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May 15, 1995


JOHN F. KEENAN, United States District Judge

The opinion of the court was delivered by: JOHN F. KEENAN


 JOHN F. KEENAN, United States District Judge:


 Plaintiff, Hilton International Co., Inc. ("HI" or "International"), seeks a permanent injunction restraining defendants from using the name CONRAD in connection with hotels located outside the United States and otherwise enforcing the terms of a certain Trademark Agreement. This agreement, PX 1, *fn1" was entered into by the parties on December 1, 1964. This Trademark Agreement provides inter alia that HI has the exclusive right to use HILTON as the name of hotels operated outside the United States; and Hilton Hotels Corporation ("HHC") has the exclusive right to use HILTON as the name of hotels operated within the United States.

 The 1964 Agreement also includes a provision permitting the parties to operate hotels outside their designated HILTON territories provided the hotels are (i) not named "HILTON," and (ii) not "directly" or "indirectly" advertised, promoted or identified as "HILTON" hotels. See PX 1. Plaintiff maintains that defendants are violating this agreement by operating hotels known as "CONRAD" in several locations outside the United States.

 A summary of the pleadings should be helpful in order to follow and understand this decision. HI brings the following causes of action against HHC based on HHC's use of the name CONRAD for its international properties: (1) breach of an agreement not to advertise, promote, or identify hotels operated outside the United States directly or indirectly as HILTON hotels; (2) breach of an implied covenant not to derogate from the value of goodwill in HILTON transferred by HHC to HI; (3) unfair competition under New York common law; and (4) false advertising under ยง 43(a) of the Lanham Act. HI seeks an injunction against use of the name CONRAD, and damages.

 HHC raises the following affirmative defenses: (1) failure to state a claim for which relief can be granted; (2) unclean hands based on the fact that HI previously evidenced an interpretation of the Trademark Agreements which is opposed to the positions asserted by them in this lawsuit and that HI caused the harm that they now seek to remedy; (3) laches, acquiescence and estoppel based on HI's delay in asserting its rights as well as its affirmative acts which evidenced a consent to the use of the name CONRAD, while HHC expended significant sums developing and promoting the name CONRAD; (4) fair use of the name of HHC's founder, Conrad Hilton; and (5) The statute of limitations bars HI from asserting that the manner in which "CONRAD" was used before October 1988 in promoting, advertising and identifying the CONRAD hotels in Australia and St. Martin, breaches the trademark agreements.

 HHC asserts the following Counterclaims against HI: (1) breach of the trademark agreements as a result of HI's advertising, promotion and identification of VISTA hotels directly and indirectly as HILTON hotels; and (2) prima facie tort under New York common law resulting from simultaneous termination by HI of its participation in joint HHC-HI programs and the institution of this lawsuit with the sole intention of inflicting harm on HHC without excuse or business justification. HHC seeks an injunction and damages.

 The trial has been bifurcated to first determine liability. If necessary, damages will be determined by a separate trial.


 Plaintiff HI is a Delaware corporation owned by a British conglomerate, Ladbroke Group PLC, having its principal place of business in London, England. HI owns or operates the HILTON hotel chain abroad, and the VISTA hotel chain in the United States. See Stip. at P 1.

 HI was organized by HHC in 1948 to establish HILTON hotels outside the continental United States. HHC's and HI's founder and first president was Conrad Hilton, the world-renowned hotelier. See Stip. at PP 7-8. HI began its expansion outside the United States in 1949 with the opening of the Caribe HILTON, a 300 room hotel in Puerto Rico. See Tr. at 922; PX 613. Over the next decade, HI opened HILTON hotels in Madrid, Istanbul, Mexico City, Panama, Havana, Montreal, Berlin and Acapulco. In 1964, HI was spun-off as a separate company. At that time, HI was operating 23 hotels around the world, with eight additional hotels under construction. See PX 613.

 Conrad Hilton was integrally associated with HI's early development. See Tr. at 1930. After the spin-off in 1964, Conrad Hilton remained Chairman of the Board of Directors and President of both HHC and HI. While he continued to run HHC, Conrad Hilton ceased the active management of HI which was taken over by its then Executive Vice President, Curt Strand. See Tr. at 930-31, 942, 3354. However, his image and reputation were central to the openings of the various international HILTON hotels. See Tr. at 937. He was a major figure at the hotel openings, which were media events attended by movie stars, the press, local politicians and dignitaries. See Tr. at 923-28, 933-38; PX 1886, PX 1887, PX 1977. The openings generated extensive publicity, much of it focusing on Conrad Hilton, who had his own public relations person. See Tr. at 925, 928, 935, 937, 1930-31, 3286. As a result of his close involvement with HI's development abroad, Conrad Hilton established a worldwide reputation as the founder of HI and the world's most famous hotelier. See Tr. at 3286-87. The names Conrad Hilton and HILTON both became very well known around the world (see Tr. at 1913, 3286-87), and Conrad Hilton's own image and reputation became closely associated with the HILTON name. See Tr. at 978-979.

