Alabama-based defendants caught by long arm of the law

In Sunward Electronics Inc v McDonald, the US Court of Appeals for the Second Circuit has affirmed a preliminary injunction enjoining the plaintiff's former franchisees from using the plaintiff's marks. It held that the lower court had jurisdiction to uphold the plaintiff's Lanham Act claim against the Alabama-based defendants because, among other things, the defendants had committed torts covered by New York's long arm statute.

Sunward Electronics Inc, a New York corporation and owner of the trademarks DOG GUARD and OUT-OF-SIGHT FENCING, entered into an exclusive dealership agreement in 1995 with Dog Guard Out-of-Site Fencing Inc, Keith McDonald and Robert McDonald (the defendants) - an Alabama corporation and Alabama citizens respectively. Under this dealership agreement, the defendants distributed Sunward's pet fencing systems under Sunward's trademarks in the defendants' territory.

After discovering that the defendants were selling a competitor's pet fencing systems in violation of a non-compete provision, Sunward terminated the agreement on February 27 2003. Despite this termination, the defendants continued to use Sunward's marks for their own business.

On March 20 2003 Sunward filed a complaint with the US District Court for the Southern District of New York against the defendants alleging, among other causes of action, false designation and unfair competition under the Lanham Act. Of particular concern to Sunward, was the fact that the defendants' telephone listings in business directories for the defendants' business continued to feature Sunward's marks. The district court upheld the claim and issued a preliminary injunction ordering the defendants to assign the relevant phone number to Sunward.

On appeal to the US Court of Appeals for the Second Circuit, the defendants argued that they were not subject to jurisdiction in New York because Sunward's Lanham Act claim was not based on any transactions occurring within New York or with New York residents. They argued that any such transactions ended upon the termination of the dealership agreement. The court disagreed, stating that Sunward's Lanham Act claim was based on the defendants' tortious actions, which were subject to New York's statutory long arm jurisdiction. This was because, although based in Alabama, the defendants had maintained continuous and substantial contact with New York, primarily as a result of their dealings with Sunward.

The defendants also disputed the granting of the preliminary injunction, arguing that:

  • the listings were accurate and authorized at the time of publication (and thus not a false designation);

  • the balance of hardships favoured them; and

  • Sunward would not suffer any harm because it had no current presence in Alabama.

The court quickly dismissed the defendants' first and third arguments by finding that (i) the defendants' use of Sunward's trademarks after the termination of the dealership agreement was an additional trademark infringement even if the defendants' initial use was authorized, and (ii) as a matter of law, Sunward was presumptively interested in expanding into any area where it previously had a presence.

As for the defendants' second argument, the court found that the defendants would suffer no harm since customers calling the defendants' phone number listed in connection with Sunward's trademarks would be attempting to reach an authorized dealer of Sunward's goods. Since the defendants were no longer an authorized dealer, they would not suffer any harm from this confusion. In contrast, Sunward would suffer substantial harm since the defendants would be able to capitalize on this confusion by selling to such customers goods that directly competed with Sunward's products.

Finally, the court remanded the case back to the district court to decide on the least restrictive injunction that would still address Sunward's concerns. The court suggested that transferring the phone number to an independent answering service might best serve that purpose.

John D Mercer, Goodwin Procter LLP, New York

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