronic publishers. The print publishers argued that because they owned the copyright in their respective compilations (the individual daily and weekly editions of their publications) they were “privileged” to license their compilations to the electronic publishers, who made them available to online subscribers. The District Court granted the defendants’ Motion for Summary Judgment. The Second Circuit reversed, holding that electronic and CD-ROM databases containing individual articles from multiple editions of periodicals did not constitute “revisions” of individual periodical issues within the meaning of the Copyright Act provision governing collective works, and that the print publishers were not entitled to relicense an article of the original authors, which had express licensing agreements with the print publishers prohibiting republication without consent. <>Tasini v. The New York Times Company, Inc., 206 F. 3d 161 (2nd Cir. 2000)

The Driver’s Privacy Protection Act, 18 U.S.C. § 2721 et seq., is constitutional as a proper exercise of Congress’ authority to regulate interstate commerce under the commerce clause and does not violate the principles of federalism contained in the 10th Amendment. The Driver’s Privacy Protection Act restricts the ability of the states to disclose a driver’s personal information without the driver’s consent. <>Reno v. Condon, ____ U.S. ______, 120 S. Ct. 666, (2000)

A verdict of $8,000,000 compensatory damages and $135,000,000 punitive damages was set aside and a new trial ordered by the trial court because of attorney misconduct, in a trademark infringement case. The court had sustained 778 objections by the defendant to plaintiff’s evidence, and the court itself interposed 67 additional objections. This created the appearance that the court and the “large” defendant were conspiring to conceal evidence offered by the “small” plaintiff. As a result a new trial was required. The court also found that the California state courts would not recognize the common law tort of unfair competition by reverse confusion where the parties were not in competition in the same market. Forward confusion occurs when the consumer might believe the junior user’s product is that of the senior user, i.e. the defendant “palms off” its product as that of the senior user (trademark holder). Reverse confusion occurs when the consumer believes the products of the senior user (small company-trademark holder) are actually the products of the junior user (large company-infringer). This usually occurs when the infringer is much larger and more well known than the trademark holder. <>Dreamwerks Production Group,Inc v. SKG Studio, dba DreamWorks SKG, 142 F.3d 1127 (9th Cir. 1998). Since plaintiff’s state common law claims fail, its claims for punitive damages must also fail because punitive damages are not recoverable under the Federal Trademark (Lanham) Act, 15 U.S.C. 1052, 1117 et seq. The court also found that plaintiff’s claims for statutory trademark infringement could not exceed $500,000 as a matter of law. An Appeal by Trovan to the 9th Circuit is pending. Trovan, Ltd. v. Pfizer, Inc. ___F.Supp.2d ___, 2000 WL 709149 (C.D. Cal. 5-24-2000)

An entertainment-industry information provider was entitled to an injunction against a video rental store chain where the provider was the senior user of the “MovieBuff” trademark. The video chain could not use the term “MovieBuff.com” on its web domain as a result of its earlier use of the trademark “The MovieBuff’s Movie Store.” Use of the “MovieBuff.com” domain name would create likelihood of confusion which is actionable under the Lanham act. <>Brookfield Communications, Inc. v. West Coast Entertainment Corporation, 174 F. 3d 1036 (9th Cir. 1999)

Federal circuit review of administrative decisions from the Patent and Trademark Office is under the more deferential “substantial evidence” standard of the Administrative Procedure Act instead of the “clearly erroneous” standard under Fed. R. Civ. P. 52(a)<>Dickinson v. Zurko, 527 U.S. 150 (1999)

Private businesses acting under clearly articulated government programs or providing quasi-governmental functions, are not liable for violating antitrust laws. Network Solutions, Inc. is a private company that registers internet domain names, under domain name law, under a contract with national science foundation, an independent agency of the United States Government that supports the development of the world wide web and facilitates its use. In this capacity, Network Solutions Inc. may not be found liable for violating internet property law. Domain names are not free speech protected by the First Amendment or by domain name law. Beverly v. Network Solutions, Inc., 49 U.S.P.Q. 2d 1567 (N.D. Cal. No. C-98-0337-VRW 1998); Thomas v. Network Solutions, Inc. and National Science Foundation, 2 F. Supp. 2d 22 (D.D.C. 1998); PGMedia v. Network Solutions, Inc. and National Science Foundation, 51 F. Supp. 2d 389 (S.D.N.Y. 1999)

The copying of anticopying computer software for the purpose of designing a program to defeat the anticopying software program did not violate the copyright of the producer of the anticopying software, under the Computer Software Copyright Act of 1980, 17 U.S.C. § 117, did not constitute contributory infringement and did not violate the Louisiana Software License Enforcement Act. Vault Corporation v. Quaid Software Limited, 847 F. 2d 255 (5th Cir. 1988);<>Ringgold v. Black Entertainment Television, Inc., 126 F. 3d 70, 150 A.L.R. Fed. 813 (2nd Cir. 1997); <>Alcatel USA, Inc. v. DGI Technologies, Inc. v. DGI Technologies, Inc., 166 F. 3d 772 (5th Cir. 1999)

35 U.S.C. § 102 (b) bars a patent when the subject matter of the invention was placed on sale in this country more than a year before the patent application was filed. The one-year period begins once the invention is “ready for patenting”. This new standard has resulted in a more strict application of the one-year on-sale bar rule.<>Pfaff v. Wells Electronics, Inc., U.S. , 119 S. Ct. 304, (1998); <>Abbott Laboratories v. Geneva Pharmaceuticals, Inc. 182 F. 3d 1315 (Fed. Cir. 1999); <>Brasseler U.S.A. L.L.P. v. Stryken Sales Corp., 182 F. 3d 888 (Fed. Cir. 1999); Stx Inc. v. Brine, Inc., 37 F. Supp. 2d 740 (D. Md. 1999)

Patent Law, Common Law Trademarks, Trademark Dilution Law, Trade Secrets Law, Unfair Competition Law, Forward Trademark Confusion, Reverse Trademark Confusion, Patent Infringement Law.

The Tenth Circuit recently overturned privacy regulations of the Federal Communications Commission which limited the ability of telephone companies to use information about individuals’ calling patterns for marketing purposes. <>U.S. West, Inc., v. Federal Communications Commission, 182 F. 3d 1224 (10th Cir. 1999)

The Ninth Circuit held, in deciding a claim of trademark dilution, that the trademarks “Avery” and “Dennison”, while well-known trademarks, did not rise to the level of “famous” trademarks deserving increased protection under the Federal Trademark Dilution Act, noting that they are also surnames and similar marks are used by third parties. Only truly prominent, not merely distinctive, trademarks deserve dilution protection. Summary Judgment in favor of Avery Dennison reversed. The defendant had registered “Avery.net” and “Dennsion.net” along with thousand of other domain names, under domain name law, incorporating common last names for the purpose of selling them to individuals with those last names. <>Avery Dennison v. Sumpton, 189 F. 3d 868 (9th Cir. 1999)

West Publishing company and Thomson corporation, the third and first largest publishers of law books and legal research materials proposed a merger. The United States and 7 states file an antitrust action to bar the merger. West also owns Westlaw an online legal research service. West also claimed copyright protection for its “Star Pagination” system, which provides for the insertion of numeric symbols in the text of decisions to indicate the equivalent West Reporter page break and page number. Star Pagination permits an individual to rely on a printed decision not published by West, while retaining the ability to cite to West’s National Reporter System. After initially disapproving a proposed consent decree to permit the merger, the district court entered a final decree approving the merger, specifically providing that it did not grant confirmation of West’s claims of copyright protection for its Star Pagination System. Subsequently, Matthew Bender & Co. and Hyperlaw, Inc. filed declaratory judgment actions seeking a ruling that sales of CD-ROM disks containing compellations of judicial opinions, including Star Paginations, did not infringe West’s copyrights. The Second Circuit confirmed a New York district court decision holding that West’s Star Pagination System was not entitled to copyright protection because it merely compiled data without contributing sufficient original, creative, material to warrant copyright protection. United States v. Thomson Corp., 949 F. Supp. 907 (D.D.C. 1996); United States v. Thomson Corp., 1997 WL 226233 (D.D.C. 1997);<>Matthew Bender & Co., Inc. and Hyperlaw, Inc. v. West Publishing Co., 158 F. 3d 674 (2nd Cir. 1998);<>Matthew Bender & Co., Inc. and Hyperlaw, Inc. v. West Publishing Co., 158 F. 3d 693 (2nd Cir. 1998)

Patent Law, Common Law Trademarks, Trademark Dilution Law, Trade Secrets Law, Unfair Competition Law, Forward Trademark Confusion, Reverse Trademark Confusion, Patent Infringement Law.

