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NEW SENSOR CORPORATION v. CE DISTRIBUTION LLC

April 26, 2005.

NEW SENSOR CORPORATION, Plaintiff,
v.
CE DISTRIBUTION LLC, Defendant.



The opinion of the court was delivered by: I. LEO GLASSER, Senior District Judge

MEMORANDUM AND ORDER

INTRODUCTION

  This Court granted summary judgment to defendant CE Distribution LLC ("CE" or "defendant") as to the claims filed against it by plaintiff New Sensor Corporation ("New Sensor" or "plaintiff") for trademark infringement and unfair competition under the Lanham Act, 15 U.S.C. §§ 1051 et seq., and New York State trademark laws, N.Y. Gen. Bus. Law § 360-m, in a memorandum and order, familiarity with which is assumed. New Sensor Corp. v. CE Distribution LLC, 303 F. Supp. 2d 304 (E.D.N.Y. 2004). The Second Circuit affirmed this decision in a summary order, familiarity with which is also assumed. New Sensor Corp. v. CE Distribution LLC, 121 Fed. Appx. 407 (2d Cir. 2004). Pending before the Court is CE's motion for sanctions under 15 U.S.C. § 1117, 28 U.S.C. § 1927 and the inherent power of the Court. Defendant argues that plaintiff's lawsuit and the prosecution of an appeal from this Court's decision summarily dismissing the complaint were frivolous. Plaintiff opposes the motion arguing that it initiated this lawsuit in good faith after it conducted a pre-litigation investigation which supported the allegations in the complaint.

  For the reasons set forth below, defendant's motion is granted.

  BACKGROUND

  Only the facts necessary for a determination of defendant's motion are restated here. Plaintiff and defendant compete as distributors of vacuum tubes used in electronic equipment. J.S.C. Svetlana ("JSC") is a Russian corporation located in St. Petersburg that manufactures vacuum tubes. In 1992, JSC entered into a joint venture agreement with Svetlana Electron Distributors ("SED"), pursuant to which SED had the exclusive right to distribute JSC vacuum tubes throughout the world except in the countries that comprised the former Soviet Union. Five years later, in 1997, SED registered certain trademarks, including one consisting of a stylized "S" plus the words SVETLANA ELECTRON DEVICES (the "trademark"), with the United States Patent and Trademark Office.

  In 2000, when the joint venture between JSC and SED dissolved, JSC entered into an agreement with PM of America, Inc. ("PMA") to distribute its tubes in the United States. In July 2001, New Sensor purchased the trademark from SED. According to New Sensor's President, Michael Matthews ("Matthews"), "as part of the reason for the purchase," he "believed that consumers in the United States associated the SVETLANA mark" with SED, a belief grounded in his fifteen-years of experience in the vacuum tube industry. (Declaration of Michael Matthews executed on March 1, 2005 ("Matthews Decl.") ¶ 3). The tubes that New Sensor currently distributes under the SVETLANA mark are manufactured at Xpo-pul, a factory in Saratov, Russia. New Sensor does not sell tubes manufactured by JSC.

  In September 2001, JSC and PMA filed an infringement action against New Sensor and SED in the United States District Court of Alabama alleging that New Sensor did not have rights in the SVETLANA mark. (Matthews Decl. ¶ 4). New Sensor counterclaimed, alleging that the plaintiffs were infringing New Sensor's SVETLANA mark by selling vacuum tubes marked with SVETLANA. In January 2003, the parties resolved the Alabama litigation and entered into a settlement agreement with the following terms: New Sensor had the exclusive rights to the SVETLANA mark; in order to avoid confusion with New Sensor's SVETLANA-brand vacuum tubes, JSC and PMA would not use the SVETLANA name or mark in connection with the promotion or marketing of vacuum tubes, but would use "SED-SPb,"*fn1 the name of JSC's Svetlana factory that manufactured the vacuum tubes; and New Sensor released CE and other customers of JSC and PMA from any claims arising out of the use of the SVETLANA mark in connection with the sale of inventory manufactured by JSC and purchased by CE (and other customers) before March 4, 2003. (Matthews Decl. ¶¶ 5-6). "The purpose of this release was to allow PMA (JSC's . . . U.S. distributor) to dispose of SVETLANA-marked tubes already in its inventory at the time of the agreement." (Id. ¶ 6). Following the settlement agreement, PMA sent a letter to its customers, approved by New Sensor, which informed them that tubes formerly branded SVETLANA would now be sold under the Winged-C logo.