 From the founding of HI in 1948 until December 1, 1964, all of HI's issued and outstanding stock was owned by HHC. See Stip. at P 10. In 1964, HHC's Board of Directors decided to spin-off HI as a separate company because Conrad Hilton's financial advisors believed the market was not fully appreciating the value of this company. See Tr. at 846-47, 3280-81. The HHC Board concluded that having HI and HHC trading as one stock "was like having a race horse and a plow horse" pulling the same wagon. See Tr. at 3281. The "race horse" in this analogy was HI, which HHC believed had tremendous growth potential. See Tr. at 3281.

 HHC's Board of Directors eventually authorized the distribution of all the issued and outstanding stock of HI to HHC's shareholders of record as of November 16, 1964 on the basis of one share of HI for each two shares of HHC owned on that date. The shares of HI were mailed to the shareholders on December 1, 1964. See Stip. at P 11. The combination of the two stocks appreciated by 35% as soon as the spin-off took place. See Tr. at 3281.

 In connection with the spin-off, HI and HHC entered into a series of agreements, including the Trademark Agreement. See PX 1. HI and HHC also entered into two agreements, the same day, December 1, 1964, relating to the joint ownership and management of Hilton Reservation Service ("HRS") through Hilton Service Corporation ("HSC"), a corporation owned 51% by HHC and 49% by HI. See PX 2. The parties contractually committed to participate in HRS for a period of forty years. See PX 2, at P 9.

 The Trademark Agreement was drafted by HHC. See Tr. at 852-53. It provided that it was to be construed in accordance with Delaware law. Under the Agreement, HI received the sole and exclusive right to use the HILTON name and trademarks outside the United States and HHC received the sole and exclusive right to use the HILTON name and trademarks in the United States (with the exception of certain specified rights given to HI with respect to a pre-existing HI hotel in Hawaii). See PX 1. The key provision of PX 1 so far as this lawsuit is concerned is contained in Section A, paragraph 4 thereof. It reads in pertinent part as follows:

nothing contained herein shall prevent either Hotels or International from owning, leasing, operating, managing or licensing others to operate hotels, restaurants, bars or related facilities any place in the world under other than the "HILTON" name, service marks and symbols hereinabove referred to, provided that any such hotels, restaurants, bars or related facilities are not advertised, promoted or identified, directly or indirectly, as "HILTON" hotels.

 The word "indirectly" is the problem because of subsequent actions by both HI and HHC.

 The Trademark Agreement was designed to divide the goodwill associated with the HILTON name on a global basis. The agreement ensured that subsequent to the spin-off of HI from HHC and the commencement of their operation as separate companies, the goodwill associated with the HILTON name would inure exclusively to the benefit of HI outside the United States, and to the benefit of HHC within the United States. See Tr. at 932, 1911-12. This is confirmed by the testimony of Barron Hilton. See Tr. at 3278. Following the spin-off, the reputation in the HILTON name resulting from HI's historic activities outside the United States under Conrad Hilton's leadership was part of the value that went to the shareholders of HI. See Tr. at 1913.

 In 1967, HI was purchased by Trans World Airlines, Inc. ("TWA") for approximately $ 90 million. See PX 13; Tr. at 848, 951, 3282. The key asset transferred to TWA was the exclusive ownership of the HILTON trademark and the goodwill associated therewith outside the United States. See Tr. at 3284, 3286. At the time of the TWA sale, Conrad Hilton and his family and foundation owned approximately one-third of HI's stock. See Tr. at 3282, 3284. They received approximately $ 30 million in TWA stock as a result of the sale, in 1967 dollars. See Tr. at 3284.

 While HI was owned by TWA from 1967-1987, both parties operated their businesses independently. Marketing efforts were, with few exceptions, independently pursued. The parties did share the HRS and their principals periodically conferred with respect to the generation of business and possible expansion. See Tr. at 979, 980, 1003-1005, 3374.

 Under the terms of PX 2, HSC operated HRS so that rooms could be reserved at hotels operated by both HHC and HI. HHC and HI were to promote the reservation service and participation of all hotels operated by HI and HHC in HRS was mandatory. See Tr. at 1810, 1811, 3373. The original 1964 HRS agreement (see PX 2) was amended by a letter agreement in 1978 (see PX 10). This called for HI and HHC to include such hotels as VISTAs *fn2" and CONRADs in HRS. These HRS agreements (see PX 2 and PX 10) permitted a further association between the Hilton and non-Hilton brands whether they were HI or HHC hotels. As a matter of fact, plaintiff's able counsel acknowledged that PX 10 "necessarily resulted in some degree of confusion." Tr. at 4120. As we shall see, HRS is one of the main causes of the dispute before the Court.

 In 1987, HI was sold to Allegis Corp. See Tr. at 82-92. Later that same year, Allegis sold HI to the current owner, Ladbroke Group, a British conglomerate which operates hotels in the United Kingdom. See id.