The District Court abused its discretion in failing to approve a consent antitrust decree between the United States and Microsoft under the Tunney Act, 15 U.S.C. § 16 (e). Microsoft had been charged with maintaining a monopoly by requiring original equipment manufacturers to pay Microsoft a royalty for each computer sold, containing a particular microprocessor, whether or not the original equipment manufacturer had included a Microsoft Operating System with that computer. Subsequent antitrust claims regarding Microsoft’s browser are still pending. United States v. Microsoft Corporation, 159 F.R.D. 318 (D.D.C. 1995), reversed, <>56 F. 3d 1448 (D.C. Cir. 1995); United States v. Microsoft Corporation, 980 F. Supp. 537 (D.D.C. 1997), reversed, <>147 F. 3d 935 (D.C. Cir. 1998)

A “squatter” may not secure domain names using well established trademarks and tradenames held by others, then deny use of the domain name to the owner of the trademark. Such use of the domain name infringes the trademark rights of the trademark holder and dilutes the value of the trademark. Panavision Intern, L.P. v. Toeppen, 945 F. Supp. 1296 (C.D. Cal. 1996), affirmed,<>141 F. 3d 1316 (9th Cir. 1998); Jews for Jesus v. Brodsky, 993 F. Supp. 282 (D.N.J. 1998); Cairns v. Franklin Mint Co., 24 F. Supp. 2d 1013 (C.D. Cal. 1998)

The concept of the customers’ goodwill in the context of trademark law is the goodwill for the trademark, not the goodwill for a specific restaurant. As a result, a terminated “Roy Rogers” franchisee could not continue to use the trademark, after termination, notwithstanding its contention that the owners of the trademark had mismanaged the operation, resulting in a significant reduction in the number of operating franchisees and damage to the “goodwill” and trademark. The District Court found that the resulting harm to the franchisee, by granting the injunction, would outweigh the harm to the trademark owners if the injunction was not granted. The Court of Appeals reversed, finding the District abused its discretion. A preliminary injunction was entered by the Court of Appeals. <>Pappan Enterprises, Inc. v. Hardee’s Food Systems, Inc. et el., 143 F. 3d 800 (3rd Cir. 1998)

A plaintiff’s failure to designate its trade secret with specificity upon a Court Order to do so, precluded it from later relying on the trade secret to support its misappropriation claim. <>Imax Corp. v. Cinema Technologies, Inc., 152 F. 3d 1161 (9th Cir. 1998)

The Doctrine of Equivalants, established in<>Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605 (1950) is not inconsistent with the Patent Act, but must be applied to individual elements of the patent claim, not to the invention as a whole. Prosecution History Estoppel does not apply when patent claims have been amended during the application process, regardless of the reasons for the change. The patentee’s addition of lower pH limit during the application process did not necessarily preclude application of the Doctrine of Equivlants as to that element. The Doctrine of Equivlants does not require proof of intent and is not limited to equivalents disclosed within the patent itself . The case was remanded for additional findings of fact, first to the Federal Circuit and then to the District Court.<>Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17 (1997), on remand, remanded to the District Court, 114 F. 3d 1161 (Fed. Cir. 1997)

A party defamed by a message on a web site, placed there by a third party, could not recover from the internet service provider, America Online, under 47 U.S.C. § 230 which provides immunity to Internet providers and users, under internet property law, for defamatory language placed on the internet by third parties. <> Zeran v. America Online, 129 F. 3d 327 (4th Cir. 1997)

The manufacturer of “Zippo” cigarette lighters could not recover under the Lanham act or under state law against a computer news service which used domain names “Zippo.com” and “Zippo.net” and “Zipponews.com.” Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997)

A federal circuit encountered some difficultly in distinguishing issues of fact, to be decided by a jury, from issues of law, to be decided by the court, following the United States Supreme Court Decisions in Markman and Hilton Davis cases, issuing five separate opinions in <>Lough v. Brunswick Corp., 86 F. 3d 1113 (Fed. Cir. 1996), rehearing denied, in banc suggestion declined, 103 F. 3d 1517 (Fed. Cir. 1997)

Actors George Wendt and John Ratzenberg, who played Norm and Cliff in the television show Cheers, brought suit against a Host International, Inc. and Paramount Pictures Corp. which owned the copyrights in the two Cheers characters. Host International created three dimensional robotic figures which were placed in airport bars. The robotic figures were originally modeled to look like the characters from Cheers. After Wendt and Ratzenberg complained, Host modified the robotic figures, claiming they no longer resembled the Cheers characters and changed their name from Norm and Cliff to Bob and Hank. Wendt and Ratzenberger brought suit for violations of their publicity rights and under trademark infringement law. The District Court found that there was no similarity and granted Summary Judgment for the defendants. The Ninth Circuit reversed, finding that material issues of fact remained as to the degree the robots appropriated the likeness of Wendt and Ratzenberger with respect to the plaintiffs’ claims that Host violated their statutory and common law rights of publicity and engaged in unfair competition. <>Wendt v. Host International & Paramount Pictures, 125 F. 3d 806 (9th Cir. 1997)

An employee of Computer Associates accepted employment from a competitor, taking copies of the computer source code for two versions of the ADAPTER operating system, in violation of his employment agreement. Computer Associates filed suit against the competitor alleging claims under copyright infringement law and trade secret misappropriation. The district court found a violation of copyright infringement law, while holding that the federal copyright act preempted the state law claim of trade secret misappropriation. The second circuit reversed on the preemption issue, while affirming the judgment finding a violation of copyright infringement law. On remand, the district court held that texas’ 2 year statute of limitations for of trade secret misappropriation applied, was constitutional and not subject to the “discovery” exception. On appeal the second circuit certified these questions to the Texas Supreme Court which also held that the 2 year statute of limitations applied, was constitutional and not subject to the “discovery” rule. Computer Associates International, Inc. v. Altai, Inc., 775 F. Supp. 544 (E.D.N.Y. 1991), reversed and remanded, 982 F. 2d 693 (2nd Cir. 1992), on remand, 832 F. Supp. 50 (E.D.N.Y. 1993), questions certified to the Texas Supreme Court by the Second Circuit, 22 F. 3d 32 (2nd Cir. 1994); Texas Supreme Court decision , 918 S.W. 2d 453 (1996)

Point and click contracts (executed electronically over the internet) to pay royalties under “shareware” contracts, to refrain from providing unsolicited email (spam) under a web site provider-subscriber contract and to license software under a “shrinkwrap” contract have all been held enforceable, under internet property law.<>CompuServe, Inc., v. Patterson, 89 F. 3d 1257 (6th Cir. 1996); Hotmail Corp., v. Van$ Money Pie, Inc., 47 U.S.P.Q. 2d 1020, 1998 WL 388389 (N.D. Cal. 1998); <>ProCD v. Zeidenberg, 86 F. 3d 1447 (7th Cir. 1996)

Where there is an equal choice between a broader and narrower meaning of a patent claim, and there is an enabling disclosure that indicates that the patent applicant is entitled to a claim having the narrower meaning, the Federal Circuit considers the notice function of the claim to best be served by adopting the narrower meaning. Arbek Manufacturing, Inc. v. Mozzam, 55 F. 3d 1567 (Fed. Cir. 1995); <>Athletic Alternatives, Inc. v. Prince Mfg., Inc., 73 F. 3d 1573 (Fed. Cir. 1996)

To infringe, the accused device must contain every limitation of the patent claim. <>Texas Instruments, Inc. v. Cypress Semiconductor Corp., 90 F. 3d 1558 (Fed. Cir. 1996)

Patent infringement actions descended from actions at law. As a result, the 7th Amendment requires a jury trial. The interpretation of patent claims, however, or terms of art, and the construction of a patent, including terms of art are exclusively issues for the court, not a jury. <>Markman v. Westview Instruments, Inc., et.el., 517 U.S. 370 (1996)

Decisions on Motions for Contempt for allegedly violating an injunction are reviewed on an abuse of discretion standard.<>Reliance Ins. Co. v. Mast Constr. Co., 84 F. 3d 372 (10th Cir. 1996)

In 1990 the Copyright Act, 17 U.S.C. 102(a)(5), was amended to specifically protect “pictorial, graphic, or sculptural works,” including technical drawings, architectural plans, diagrams, and models. Engineering drawings are also protected by the act. Guillot-Vogt Associates, Inc. v. Holly & Smith, 848 F.Supp. 682 (E.D. La. 1994); an “architectural work” for purposes of copyright protection is a design as embodied in a tangible medium of expression, including architectural plans or drawings, and includes overall form as well as arrangement and composition of spaces, elements, and design, but does not include individual standard features. CSM Investors, Inc. v. Everest Development Ltd., 840 F.Supp. 1304 (D.Minn. 1994); in order for a designer to be considered the owner of a copyright and thereby protected by the act, the work must be a work “made for hire” under a written agreement or by an employee. Bryce & Polazzola Architects, Inc. v. A.M.E. Group, 865 F.Supp. 401 (E.D.Mich. 1994)

The application of Trademark cancellation law to a fraudulently procured trademark registration is a discretionary matter for the District Court under the Lanham act. 15 U.S.C. § 1052, 1119, 1127. A trademark may not be registered if it consists of a name, portrait, or signature identifying a living person, without the written consent of that person. Other parties, however, may not challenge the registration of a trademark, under trademark infringement law, on the grounds that it includes the name of some other person without permission. Trademark cancellation law may be invoked only by the living person whose identity is included within the trademark. An injunction in favor of the owner of “Houlihan’s” service mark was affirmed and the counterclaim filed by the defendant, competitor, which was using the trade name “Mike Houlihan’s” was dismissed. Gilbert/Robinson, Inc. v. Carrie Beverage-Missouri, Inc., 989 F. 2d 985 (8th Cir. 1993)

The Noerr-Pennington Doctrine. The Noerr-Pennington Doctrine was developed to protect efforts to influence legislative or executive action by the government (by petitioning and/or filing lawsuits) from liability under the antitrust statutes. Litigation or other conduct petitioning the government cannot be the basis for claims of malicious prosecution or abuse of process or the basis for enforcing or establishing a monopoly under the antitrust laws, unless the litigation is sham litigation, i.e. litigation which is objectively baseless.<>Eastern Rail Road President’s Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); <>United Mine Workers v. Pennington, 381 U.S. 657 (1965); <>California Motor Transport v. Trucking Unlimited, 404 U.S. 508 (1972); Defino v. Civic Center Corp., 780 S.W. 2d 665 (Mo. App. 1989); Oregon Natural Resources Council v. Mohla, 944 F. 2d 531 (9th Cir. 1991); Franchise Realty Interstate Corp. (McDonald’s Affiliate) v. San Francisco Local Joint Executive Board of Culinary Workers, 542 F. 2d 1076 (9th Cir. 1976); <>Whelan v. Abell, 48 F. 3d 1247 (D.C. Cir. 1995); Havoco of America, LTD. v. Hollobow, 702 F. 2d 643 (7th Cir. 1983); <>Professional Real Estate v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993)

A copyrighted computer program is “copied” for purposes of copyright law when the computer program is transferred from a permanent storage device to a computer’s Random Access Memory (RAM). A computer service company which loaded copyrighted software into RAM and was then able to view system errors and diagnose problems with the computer, engaged in copying for copyright infringement purposes and in trade secret misappropriation. MAI Systems Corporation v. Peak Computer, Inc., 991 F. 2d 511 (9th Cir. 1993)

The White Pages of a local telephone utility did not constitute original material sufficiently creative or unique to be copyrighted. An area-wide telephone directory which used material from the local telephone company’s White Pages did not infringe any rights of the local telephone company because the White Pages were not copyrightable. <>Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 U.S. 340 (1991)

In patent disputes a company may be sued anywhere it does business. As a result, a large number of patent infringement cases are filed in the United States District Court for the Eastern District of Virginia, in Alexandria, which has a reputation for rapidly moving these cases to trial (known as the “rocket docket”). V.E. Holding Corp. v. Johnson Gas Appliance, 917 F. 2d 1574, (Fed. Cir. 1990).