  In the summer of 2003, CE's website discussed New Sensor's acquisition of the SVETLANA mark and compared New Sensor's SVETLANA vacuum tubes to those sold by CE. (Matthews Decl. ¶ 8). According to Matthews, the website text "presented a negative spin on New Sensor's acquisition of the SVETLANA mark." (Id.). "In addition to several misleading statements in the text" of the website, Matthews believed the following three statements were false: (1) "If you want the tubes that you've come to know in the past as `Svetlana,' the only way to be sure you're getting that tube is to look for the [`Winged-C'] mark." Matthews believed that this statement was false because the foreign manufacturer of CE's tubes was not the only manufacturer of tubes previously marketed under the SVETLANA brand, see Matthews Decl. ¶ 8(1); (2) "Because of a change in ownership of the former American distributor, JSC Svetlana recently lost its ability to sell vacuum tubes bearing the `Svetlana' name." Matthews believed that this statement was false because JSC's inability to use the SVETLANA mark in the United States resulted from New Sensor's purchase of the trademark and goodwill from SED and the settlement agreement, not a change in ownership of JSC, see id. ¶ 8(2); and (3) "The Xpo-Pul factory `Svetlana' tubes are not the same Svetlana tubes that you have been accustomed to over the year!" Matthews believed that this statement was false "because it told the consumer that New Sensor's SVETLANA brand of vacuum tubes is different than the SVETLANA brand of vacuum tubes that had been sold by New Sensor's assignor, [SED], when in fact there always has been only one brand, which New Sensor now owns," see id. ¶ 8(3). Against this background, New Sensor believed that CE was attempting to trade on the good will associated with the SVETLANA mark "and that CE might have been selling SVETLANA-branded tubes not covered by the Alabama settlement." (Id. ¶ 9).

  After reviewing CE's website, Matthews sent a letter to CE's President, Noreen Cravener ("Cravener"), in August 2003, in which he set forth his concerns. (Matthews Decl. ¶ 10). Cravener refused to change the text of the website as requested and "did not offer any explanation for" her denial that CE had violated the Alabama settlement. (Id. ¶ 11). Moreover, CE refused to change its website to refer to JSC's factory by its correct name, SED-SPb. (Id. ¶ 12). Matthews also "believed that CE's repetitive use of the mark on the website would serve to weaken the strength of the SVETLANA mark in the marketplace." (Id.). Matthews subsequently directed his counsel to send a letter to CE setting forth its position, and in response, CE's counsel did not deny that PMA had sold tubes to CE after January 14, 2003. (Id. ¶ 13). This purportedly gave Matthews "further reason to believe that PMA's representations in the settlement agreement were untrue." (Id.).

  Matthews therefore asserts that at the time the complaint was filed, New Sensor believed in good faith that "CE's statements on [its] website were untruthful, that CE's use of the SVETLANA mark was likely to cause confusion in the marketplace, and that PMA had sold SVETLANA-marked tubes to CE after January 14, 2003, thus invalidating the release of CE in the settlement agreement." (Matthews Decl. ¶ 14). Matthews claims that "the most critical of New Sensor's claims against CE concerned what [he] believed were the false statements on CE's website text." (Id. ¶ 15).