 In 1978, HHC and HI each considered operating hotels outside their contractual territories and going into each others exclusive HILTON territory. See Tr. at 857-861, 3289-3291. This led to the September 19, 1978 letter agreement. See PX 9. *fn3" The 1978 Letter Agreement established what came to be known as "the one-third rule." Under that provision, both parties were permitted to use the word "Hilton" as part of their company name to state the fact that the company owned, operated or licensed the hotel in the other's territory, provided such reference did not appear in greater than one-third the size of the actual hotel name. See PX 9; Tr. at 863-65. The 1978 Letter Agreement also permitted the parties to list their hotels operated outside their exclusive HILTON territory together with their HILTON hotels in the same directories, without regard to the one-third size restriction. See PX 9, Tr. at 900, 914-15. It is this agreement that is at the center of the difficulties arising in this lawsuit. Neither the consuming public nor the travel trade distinguished between HI and HHC. HI and HHC were perceived as a single worldwide organization. Both HI and HHC acknowledge this point.

 Matters became more muddled by virtue of a May 1989 Amendment to the 1964 and 1978 agreements. See PX 11. Paragraph 1 of this modification provided that HHC and HI may:

use the Hilton name and trademark in each other's exclusive territories (as defined in the Trademark Agreement) to refer to their respective hotels in any and all printed advertising and/or promotional materials used in joint marketing programs in which HHC and HIC may from time to time both agree to participate, including, but not limited to, the HHC HHonors frequent guest program and the HHC Senior HHonors program for mature travellers. Such use of the Hilton name and trademark shall not be subject to size restrictions set forth in the 1978 Agreement.

 PX 1, at P 1. The 1978 Letter Agreement was still further modified by a 1990 letter agreement between HHC and HI. See PX 12. That agreement provided that it was permissible under the "one-third rule" to promote one or a number of hotels within the other party's exclusive territory ("the 1990 Letter Agreement"). See id.

 Defendants point out that none of the agreements specifically prohibit either party from using the word "CONRAD" as the name for hotels operated outside its territory. Plaintiff urges that there is a natural linkage between the names CONRAD and HILTON and that the use of the name CONRAD by defendants violates the terms of the 1964 agreement (see PX 1) by "indirectly" advertising, promoting and identifying the CONRADs as HILTON hotels. Defendants argue that PX 11 "completely obviated the prohibition in the 1964 Agreement against indirect (emphasis in defense papers) identification as Hilton" because it expressly allowed direct use of "the Hilton name and trademark in each other's exclusive territories" in joint advertising which would identify the hotels in the other's territory as HILTON hotels. See PX 11. However, paragraph 4 of that 1989 Amendment reads as follows:

Nothing herein contained shall be deemed to otherwise affect or limit in any manner whatsoever the rights and obligations of the parties as contained in the Trademark Agreement and the 1978 Agreement, and the aforesaid agreements shall remain in full force and effect in accordance with their respective terms.

 PX 11, at P 4. PX 11 was unilaterally terminated by HI on October 16, 1991, the day after this lawsuit commenced.

 Let us now trace the steps that have gotten us to the situation in which these hitherto friendly and cooperating entities find themselves bitterly contesting each other.

 The name CONRAD was first suggested to HHC in a January 26, 1981 letter (see PX 40; Tr. at 3297) to Barron Hilton, the Chairman of HHC, who is one of Conrad Hilton's sons. *fn4" The name CONRAD was formally selected for HHC's international properties in 1982. Greg Dillon, a 43-year employee of HHC, now vice chairman emeritus of the company, testified on direct examination concerning the choice of the name CONRAD.

Q. Shifting to a different subject now, Mr. Dillon, were you involved in the selection of the name CONRAD?
A. Yes, I was.
Q. What was your involvement?
A. At the time I was running what later became the Conrad International Company in the development of our international properties and in that capacity and also as a member of the president's, our president's executive staff and director of Hilton Hotels Corporation, I was involved with others in making the decision.
Q. And you ultimately reached a decision to select Conrad, is that correct?
A. That's correct.
Q. Why was Conrad selected?
A. Conrad was selected because of the fact that we were of the opinion based on the research that we had done both internally and externally the company that Conrad was the best name available to us for the new international company (sic).
Q. Did it have any other advantages in addition to that?
A. Well, it did have the advantage, the name Conrad had the advantage since it was the name of our founder, had the advantage of tying it back to Hilton Hotels Corporation USA whereby we would have the benefit of all the expertise, experience, prestige, financial ability and so on of the parent company.
Q. You referred to tying it back to your parent corporation. Did you have an understanding at that time that that was permissible under the '78 agreement?
A. I think we did, yes.
Q. How if at all did you wish to associate Conrad with the parent corporation Hilton Hotels Corporation?
A. Well, we wanted -- the name Conrad or whichever name we might have selected, but it so happened it was the name Conrad was a new name. This was a new company. It did not have the same background and financial capability and so on as Hilton Hotels Corporation but was a subsidiary of Hilton Hotels Corporation and had its complete support and the ...

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