A franchiser/licensor which licensed the name “Shoney’s” to a franchisee for operation of a restaurant could not license the same trade name “Shoney’s” in the same geographical area to a motel operator, as this additional licensing would violate the contract with the original franchisee/restaurant operator. While the franchisee/licensee could use the name “Shoney’s” only for a restaurant, within the restricted territory, and not a motel, all other parties, including the franchiser/licensor were also precluded from using the name “Shoney’s Inn” for a motel within the exclusive territory. No one could use the name “Shoney’s” in relation to a motel within the restricted territory. Shoney’s, Inc. v. Schoenbaum, 894 F. 2d 92 (4th Cir. 1989)

Unlike the registration of a patent, a trademark registration of itself does not create the underlying right to exclude, under trademark infringement law; nor is a trademark created by registration. The Lanham act and the Common Law protect unregistered trademarks. A Licensee was entitled to attorney’s fees for bad faith where the manufacturer, trademark holder granted an exclusive license for an area in which a previous exclusive license had been granted to another, then filed suit against the licensee. San Juan Products, Inc. v. San Juan Pools of Kansas, Inc., 849 F. 2d 468 (10th Cir. 1988)

Contempt proceedings to enforce injunctions against infringement are available only with respect to devices previously admitted or adjudged to infringe and other devices which are no more than colorably different from the patented device, which clearly are infringements of the patent. Contempt proceedings may not be used as a substitute for a subsequent infringement action against a device different from the infringing device. KSM Fastening Systems v. H.A. Jones Co., 776 F. 2d 1522 (Fed. Cir. 1985)

One of the benefits of the patent system is the “negative incentive” it creates to “design around” a competitor’s products, even when they are patented, thus brining a steady flow of innovations to the market place. State Indus., Inc. v. A.O. Smith Corp., 751 F. 2d 1226 (Fed. Cir. 1985)

Patent Law, Common Law Trademarks, Trademark Dilution Law, Trade Secrets Law, Unfair Competition Law, Forward Trademark Confusion, Reverse Trademark Confusion, Patent Infringement Law.

Law updates about Copyright infringement law, Trademark cancellation law, Copyright law, Trademark law, Internet property law, Domain name law, Intellectual Property Law, Trademark infringement law, The Lanham act and Trade Secret misappropriation. Internet Attorney.

These materials are in reverse chronological order. New material is added at the top. Older material is inserted in the correct chronological spot. Overruled, modified and/or obsolete material is deleted, revised, consolidated and/or moved, when appropriate. Citations preceded by <>are linked to the complete court opinion. (NOTE: Some linked court sites are not always available).

Six freelance writers brought claims under copyright infringement law against several print publishers including the New York Times, News Day and Time, as well as several electronic publishers. The plaintiffs alleged their copyrights were infringed when the print publishers licensed their publications (which incorporated individual articles in which the freelance writers owned copyrights) to the electronic publishers. The print publishers argued that because they owned the copyright in their respective compilations (the individual daily and weekly editions of their publications) they were “privileged” to license their compilations to the electronic publishers, who made them available to online subscribers. The District Court granted the defendants’ Motion for Summary Judgment. The Second Circuit reversed, holding that electronic and CD-ROM databases containing individual articles from multiple editions of periodicals did not constitute “revisions” of individual periodical issues within the meaning of the Copyright Act provision governing collective works, and that the print publishers were not entitled to relicense an article of the original authors, which had express licensing agreements with the print publishers prohibiting republication without consent. <>Tasini v. The New York Times Company, Inc., 206 F. 3d 161 (2nd Cir. 2000)

The Driver’s Privacy Protection Act, 18 U.S.C. § 2721 et seq., is constitutional as a proper exercise of Congress’ authority to regulate interstate commerce under the commerce clause and does not violate the principles of federalism contained in the 10th Amendment. The Driver’s Privacy Protection Act restricts the ability of the states to disclose a driver’s personal information without the driver’s consent. <>Reno v. Condon, ____ U.S. ______, 120 S. Ct. 666, (2000)

A verdict of $8,000,000 compensatory damages and $135,000,000 punitive damages was set aside and a new trial ordered by the trial court because of attorney misconduct, in a trademark infringement case. The court had sustained 778 objections by the defendant to plaintiff’s evidence, and the court itself interposed 67 additional objections. This created the appearance that the court and the “large” defendant were conspiring to conceal evidence offered by the “small” plaintiff. As a result a new trial was required. The court also found that the California state courts would not recognize the common law tort of unfair competition by reverse confusion where the parties were not in competition in the same market. Forward confusion occurs when the consumer might believe the junior user’s product is that of the senior user, i.e. the defendant “palms off” its product as that of the senior user (trademark holder). Reverse confusion occurs when the consumer believes the products of the senior user (small company-trademark holder) are actually the products of the junior user (large company-infringer). This usually occurs when the infringer is much larger and more well known than the trademark holder. <>Dreamwerks Production Group,Inc v. SKG Studio, dba DreamWorks SKG, 142 F.3d 1127 (9th Cir. 1998). Since plaintiff’s state common law claims fail, its claims for punitive damages must also fail because punitive damages are not recoverable under the Federal Trademark (Lanham) Act, 15 U.S.C. 1052, 1117 et seq. The court also found that plaintiff’s claims for statutory trademark infringement could not exceed $500,000 as a matter of law. An Appeal by Trovan to the 9th Circuit is pending. Trovan, Ltd. v. Pfizer, Inc. ___F.Supp.2d ___, 2000 WL 709149 (C.D. Cal. 5-24-2000)

An entertainment-industry information provider was entitled to an injunction against a video rental store chain where the provider was the senior user of the “MovieBuff” trademark. The video chain could not use the term “MovieBuff.com” on its web domain as a result of its earlier use of the trademark “The MovieBuff’s Movie Store.” Use of the “MovieBuff.com” domain name would create likelihood of confusion which is actionable under the Lanham act. <>Brookfield Communications, Inc. v. West Coast Entertainment Corporation, 174 F. 3d 1036 (9th Cir. 1999)

Federal circuit review of administrative decisions from the Patent and Trademark Office is under the more deferential “substantial evidence” standard of the Administrative Procedure Act instead of the “clearly erroneous” standard under Fed. R. Civ. P. 52(a)<>Dickinson v. Zurko, 527 U.S. 150 (1999)

Private businesses acting under clearly articulated government programs or providing quasi-governmental functions, are not liable for violating antitrust laws. Network Solutions, Inc. is a private company that registers internet domain names, under domain name law, under a contract with national science foundation, an independent agency of the United States Government that supports the development of the world wide web and facilitates its use. In this capacity, Network Solutions Inc. may not be found liable for violating internet property law. Domain names are not free speech protected by the First Amendment or by domain name law. Beverly v. Network Solutions, Inc., 49 U.S.P.Q. 2d 1567 (N.D. Cal. No. C-98-0337-VRW 1998); Thomas v. Network Solutions, Inc. and National Science Foundation, 2 F. Supp. 2d 22 (D.D.C. 1998); PGMedia v. Network Solutions, Inc. and National Science Foundation, 51 F. Supp. 2d 389 (S.D.N.Y. 1999)

The copying of anticopying computer software for the purpose of designing a program to defeat the anticopying software program did not violate the copyright of the producer of the anticopying software, under the Computer Software Copyright Act of 1980, 17 U.S.C. § 117, did not constitute contributory infringement and did not violate the Louisiana Software License Enforcement Act. Vault Corporation v. Quaid Software Limited, 847 F. 2d 255 (5th Cir. 1988);<>Ringgold v. Black Entertainment Television, Inc., 126 F. 3d 70, 150 A.L.R. Fed. 813 (2nd Cir. 1997); <>Alcatel USA, Inc. v. DGI Technologies, Inc. v. DGI Technologies, Inc., 166 F. 3d 772 (5th Cir. 1999)

35 U.S.C. § 102 (b) bars a patent when the subject matter of the invention was placed on sale in this country more than a year before the patent application was filed. The one-year period begins once the invention is “ready for patenting”. This new standard has resulted in a more strict application of the one-year on-sale bar rule.<>Pfaff v. Wells Electronics, Inc., U.S. , 119 S. Ct. 304, (1998); <>Abbott Laboratories v. Geneva Pharmaceuticals, Inc. 182 F. 3d 1315 (Fed. Cir. 1999); <>Brasseler U.S.A. L.L.P. v. Stryken Sales Corp., 182 F. 3d 888 (Fed. Cir. 1999); Stx Inc. v. Brine, Inc., 37 F. Supp. 2d 740 (D. Md. 1999)

Patent Law, Common Law Trademarks, Trademark Dilution Law, Trade Secrets Law, Unfair Competition Law, Forward Trademark Confusion, Reverse Trademark Confusion, Patent Infringement Law.