  DISCUSSION

  CE seeks to recover attorney's fees under of the Lanham Act, which provides, in pertinent part, that "[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party." 15 U.S.C. § 1117(a).*fn2 The Second Circuit has held that the standard for the award of attorney's fees to a prevailing defendant is the same as to a prevailing plaintiff. Conopco, Inc. v. Campbell Soup Co., 95 F.3d 187, 194-95 (2d Cir. 1996) ("Nothing . . . indicates that a different standard should apply for prevailing plaintiffs and prevailing defendants."). The prevailing party must make a showing of "fraud or bad faith" on the part of its opponent to obtain fees. Conopco, Inc., 95 F.3d at 195. "Fraud" or "bad faith" can be established in different ways, including where "plaintiff brought suit in bad faith without an investigation of the merits of his claim"; "plaintiff's claims had no real substance"; or "plaintiff filed suit as a competitive ploy." See, e.g., 17 PLI Trademark Law Prac. Guide § 17:3:6 (2004) (citations omitted). Courts in this judicial district have held that "bad faith" has been established where a party has met one or more of these prerequisites. Plaintiff's pursuit of patently frivolous claims is circumstantial evidence of bad faith. Compare IMAF, S.p.A. v. J.C. Penney Co., Inc., 810 F.Supp. 96, 100 (S.D.N.Y. 1992) with Yeshiva Univ. v. New Eng. Educ. Inst., Inc., 631 F. Supp. 146, 149 (S.D.N.Y. 1986) ("there is no precedent for awarding defendants attorney's fees where the plaintiff's claim on the merits is not only advanced in good faith, but actually presented a close question for the jury"). Courts in this circuit have also held that bad faith may be found where a lawsuit is utilized for ulterior motives, including business advantage and inhibiting competition. See, e.g., Mennen Co. v. Gillette Co., 565 F.Supp. 648, 657 (S.D.N.Y. 1983) (awarding attorney fees under § 35(a) where there was "a substantial overtone in this case to warrant an inference that this suit was initiated as a competitive ploy"), aff'd, 742 F.2d 1437 (2d Cir. 1984). Finally, a case may be found to be "exceptional" for purposes of recovering attorney's fees where the defendant demonstrates that the plaintiff harbored a harassing purpose in instituting the action. See Universal City Studios, Inc. v. Nintendo Co., 797 F.2d 70, 77 (2d Cir.) (awarding attorney's fees in part because plaintiff brought suit for coercive purpose of joining in defendants' profits), cert. denied, 479 U.S. 987 (1986); Diamond Supply Co. v. Prudential Paper Prods. Co., 589 F. Supp. 470, 476 (S.D.N.Y. 1984) (attorney's fees awarded to a defendant because plaintiff's action was "patently baseless" and constituted "bad faith harassment").

  In support of its motion, CE relies heavily on Viola Sportswear, Inc. v. Mimun, 574 F. Supp. 619 (E.D.N.Y. 1983). In that case, plaintiff entered into an exclusive licensing agreement with defendants to manufacture and sell children's Sasson jeans. Viola, 574 F. Supp. at 619. Subsequent to this agreement, defendants sent one ten dollar pair of such jeans to a third-party as part of a group of production samples that were sold before plaintiff obtained the exclusive right to sell. Id. at 619-20. Plaintiff asserted that defendants' conduct ran afoul of the licensing agreement. Id. at 619. In finding that plaintiff's claims had no merit and were asserted in bad faith, this Court pointed to plaintiff's failure to investigate the facts prior to filing the complaint. The deposition of plaintiff's corporate president conclusively established that plaintiff had no concrete information upon which to base its lawsuit. Id. at 620. "He candidly admitted" in his deposition that he never reviewed the complaint before it was filed, he never possessed any evidence upon which a reasonable person might have formed the belief that the allegations in the complaint were accurate, he only knew of the single pair of jeans, and thus had no proof that defendants engaged in a nationwide conspiracy, and he acknowledged that the jeans in question may have been manufactured and sold prior to the execution of the exclusive licensing agreement. Id. Discovery further revealed that none of the defendants had manufactured, sold or offered plaintiff's jeans for sale after it obtained an exclusive license to manufacture and sell the jeans. Id. This Court noted the extensive litigation which followed, including discovery that revealed that plaintiff's claims were baseless. In awarding fees to the defendant, this Court held that the phrase "exceptional" would "surely ...


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