The Tenth Circuit recently overturned privacy regulations of the Federal Communications Commission which limited the ability of telephone companies to use information about individuals’ calling patterns for marketing purposes. <>U.S. West, Inc., v. Federal Communications Commission, 182 F. 3d 1224 (10th Cir. 1999)

The Ninth Circuit held, in deciding a claim of trademark dilution, that the trademarks “Avery” and “Dennison”, while well-known trademarks, did not rise to the level of “famous” trademarks deserving increased protection under the Federal Trademark Dilution Act, noting that they are also surnames and similar marks are used by third parties. Only truly prominent, not merely distinctive, trademarks deserve dilution protection. Summary Judgment in favor of Avery Dennison reversed. The defendant had registered “Avery.net” and “Dennsion.net” along with thousand of other domain names, under domain name law, incorporating common last names for the purpose of selling them to individuals with those last names. <>Avery Dennison v. Sumpton, 189 F. 3d 868 (9th Cir. 1999)

West Publishing company and Thomson corporation, the third and first largest publishers of law books and legal research materials proposed a merger. The United States and 7 states file an antitrust action to bar the merger. West also owns Westlaw an online legal research service. West also claimed copyright protection for its “Star Pagination” system, which provides for the insertion of numeric symbols in the text of decisions to indicate the equivalent West Reporter page break and page number. Star Pagination permits an individual to rely on a printed decision not published by West, while retaining the ability to cite to West’s National Reporter System. After initially disapproving a proposed consent decree to permit the merger, the district court entered a final decree approving the merger, specifically providing that it did not grant confirmation of West’s claims of copyright protection for its Star Pagination System. Subsequently, Matthew Bender & Co. and Hyperlaw, Inc. filed declaratory judgment actions seeking a ruling that sales of CD-ROM disks containing compellations of judicial opinions, including Star Paginations, did not infringe West’s copyrights. The Second Circuit confirmed a New York district court decision holding that West’s Star Pagination System was not entitled to copyright protection because it merely compiled data without contributing sufficient original, creative, material to warrant copyright protection. United States v. Thomson Corp., 949 F. Supp. 907 (D.D.C. 1996); United States v. Thomson Corp., 1997 WL 226233 (D.D.C. 1997);<>Matthew Bender & Co., Inc. and Hyperlaw, Inc. v. West Publishing Co., 158 F. 3d 674 (2nd Cir. 1998);<>Matthew Bender & Co., Inc. and Hyperlaw, Inc. v. West Publishing Co., 158 F. 3d 693 (2nd Cir. 1998)

Patent Law, Common Law Trademarks, Trademark Dilution Law, Trade Secrets Law, Unfair Competition Law, Forward Trademark Confusion, Reverse Trademark Confusion, Patent Infringement Law.

The District Court abused its discretion in failing to approve a consent antitrust decree between the United States and Microsoft under the Tunney Act, 15 U.S.C. § 16 (e). Microsoft had been charged with maintaining a monopoly by requiring original equipment manufacturers to pay Microsoft a royalty for each computer sold, containing a particular microprocessor, whether or not the original equipment manufacturer had included a Microsoft Operating System with that computer. Subsequent antitrust claims regarding Microsoft’s browser are still pending. United States v. Microsoft Corporation, 159 F.R.D. 318 (D.D.C. 1995), reversed, <>56 F. 3d 1448 (D.C. Cir. 1995); United States v. Microsoft Corporation, 980 F. Supp. 537 (D.D.C. 1997), reversed, <>147 F. 3d 935 (D.C. Cir. 1998)

A “squatter” may not secure domain names using well established trademarks and tradenames held by others, then deny use of the domain name to the owner of the trademark. Such use of the domain name infringes the trademark rights of the trademark holder and dilutes the value of the trademark. Panavision Intern, L.P. v. Toeppen, 945 F. Supp. 1296 (C.D. Cal. 1996), affirmed,<>141 F. 3d 1316 (9th Cir. 1998); Jews for Jesus v. Brodsky, 993 F. Supp. 282 (D.N.J. 1998); Cairns v. Franklin Mint Co., 24 F. Supp. 2d 1013 (C.D. Cal. 1998)

The concept of the customers’ goodwill in the context of trademark law is the goodwill for the trademark, not the goodwill for a specific restaurant. As a result, a terminated “Roy Rogers” franchisee could not continue to use the trademark, after termination, notwithstanding its contention that the owners of the trademark had mismanaged the operation, resulting in a significant reduction in the number of operating franchisees and damage to the “goodwill” and trademark. The District Court found that the resulting harm to the franchisee, by granting the injunction, would outweigh the harm to the trademark owners if the injunction was not granted. The Court of Appeals reversed, finding the District abused its discretion. A preliminary injunction was entered by the Court of Appeals. <>Pappan Enterprises, Inc. v. Hardee’s Food Systems, Inc. et el., 143 F. 3d 800 (3rd Cir. 1998)

A plaintiff’s failure to designate its trade secret with specificity upon a Court Order to do so, precluded it from later relying on the trade secret to support its misappropriation claim. <>Imax Corp. v. Cinema Technologies, Inc., 152 F. 3d 1161 (9th Cir. 1998)

The Doctrine of Equivalants, established in<>Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605 (1950) is not inconsistent with the Patent Act, but must be applied to individual elements of the patent claim, not to the invention as a whole. Prosecution History Estoppel does not apply when patent claims have been amended during the application process, regardless of the reasons for the change. The patentee’s addition of lower pH limit during the application process did not necessarily preclude application of the Doctrine of Equivlants as to that element. The Doctrine of Equivlants does not require proof of intent and is not limited to equivalents disclosed within the patent itself . The case was remanded for additional findings of fact, first to the Federal Circuit and then to the District Court.<>Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17 (1997), on remand, remanded to the District Court, 114 F. 3d 1161 (Fed. Cir. 1997)

A party defamed by a message on a web site, placed there by a third party, could not recover from the internet service provider, America Online, under 47 U.S.C. § 230 which provides immunity to Internet providers and users, under internet property law, for defamatory language placed on the internet by third parties. <> Zeran v. America Online, 129 F. 3d 327 (4th Cir. 1997)

The manufacturer of “Zippo” cigarette lighters could not recover under the Lanham act or under state law against a computer news service which used domain names “Zippo.com” and “Zippo.net” and “Zipponews.com.” Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997)

A federal circuit encountered some difficultly in distinguishing issues of fact, to be decided by a jury, from issues of law, to be decided by the court, following the United States Supreme Court Decisions in Markman and Hilton Davis cases, issuing five separate opinions in <>Lough v. Brunswick Corp., 86 F. 3d 1113 (Fed. Cir. 1996), rehearing denied, in banc suggestion declined, 103 F. 3d 1517 (Fed. Cir. 1997)

Actors George Wendt and John Ratzenberg, who played Norm and Cliff in the television show Cheers, brought suit against a Host International, Inc. and Paramount Pictures Corp. which owned the copyrights in the two Cheers characters. Host International created three dimensional robotic figures which were placed in airport bars. The robotic figures were originally modeled to look like the characters from Cheers. After Wendt and Ratzenberg complained, Host modified the robotic figures, claiming they no longer resembled the Cheers characters and changed their name from Norm and Cliff to Bob and Hank. Wendt and Ratzenberger brought suit for violations of their publicity rights and under trademark infringement law. The District Court found that there was no similarity and granted Summary Judgment for the defendants. The Ninth Circuit reversed, finding that material issues of fact remained as to the degree the robots appropriated the likeness of Wendt and Ratzenberger with respect to the plaintiffs’ claims that Host violated their statutory and common law rights of publicity and engaged in unfair competition. <>Wendt v. Host International & Paramount Pictures, 125 F. 3d 806 (9th Cir. 1997)

An employee of Computer Associates accepted employment from a competitor, taking copies of the computer source code for two versions of the ADAPTER operating system, in violation of his employment agreement. Computer Associates filed suit against the competitor alleging claims under copyright infringement law and trade secret misappropriation. The district court found a violation of copyright infringement law, while holding that the federal copyright act preempted the state law claim of trade secret misappropriation. The second circuit reversed on the preemption issue, while affirming the judgment finding a violation of copyright infringement law. On remand, the district court held that texas’ 2 year statute of limitations for of trade secret misappropriation applied, was constitutional and not subject to the “discovery” exception. On appeal the second circuit certified these questions to the Texas Supreme Court which also held that the 2 year statute of limitations applied, was constitutional and not subject to the “discovery” rule. Computer Associates International, Inc. v. Altai, Inc., 775 F. Supp. 544 (E.D.N.Y. 1991), reversed and remanded, 982 F. 2d 693 (2nd Cir. 1992), on remand, 832 F. Supp. 50 (E.D.N.Y. 1993), questions certified to the Texas Supreme Court by the Second Circuit, 22 F. 3d 32 (2nd Cir. 1994); Texas Supreme Court decision , 918 S.W. 2d 453 (1996)

Point and click contracts (executed electronically over the internet) to pay royalties under “shareware” contracts, to refrain from providing unsolicited email (spam) under a web site provider-subscriber contract and to license software under a “shrinkwrap” contract have all been held enforceable, under internet property law.<>CompuServe, Inc., v. Patterson, 89 F. 3d 1257 (6th Cir. 1996); Hotmail Corp., v. Van$ Money Pie, Inc., 47 U.S.P.Q. 2d 1020, 1998 WL 388389 (N.D. Cal. 1998); <>ProCD v. Zeidenberg, 86 F. 3d 1447 (7th Cir. 1996)

Where there is an equal choice between a broader and narrower meaning of a patent claim, and there is an enabling disclosure that indicates that the patent applicant is entitled to a claim having the narrower meaning, the Federal Circuit considers the notice function of the claim to best be served by adopting the narrower meaning. Arbek Manufacturing, Inc. v. Mozzam, 55 F. 3d 1567 (Fed. Cir. 1995); <>Athletic Alternatives, Inc. v. Prince Mfg., Inc., 73 F. 3d 1573 (Fed. Cir. 1996)

To infringe, the accused device must contain every limitation of the patent claim. <>Texas Instruments, Inc. v. Cypress Semiconductor Corp., 90 F. 3d 1558 (Fed. Cir. 1996)

Patent infringement actions descended from actions at law. As a result, the 7th Amendment requires a jury trial. The interpretation of patent claims, however, or terms of art, and the construction of a patent, including terms of art are exclusively issues for the court, not a jury. <>Markman v. Westview Instruments, Inc., et.el., 517 U.S. 370 (1996)

Decisions on Motions for Contempt for allegedly violating an injunction are reviewed on an abuse of discretion standard.<>Reliance Ins. Co. v. Mast Constr. Co., 84 F. 3d 372 (10th Cir. 1996)

In 1990 the Copyright Act, 17 U.S.C. 102(a)(5), was amended to specifically protect “pictorial, graphic, or sculptural works,” including technical drawings, architectural plans, diagrams, and models. Engineering drawings are also protected by the act. Guillot-Vogt Associates, Inc. v. Holly & Smith, 848 F.Supp. 682 (E.D. La. 1994); an “architectural work” for purposes of copyright protection is a design as embodied in a tangible medium of expression, including architectural plans or drawings, and includes overall form as well as arrangement and composition of spaces, elements, and design, but does not include individual standard features. CSM Investors, Inc. v. Everest Development Ltd., 840 F.Supp. 1304 (D.Minn. 1994); in order for a designer to be considered the owner of a copyright and thereby protected by the act, the work must be a work “made for hire” under a written agreement or by an employee. Bryce & Polazzola Architects, Inc. v. A.M.E. Group, 865 F.Supp. 401 (E.D.Mich. 1994)

The application of Trademark cancellation law to a fraudulently procured trademark registration is a discretionary matter for the District Court under the Lanham act. 15 U.S.C. § 1052, 1119, 1127. A trademark may not be registered if it consists of a name, portrait, or signature identifying a living person, without the written consent of that person. Other parties, however, may not challenge the registration of a trademark, under trademark infringement law, on the grounds that it includes the name of some other person without permission. Trademark cancellation law may be invoked only by the living person whose identity is included within the trademark. An injunction in favor of the owner of “Houlihan’s” service mark was affirmed and the counterclaim filed by the defendant, competitor, which was using the trade name “Mike Houlihan’s” was dismissed. Gilbert/Robinson, Inc. v. Carrie Beverage-Missouri, Inc., 989 F. 2d 985 (8th Cir. 1993)

The Noerr-Pennington Doctrine. The Noerr-Pennington Doctrine was developed to protect efforts to influence legislative or executive action by the government (by petitioning and/or filing lawsuits) from liability under the antitrust statutes. Litigation or other conduct petitioning the government cannot be the basis for claims of malicious prosecution or abuse of process or the basis for enforcing or establishing a monopoly under the antitrust laws, unless the litigation is sham litigation, i.e. litigation which is objectively baseless.<>Eastern Rail Road President’s Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); <>United Mine Workers v. Pennington, 381 U.S. 657 (1965); <>California Motor Transport v. Trucking Unlimited, 404 U.S. 508 (1972); Defino v. Civic Center Corp., 780 S.W. 2d 665 (Mo. App. 1989); Oregon Natural Resources Council v. Mohla, 944 F. 2d 531 (9th Cir. 1991); Franchise Realty Interstate Corp. (McDonald’s Affiliate) v. San Francisco Local Joint Executive Board of Culinary Workers, 542 F. 2d 1076 (9th Cir. 1976); <>Whelan v. Abell, 48 F. 3d 1247 (D.C. Cir. 1995); Havoco of America, LTD. v. Hollobow, 702 F. 2d 643 (7th Cir. 1983); <>Professional Real Estate v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993)

A copyrighted computer program is “copied” for purposes of copyright law when the computer program is transferred from a permanent storage device to a computer’s Random Access Memory (RAM). A computer service company which loaded copyrighted software into RAM and was then able to view system errors and diagnose problems with the computer, engaged in copying for copyright infringement purposes and in trade secret misappropriation. MAI Systems Corporation v. Peak Computer, Inc., 991 F. 2d 511 (9th Cir. 1993)

The White Pages of a local telephone utility did not constitute original material sufficiently creative or unique to be copyrighted. An area-wide telephone directory which used material from the local telephone company’s White Pages did not infringe any rights of the local telephone company because the White Pages were not copyrightable. <>Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 U.S. 340 (1991)

In patent disputes a company may be sued anywhere it does business. As a result, a large number of patent infringement cases are filed in the United States District Court for the Eastern District of Virginia, in Alexandria, which has a reputation for rapidly moving these cases to trial (known as the “rocket docket”). V.E. Holding Corp. v. Johnson Gas Appliance, 917 F. 2d 1574, (Fed. Cir. 1990).

A franchiser/licensor which licensed the name “Shoney’s” to a franchisee for operation of a restaurant could not license the same trade name “Shoney’s” in the same geographical area to a motel operator, as this additional licensing would violate the contract with the original franchisee/restaurant operator. While the franchisee/licensee could use the name “Shoney’s” only for a restaurant, within the restricted territory, and not a motel, all other parties, including the franchiser/licensor were also precluded from using the name “Shoney’s Inn” for a motel within the exclusive territory. No one could use the name “Shoney’s” in relation to a motel within the restricted territory. Shoney’s, Inc. v. Schoenbaum, 894 F. 2d 92 (4th Cir. 1989)

Unlike the registration of a patent, a trademark registration of itself does not create the underlying right to exclude, under trademark infringement law; nor is a trademark created by registration. The Lanham act and the Common Law protect unregistered trademarks. A Licensee was entitled to attorney’s fees for bad faith where the manufacturer, trademark holder granted an exclusive license for an area in which a previous exclusive license had been granted to another, then filed suit against the licensee. San Juan Products, Inc. v. San Juan Pools of Kansas, Inc., 849 F. 2d 468 (10th Cir. 1988)

Contempt proceedings to enforce injunctions against infringement are available only with respect to devices previously admitted or adjudged to infringe and other devices which are no more than colorably different from the patented device, which clearly are infringements of the patent. Contempt proceedings may not be used as a substitute for a subsequent infringement action against a device different from the infringing device. KSM Fastening Systems v. H.A. Jones Co., 776 F. 2d 1522 (Fed. Cir. 1985)

One of the benefits of the patent system is the “negative incentive” it creates to “design around” a competitor’s products, even when they are patented, thus brining a steady flow of innovations to the market place. State Indus., Inc. v. A.O. Smith Corp., 751 F. 2d 1226 (Fed. Cir. 1985)

Patent Law, Common Law Trademarks, Trademark Dilution Law, Trade Secrets Law, Unfair Competition Law, Forward Trademark Confusion, Reverse Trademark Confusion, Patent Infringement Law.

Law updates about franchise agreements, franchise territory, franchise terminations, franchise encroachment, license agreements, franchise internet sales and other franchising issues. Franchise Attorney.

These materials are in reverse chronological order. New material is added at the top. Older material is inserted in the correct chronological spot. Overruled, modified and/or obsolete material is deleted, revised, consolidated and/or moved, when appropriate. Citations preceded by <>are linked to the complete court opinion. (NOTE: Some linked court sites are not always available). Franchisee Lawyer.

The FAA did not preempt a choice of law clause in franchise contracts. State, not Federal, law applied to the franchisees claims that the franchiser waived its right to compel arbitration. Waiver did not occur, however, when the franchiser used its real estate leasing company to file eviction suits against the franchisees, and the arbitration clauses were not void as illusory, or unconscionable, or against public policy, and were supported by consideration.<>Lela Bishop, et al. v. We Care Hair Development Corporation, et al. 316 Ill. App.3d 1182, 250 Ill.Dec. 394, 738 N.E.2d 610 (Ill. App. 9-29-2000)

A Franchisor was found liable for punitive damages for defrauding the landlord at one of its franchise sites. Attorneys fees were awarded the landlord under a clause in the lease, which entitled the prevailing party to recover its attorneys fees. The Franchisor appealed, contending the clause did not apply to claims for punitive damages because they were not relative to the claims under the lease. The Court of Appeals affirmed the award of attorneys fees and also awarded the landlord additional attorneys fees for defending the appeal, under the same lease clause. <>Jannotta v. Subway Sandwich Shops, Inc, et al., (Case No. 99-1975) (2000 WL 1222052) 225 F.3d 815 (7th Cir. 8-29-2000)

A pizza franchisor persuaded an existing California franchisee to open 4 new franchise pizza shops in North Dakota, representing, through its real estate manager, that existing nearby pizza shops licensed by the franchisor for operation in K-mart stores would not compete with the new franchise shops in free standing buildings. In the meantime the authority of the franchisor to sell franchises in North Dakota, under the North Dakota Franchise Act, had expired and the new franchises were thereby sold in violation of the act. Three of the new stores (the ones near existing pizza shops in K-mart stores) failed; the franchisor then terminated the 4 new agreements and sued the California franchisee, operating the franchises in North Dakota, in Michigan, the home state of the franchisor, pursuant to the forum selection clauses in the North Dakota franchise contracts. After a bench trial, the court granted the franchisee rescission and restitution for the violations of the North Dakota Franchise Act, after previously granting summary judgment to the franchisor on the franchisee’s fraud claims based on the representations that the K-mart pizza shops would not compete with the new free standing stores. Both sides appealed. The rescission and restitution rulings in favor of the franchisee were affirmed. The fraud claim summary judgment for the franchisor was reversed and remanded for a new trial. The Court of Appeals found that these statements could be found to be representations of economic fact and market conditions, and not mere opinion, by the trier of fact. <>Little Caesar Enterprises, Inc. v Oppco, LLC, 2000 WL 967907, ___ F.3d ___ (6th Cir. 7-14-2000)

The Western District of Missouri recently agreed with the dissent in<>Barker v. Golf U.S.A., Inc., 154 F. 3d 788 (8th Cir. 1998) and refused to dismiss a case based upon a forum selection clause in a franchise agreement. The case raised claims under the Missouri franchise act. The Court applied Missouri state law, holding that the Missouri Supreme Court would most likely apply the ruling of High Life Sales Co. v. Brown-Foreman Corp., 823 S.W. 2d 493 (Mo. banc 1992) to invalidate the forum selection agreement. Tri-state Foundation Repair & Waterproofing, Inc. v. Permacrete Systems, LTD., (No. 99-1132-CV-W-6) (2000 WL 245824) (W.D.Mo. 3-1-2000)

A Connecticut franchisee brought an action against the franchiser in Connecticut alleging breach of contract, unfair trade practices, violation of the Connecticut franchise act and the Connecticut Unfair Trade Practices Act. The franchise agreement contained a forum selection clause requiring all litigation in Pennsylvania, the home state of the franchiser. The franchiser moved to dismiss on the basis of the forum selection clause. The Connecticut Superior Court dismissed all claims except the Connecticut franchise law claims, finding that the anti-waiver section of the franchise law precluded enforcement of the forum selection clause, for those claims. Pepe v. GNC franchising, Inc., _____ A. 2d ______, 46 Conn. Supp. 296, 2000 WL 528383 (Conn. Super No. CV990424776S, 2-15-2000)

A franchiser could enforce its franchise contracts against its franchisees even though the contracts were executed in violation of New York franchise law, (General Business law, sections 680, 683) because the franchiser failed to register with the state before selling the franchises and failed to provide the franchisees with the required Uniform Franchise Offering Circulars. The franchisees had ceased performing the contracts, violated the covenants not to compete and signed similar contracts with a competing franchiser. The court rejected the reasoning of a New York federal court in a similar case. See King Computer v Beeper Plus (S.D.N.Y., 92 Civ 5494, unreported, Lexis 2707, 1993); <>TKO Fleet Enterprises, Inc v Elite Limousine Plus, Inc et al., (Item No. 97) 708 N.Y.S.2d 593 ,2000 WL 693973, (N.Y.Sup. 5-8-2000)

California Public Policy reflected in its franchise law precluded transfer of a California franchise dispute to the home state of the franchiser under a Forum Selection Clause in the Franchise Agreement. <>Jones v. GNC Franchising Inc., 211 F.3d 495 (9th Cir. 2000)

The Illinois Wine and Spirits Industry Fair Dealing Act of 1999, 815 ILCS 725/1 et. seq. makes it unlawful for a supplier of alcoholic beverages to cancel or substantionally alter any distribution arrangement, then existing, without good cause. A number of liquor suppliers decided to terminate existing distributorships before the Act became effective, to permit them to select new distributors without risking violation of the Act. The Illinois Liquor Control Commission issued orders directing the suppliers to resume or continue dealings with the distributors (once the Act became effective) under its authority to issue ex-parte interim orders to that effect. The suppliers brought suit in the federal court seeking an injunction against the liquor commission and the distributors who had been terminated, arguing that the Fair Dealing Act of 1999 was unconstitutional because it arguably violates the contract and commerce clauses of the constitution. The District Court issued a preliminary injunction against the commission barring enforcement of the Act until its constitutionality could be determined. The distributors, but not the commission, appealed. The Seventh Circuit dismissed the appeals, finding that only the liquor commission had standing to appeal the injunction against it. <>Kendall-Jackson Winery, LTD. v. Leonard L. Branson, Chairman of the Illinois Liquor Control Commission, et el.,(Case No. 00-1062) 212 F.3d 995 (7th Cir. 5-12-2000)

An African-American franchisee who was denied the opportunity to purchase additional franchises from the chain’s largest franchisee, who wished to sell, established a submissible claim for violation of his civil rights under 42 U.S.C. § 1981 (b), avoiding summary judgment. Section 1981 protects “the right to make and enforce contracts without regard to race” including the making, performance, modification and termination without cause, or with cause, of all contracts; and the enjoyment of all benefits, privileges, terms and conditions of the contractual relationship. Credo v. Zema Systems Corp., 944 F. Supp. 677 (N.D. Ill. 1996); Randle v. LaSalle Telecommunications, Inc., 876 F. 2d 563 (7th Cir. 1989); Friedel v. City of Madison, 832 F. 2d 965 (7th Cir. 1987); Yarbrough v. Tower Oldsmobile, Inc., 789 F. 2d 508 (7th Cir. 1986) Inc.;Home Repair , Inc. v. Paul W. Davis Systems,(unpublished), 2000 WL 126905 (No. 98 C 4074) (N.D.Ill., 2-1-2000)

A franchiser which provides nurses to healthcare facilities on a temporary basis entered into a franchise contract providing the franchisee with an exclusive territory. Florida law applied. The agreement provided that neither the franchiser, nor its parent or affiliated companies, would compete. Adia then acquired the franchiser, as a subsidiary, and also acquired another subsidiary which directly competed with the franchisee. A verdict of $2488,000 for the franchisee was set aside by the district court, which found that Adia neither induced nor otherwise caused an interference with the franchisee’s contract rights. Restatement (Second) of Torts, 766, and 766 comment h; 922 F.Supp. 558 (M.D.Fla. 1997). The 11th Circuit certified this unresolved question of Florida state law to the Florida Supreme Court; <>120 F.3d 1229 (11th Cir. 1997). The Florida Supreme court found that a claim for tortious interference with contract rights was established because Adia acquired the company that competed with the franchisee, with knowledge of franchise contract terms prohibiting the franchiser or its affiliates from competing; <>723 So.2d 182 (Fla.1998). The 11th Circuit then reversed the judgment for Adia and remanded to the district court to resolve its prior determination that the franchisees had used the wrong method of calculating damages by using a contract, instead of tort, theory. <>Gossard et al. v. Adia Services, Inc., 173 F.3d 825 (11th Cir. 1999)

A distributor of industrial automation equipment brought an action against the manufacturer for wrongful termination, in violation of the Illinois Franchise Disclosure Act, 815 ILCS 705/1 et seq. The claim was barred by the act’s one year statute of limitations, 815 ILCS 705/27. The one year began to run no later than the distributor’s consultation with his first attorney, who was apparently unaware of the act and did not believe the distributor had grounds to contest the termination. The action was filed immediately after the distributor contacted another attorney, but more one year after the written notice of termination. Brenkman v Belmont Marketing, Inc., 87 Ill.App.3d 1060, 43 Ill.Dec. 500, 410 N.E.2d 500 (Ill.App. 1980) distinguished; <>Pyramid Controls, Inc. v. Siemens Industrial Automation, Inc., (Case No. 98-3310) 172 F.3d 516 (7th Cir. 1999)

The contract between a michigan automobile dealership and an online service, which referred potential car buyers to the dealership, was not a franchise contract covered by the the Michigan Franchise Investment law, M.C.L. 445.1502(3). While the dealership paid a franchise fee, it did not offer goods or services under a marketing plan implemented by the online company, and it did not offer goods or services substantially associated with the online company’s service or trade marks. <>Jerome-Duncan,Inc. v. Auto-By-Tel., LLC, et al., 176 F.3d 904 (6th Cir. 1999)

Franchisor Franchisee Relations, State Franchise Law, State Franchise Acts, Franchise Royalty Law, Franchise Advertising Law, Franchise Advertising Agreements, Franchise Arbitration Agreements, No Compete Clauses, Franchise Restrictive Covenants, Restrictive Covenant Law.

A Rhode Island franchisee which filed suit against the franchiser in Rhode Island under Rhode Island franchise law, was required to arbitrate its claims under the Act in Chicago, pursuant to an arbitration clause in the franchise agreement. The Court held that the Federal Arbitration Act, 9 U.S.C. § 1 et seq., preempted any contrary provisions of the Rhode Island franchise Act. <>KKW Enterprises, Inc. v. Gloria Jean’s Gourmet Coffees Franchising Corp., 184 F. 3d 42 (1999).

A California franchisee was not required to arbitrate outside the state pursuant to choice of forum and law clauses and an arbitration clause in the franchise agreement, because of conflicts between the franchise agreement and the Uniform Franchise Offering circular, about whether the California Franchise Investment Law applied. <>Laxmi v. Golf U.S.A., 193 F. 3d 1095 (9th Cir. 1999).

The exclusive distributor of slot machines brought suit against the manufacturer pursuant to the New Jersey Franchise Practices Act, alleging that the manufacturer unlawfully terminated its franchise. The distributor/franchisee was granted a preliminary injunction against termination without cause on the grounds that the distributor was likely to prevail on the merits of the case and its claim that it was a franchisee under the Act. Atlantic City Coin & Slot Service Co. & MacSeelig v. IGT, 14 F.Supp.2d 644 (D.N.J. 1998); another case held that individual shareholders of a corporate franchisee were not entitled to protection under the New Jersey Franchise Act and that claims of the franchisees that the franchiser failed to meet its contractual obligation to provide training, guidance and support failed to state a claim under the New Jersey Act, N.J. Stat. § 56:10-1 et. seq., or that the franchiser had “constructively terminated” the agreement. Learning Express, Inc. v. Ray-Matt Enterprises, Inc., 74 F Supp. 2d 79 (D.Mass. 1999)

Franchisor Franchisee Relations, State Franchise Law, State Franchise Acts, Franchise Royalty Law, Franchise Advertising Law, Franchise Advertising Agreements, Franchise Arbitration Agreements, No Compete Clauses, Franchise Restrictive Covenants, Restrictive Covenant Law.

The arbitration clauses in franchise contracts were enforceable where the franchisees argued that the arrangement was unconscionable as permitting the franchisor to litigate its claims, while requiring the franchisees to arbitrate. The franchisees also argued that the arrangement in the lease, sublease cross-default clause, in combination with the Arbitration Clauses in the Franchise Agreements were void as against public policy. The Court disagreed. <>We Care Hair Development Corp. v. Eric Engen, et al., 180 F. 3d 838 (7th Cir. 1999)

A vendor of Point of Sales Systems to fast food (Subway) franchisees stated a cause of action against the franchiser, Doctor’s Associates, Inc., for an illegal tying arrangement, in violation of the Antitrust laws for the common law tort of tortious interference with a business expectancy and for violation of the Connecticut Unfair Trade Practices Act. Motion to Dismiss, for the most part, denied. Subsolutions, Inc. v. Doctor’s Associates, Inc., 62 F. Supp. 2d 616 (D. Conn. 1999)

An argentine citizen, who had been unsuccessful in his attempt to obtain a dry cleaning franchise, sued the franchiser for the return of the deposit. The District Court granted summary judgment for the plaintiff. The franchiser appealed. The judgment was reversed because the Federal Trade Commission (FTC) franchise rules do not apply extraterritorially. The $50,000.00 deposit had been paid for the possibility of opening dry cleaning franchises in Argentina. The prospective franchisee had been unable to raise the required capital during the 60 days provided, following which the franchiser retained the non-refundable deposit. The franchisee claimed violations of the Florida Deceptive and Unfair Trade Practices Act, Fla. Stat. §§ 501.201 to 501.211 and violations of the Federal Trade Commission Franchising Rules, 16 CFR § 436.1. The franchiser successfully defended on the grounds that the Florida Statute and the FTC Rules do not apply to a transaction which took place in Argentina. <>Nieman v. Dryclean U.S.A. Franchise Co., Inc., 178 F. 3d 1126 (11th Cir. 1999)

Shoneys’ franchise (license) contracts impose an obligation on the franchisee to maintain Shoneys’ previous high standards for food quality, operations, cleanliness and service, but do not impose the same obligation on the franchisor for its company owned stores and do not require the franchisor to enforce the same standards on the other franchisees in the system. Shoneys previously determined that it was in a mature market, decided to expand very slowly while reducing operations, and paid its $300,000,000 in capital and an additional $379,000,000 in borrowed funds to its shareholders as dividends. When sales subsequently declined nationwide for both franchise and company owned stores, Jim Morris’ six Kentucky and llinois franchise stores also became unprofitable. He closed all six stores but refused to sign Shoney’s termination agreements, which include releases of all claims against Shoney’s. Shoney’s sued for future royalties under the six 20-year franchise agreements. The Court held that the future royalties clauses were not unconscionable or unenforceable and that Shoney’s did not owe its franchisees a contractual duty to maintain the System’s previous high standards for food quality, operations, service and cleanliness. Summary Judgment was entered for the franchisor on all issues, while applying Tennessee law under a clause in the franchise contracts. Shoney’s, Inc. v. Jim Morris, 100 F.Supp.2d 769 (D.C.M.D. Tenn. 2-9-1999)

A distributor qualified as a franchisee under the Illinois Franchise Disclosure Act, 815 ILCS § 705/1 et seq. by paying an indirect franchise fee of more than $500.00 over a period of time, where its business was substantially associated with the franchiser’s trademark and the distributorship agreement gave the distributor the right to conduct its business under a marketing plan prescribed or suggested in substantial part by the manufacturer/franchiser. The Illinois Franchise Disclosure Act precludes termination without cause, by the franchiser. A choice of law clause in the distributorship/franchise contract is void to the extent that it attempts to preclude application of the Illinois Franchise Disclosure Act to a franchise operated in Illinois. <>To-Am Equipment Co. v. Mitsubishi Caterpillar Forklift America Inc.,(Case No. 97-1395) 152 F. 3d 658 (7th Cir. 1998)

A Missouri franchisee was required to arbitrate in Oklahoma under Oklahoma law notwithstanding his contention that the choice of law and choice of forum clauses in the franchise agreement were void under Missouri public policy, as evidenced by the Missouri Franchise Act. <>Barker v. Golf U.S.A., Inc., 154 F. 3d 788 (8th Cir. 1998).

Suppliers, manufacturers and franchisers may set price ceilings for the resale of their products by their dealers, distributors and franchisees without risking a “per se” ruling that they have violated the Antitrust Laws. The “per se” violation rule has been replaced with the “Rule of Reason” Standard, providing the trial and federal circuit appellate courts with far more discretion in determining if the Antitrust Laws have been violated by price ceilings. <>State Oil Co. v. Kahn, 522 U.S. 3 (1997); <>Addamax Corp. v. Open Software Foundation, Inc., 152 F. 3d 48 (1st Cir. 1998)

New York held that a franchise agreement created not only a franchise but also an employer-employee relationship between the franchiser and the franchisee as a result of the control the franchiser exercised over the franchisee, under the terms of the agreement. Claim of Glenroy M. Francis, 668 N.Y.S. 2d 55 (N.Y. 1998).

Equitable principles require that an eviction action filed against a franchisee, sublessee be stayed where the franchisor, affiliated with the eviction plaintiff, lessee, had obtained a Federal Injunction barring the franchisee, sublessee from raising otherwise available defenses to the eviction action. <>Subway Restaurants, Inc. et al. v. Riggs, 297 Ill. App. 3d 284, 696 N.E. 2d 733, 231 Ill. Dec. 437 (1998)

Choice of forum and choice of law clauses in New Jersey franchise agreements, requiring New Jersey franchisees to litigate claims under the New Jersey Franchise Act outside the state of New Jersey ,are void and unenforceable as against public policy. Instructional Systems, Inc. v. Computer Curriculum Corp., 614 A. 2d 124 (N.J. 1992); <>Kubis & Perszyk Associates, Inc. v. Sun Microsystems, Inc., 680 A. 2d 618 (N.J. 1996); another case held that a New Jersey franchisee was required to arbitrate its claims under the New Jersey Franchise Act in Connecticut. <>Doctor’s Associates, Inc. v. Hamilton, 150 F. 3d 157 (2nd Cir. 1998)

Franchise and distributor agreements have sometimes been held to contain implied covenants fair dealing, which preclude the franchiser/supplier from placing a second franchise or distributorship near an existing one. Generally, an implied covenant of fair dealing, under good faith law, may not defeat a specific, express, written term. The cases finding, and failing to find, implied covenants of fair dealing, under good faith law, vary widely. Scheck v. Burger King Corp., 756 F. Supp. 543 (S.D. Fla. 1991). But see <>Burger King v. Weaver, 169 F. 3d 1310 (11th Cir. 1999); Cook v. Little Caesar Enterprises, Inc., 972 F. Supp. 400 (E.D. Mich. 1997); Payne v. McDonald’s Corp., 957 F. Supp. 749 (D. Md. 1997); Clark v. America’s Favorite Chicken Co., 916 F. Supp. 586 (E.D. La. 1996); <>Camp Creek Hospitality Inns, Inc. v. Sheraton Franchise Corp., 139 F. 3d 1396 (11th Cir. 1998)

The loss of goodwill in the context of trademark law is the loss of goodwill for the trademark, not the loss of goodwill for a specific restaurant. As a result, a terminated “Roy Rogers” franchisee could not continue to use the trademark, after termination without cause, notwithstanding its contention that the owners of the trademark mismanaged the operation, resulting in a significant reduction in the number of operating franchisees and resulting loss of goodwill and damage to the trademark. The District Court found that the harm to the franchisee from granting the injunction, would outweigh the harm to the trademark owners from not granting it. The Court of Appeals reversed, finding the District abused its discretion. A preliminary injunction was entered by the Court of Appeals. <>Pappan Enterprises, Inc. v. Hardee’s Food Systems, Inc. et el., 143 F. 3d 800 (3rd Cir. 1998)

In Illinois, a franchise agreement which does not grant the franchisee an exclusive territory, but expressly provides that it is not exclusive, does not contain an implied covenant of fair dealing, under good faith law. The franchiser is not precluded from placing a new franchised restaurant near the franchisee’s location. The express terms of the franchise agreement preclude a contrary implied term. Joseph Nibeel, Jr. and J.C. Mac, Inc. v. McDonald’s Corp., (unreported), 1998 WL 547286, (No. 97 C 7203) (N.D. Ill. 8-27-98)

A judgment for legal malpractice by attorneys for failing to register a franchise business under the Connecticut Business Opportunity Investment Act, CGS § 36-503 et. seq. was reversed because the plaintiff franchiser failed to sufficiently prove damages and because the Connecticut Unfair Trade Practices Act, CGS § 42-110a et. seq. does not apply to claims of professional malpractice. Beverly Hills Concepts, Inc. v. Schatz & Schatz, Ribocoff & Kotkin, 717 A. 2d 724 (Conn. 1998)

A landlord was permitted to recover under fraud theories where a franchisor employed an assetless alter ego to enter into a lease with the landlord and a corresponding sublease with its franchisees. A submissible claim for punitive damages was also established. <>Jannotta v. Subway Sandwich Shops, Inc., et al.,(Case No. 96-1620) 125 F. 3d 503 (7th Cir. 1997)

A chapter 11 Bankruptcy debtor-Franchisee may assume or reject nonterminated franchise agreements. The debtor-franchisee is not required to cure nonmonetary breaches (the failure to operate for 7 consecutive days) prior to assumption. 11 U.S.C. 365(b)(2)(D). In Re Claremont Acquisition Corporation, 186 B.R. 977 (C.D. Cal. 9-7-1995). When the Bankruptcy petition is filed after notice of termination by the franchisor but before the cure period provided in the franchise agreement, the franchisee may cure monetary breaches at any time before assumption is required, under 11 U.S.C. 365, and is not limited by the contract limits on the time to cure, Moody v. Amoco Oil Co. 734 F.2d 1200 (Case No. 83-2457) (7th Cir. 1984), or the 60 day limit in 11 U.S.C. 108(b). The Bankruptcy Court, however, does have equitable power to extend the time for cure and assumption beyond that permitted in 11 U.S.C. 365. <>In Re Ludlow Hospital Society, Inc v. Secretary of Health and human Services, 124 F.3d 22 (1st Cir. 8-13-1997)

Franchisees’ claims for damages of less than $75,000.00 apiece in state court did not deprive the Federal Court of Subject Matter Diversity Jurisdiction in federal actions by the franchisor to compel arbitration where the franchisor alleged in Federal Court that the amount in dispute was more than $75,000.00 for each franchisee. <>The Barbers, Hairstyling for Men & Women, Inc. v. Bishop, et al., (Case No. 97-2360) 132 F. 3d 1203 (7th Cir. 1997)

A franchiser violated the franchise agreement’s implied covenant of fair dealing, under good faith law, by placing competing franchise stores within 1.4 miles of the store operated by the plaintiff-franchisee. <>Vylene Enterprises, Inc. v. Naugles, Inc., 90 F. 3d 1472 (9th Cir. 1996).

A franchiser may be held liable for violations of the Illinois Dramshop Act committed on the premises of its franchisee. The Act imposes liability upon any person owning, renting, leasing or permitting premises to be used for the sale of alcohol. Jackson v. Moreno, 278 Ill. App. 3d 503, 215 Ill. Dec. 277, 663 N.E. 2d 27 (Ill. App. 1996).

A future royalties clause requiring a franchisee to pay royalties in the future, after it ceases operation, until the end of the term of the franchise agreement, is void and unenforceable as unreasonable, unconscionable and oppressive. <>Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 51 Cal. Rptr. 2d 365 (Cal. App. 1996).

A Michigan Franchise Statute, M.C.L.A. § 445.1527 (f), precludes enforcement of a pre-dispute franchise agreement clause requiring arbitration or litigation outside the state of Michigan for Michigan franchises. This does not preclude the franchisee from entering into a post-dispute agreement to arbitrate or litigate outside the state of Michigan. Hambell v. Alphagraphics Franchising, Inc., 779 F. Supp. 910 (E.D. Mich. 1991). The contrary conclusion was reached, however, by the U.S. District Court in Arizona. Alphagraphics Franchising Inc. v. Whaler Graphics, Inc., 840 F. Supp. 708 (D. Ariz. 1993); See also <>Webb v. Investacorp, Inc., 89 F. 3d 252 (5th Cir. 1996)

A hotel franchisee recovered from the franchiser for fraud and violation of the Minnesota Franchise Act. The jury was properly instructed to disregard to “anti-fraud” disclaimer in the franchise agreement for allegations of fraud which were not expressly disclaimed in the agreement. Under Minnesota law, the fraud damages were calculated under the minority “out-of-pocket loss” rule instead of the more expansive “benefit-of-the-bargain” rule. The previous appeal reversed the District Court’s summary judgment for the defendant. Commercial Property Investments, Inc. v. Quality Inns International, Inc., 938 F. 2d 870 (8th Cir. 1991); Commercial Property Investments, Inc. v. Quality Inns International, Inc., 61 F. 3d 639 (8th Cir. 1995).

A choice of law clause in a sales representative contract was void as against public policy under the Illinois Sales Representatives Act, 820 ILCS § 120/0.01 et seq., because the protection of the Sales Representatives Act constitutes a fundamental public policy in Illinois. Maher & Associates, Inc. v. Quality Cabinets, 267 Ill. App. 3d 69, 203 Ill. Dec. 850, 640 N.E. 2d 1000 (Ill. App. 1994).

It was not unconstitutional, as a violation of the commerce clause of the United States Constitution, to apply the New Jersey franchise statute to a New Jersey franchisee whose office was located in New Jersey but whose territory included New York and New Jersey. The New Jersey statute was held to apply to New York activities as well as New Jersey activities. <>Instructional Systems, Inc. v. Computer Curriculum Corp., 35 F. 3d 813 (3rd Cir. 1994).

An arbitration clause which requires arbitration of claims under the Federal Petroleum Marketing Practices Act, 15 U.S.C. § 2801-2806, is not enforceable where the arbitration clause eliminates some of the rights and protections provided to the franchisee under the statute, then requires arbitration. The arbitration clause was severable from the balance of the contract and was held void and unenforceable. <>Graham Oil Co. v. Arco Products Co., 43 F. 3d 1244 (9th Cir. 1994)

A franchiser was held to have sufficient nexus with the state of South Carolina, merely by licensing the use of its trademark within the state, to be subjected to state income taxes for the royalty income earned within the state. Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E. 2d 13 (S. C. 1993).

The Illinois Consumer Fraud Act requires reasonable reliance by the plaintiff on the alleged misstatements of fact. Where a franchise agreement specifically stated that the plaintiff-franchisee had not relied on, or received any guaranties about revenues or profits or prospects for success and that the franchisee had conducted an independent investigation, the franchisee could not claim reasonable reliance on any alleged oral misrepresentations. 815 ILCS § 501/1; Elipas Enterprises, Inc. v. Robert Silerstein, 243 Ill. App. 3d 230, 183 Ill. Dec. 752, 612 N.E. 2d 9 (Ill. App. 1993)

A choice of forum clause in a Missouri franchise agreement, requiring a Missouri franchisee to litigate outside the state, is void and unenforceable as against the public policy of Missouri. High Life Sales Co. v. Brown-Forman Corp., 823 S.W. 2d 493 (Mo. banc 1992).

A franchiser which failed to register with the Illinois Attorney General, as required by the Illinois Franchise Disclosure Act, could not enforce an arbitration clause requiring an Illinois franchisee to arbitrate outside the state; 815 ILCS § 705/1 et seq. Barter Exchange, Inc. of Chicago v. Barter Exchange, Inc., 238 Ill. App. 3d 187, 179 Ill. Dec. 354, 606 N.E. 2d 186 (Ill. App. 1992)

Even though the franchisee would suffer a loss of goodwill, which it developed locally, the Court enforced the restrictive covenant not to compete, following termination without cause, under the franchise agreement. Novus Franchising, Inc. v. Taylor, 795 F. Supp. 122 (M.D.Pa. 1992)

A franchiser waived its right to compel arbitration by filing eviction lawsuits against its franchisee, sublessee to resolve related disputes. The eviction lawsuits were filed by the alter ego or agent leasing company of the franchisor. Yates v. Doctor’s Associates, Inc., 193 Ill. App. 3d 431, 549 N.E. 2d 1010, 140 Ill. Dec. 359 (1990)

The choice of law clause in an Indiana franchise contract was held unenforceable, as against public policy, because it conflicted with the Indiana Franchise Disclosure Law. Wright-Moore Corp. v. Rico Corp., 908 F. 2d 128, 136 (7th Cir. 1990).

Franchisees were held in contempt for violating an injunction issued for violating the franchiser’s trademark rights by continuing to use the trademark after termination without cause, by the franchiser. Howard Johnson Co., Inc. v. Khimami, 892 F. 2d 1512 (11th Cir. 1990)

The Pillsbury Company purchased the Hagen-Dazs franchise operation. The franchisees brought suit against the Pillsbury Company and others claiming fraud and breach of the implied contractual duty of fair dealing, under good faith law. The court granted summary judgment for the defendants, finding that the purchaser of the franchise chain could not be held liable for the alleged fraud of the franchiser, that the franchiser’s officers could not be held liable for the alleged fraudulent conduct of the franchiser’s agents, that express disclaimers in the Uniform Franchise Offering Circular made the franchisees reliance on the franchiser’s alleged misrepresentations unreasonable and that even if the franchiser greatly increased sales of prepacked ice cream (bypassing the franchisees) to supermarkets and convenience stores, such increased sales did not establish breach of the implied duty of fair dealing, under good faith law. Massachusetts law applied under a choice of law clause. Rosenberg v. The Pillsbury Co., et el., 718 F. Supp. 1146 (S.D.N.Y. 1989)

Where the franchiser regularly inspected the premises of a franchisee for safety violations, an issue of fact for the jury was established as to whether the franchisee was the agent of the franchiser, thereby subjecting the franchiser to liability for an injury claim advanced by a paying guest of the franchisee. Greil v. TraveLodge Int’l. Inc., 186 Ill. App. 3d 1061, 133 Ill. Dec. 850, 541 N.E. 2d 1288, 2 A.L.R. 5th 1064 (Ill. App. 1989).

Only the parties to a Franchise Contract, containing an arbitration clause, may compel arbitration or be compelled to arbitrate. Officers and directors of a corporate party may not be compelled to arbitrate and may not compel arbitration. Vukusich v. Comprehensive Accounting Corp., 150 Ill App. 3d 634, 501 N.E. 2d 1332, 103 Ill. Dec. 794 (1986)

A franchiser which promised to lease a building from the plaintiff for use as a McDonald’s Restaurant, was liable to the plaintiff under the Doctrine of Promissory Estoppel where the plaintiff relied upon the promise to purchase the building. The franchiser’s agent had apparent authority to make the promise on behalf of McDonald’s. Mahoney v. Delaware McDonald Corp., 770 F. 2d 123 (8th Cir. 1985)

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