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Franek v. Walmart Stores

March 13, 2009

CLEMENS FRANEK, PLAINTIFF,
v.
WALMART STORES, INC., AND TARGET CORPORATION, DEFENDANTS.
JAY FRANCO & SONS, INC. PLAINTIFF,
v.
CLEMENS FRANEK, DEFENDANT.



The opinion of the court was delivered by: Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER

Currently pending before the Court is Plaintiff Jay Franco & Sons, Inc.'s ("Jay Franco" or "Plaintiff") motion for partial summary judgment. For the reasons set forth below, Plaintiff's motion for partial summary judgment [41] is granted as to Count II of its Complaint for Declaratory Judgment and Other Relief and granted as to Counts I-IV of Defendant Clemens Franek's ("Defendant" or "Franek") Counterclaims against Franco for trademark infringement, false designation of origin, deceptive trade practices and fraud.

I. Background

This litigation commenced when Franek, Defendant for purposes of this motion, filed a three-count complaint [1] against Wal-Mart and Target (08-cv-58*fn1 ). In that complaint, Franek alleged trademark infringement, false designation of origin, and violation of state law based on sales made by those retailers of a round beach towel on which he owns a federally registered trademark. Jay Franco purportedly distributed the towels to Wal-Mart and Target and asserts that it is responsible to defend those retailers in this litigation. Subsequently, Jay Franco filed a separate action against Franek (08-cv-1313). The later-filed case originally was assigned to another judge in this district, but since has been consolidated [30] before this Court.

In case number 08-cv-1313, Jay Franco filed a five-count complaint*fn2 against Franek on March 5, 2008. In its complaint, Jay Franco seeks (i) a declaratory judgment that its past advertisements, sales, purchases, and marketing of the round beach towels do not infringe Defendant's alleged trademark and do not violate the Lanham Act, 15 U.S.C. § 1051 et seq. (Compl. ¶¶ 16-21); (ii) a declaratory judgment that the trademark is invalid because it is functional (Compl. ¶¶ 22-26); (iii) cancellation of the trademark as invalid because it was obtained through deception of the United States Patent and Trademark Office ("USPTO") (Compl.¶¶ 27-34); (iv) a declaratory judgment that Franek's trademark rights are invalid because of an invalid assignment (Compl. ¶¶ 35-40); and (v) a declaratory judgment as to non-infringement under Illinois law (Compl. ¶¶ 41-44). Franek answered the complaint on May 6, 2008, and asserted four counterclaims [34]: (i) trademark infringement (Counter. ¶¶ 15-31); (ii) false designation of origin (Counter. ¶¶ 32-48); (iii) an Illinois state law claim for violation of the Deceptive Practices Act (Counter. ¶¶ 49-65); and (v) fraud under New York law (Counter. ¶¶ 66-81).

Jay Franco has filed a motion seeking summary judgment on Count II of its complaint and all four counts of Franek's counterclaim. However, Jay Franco's argument is limited to the alleged functionality of Franek's trademark. If the Court finds that the trademark is functional and invalid, summary judgment on Count II of Jay Franco's complaint will be granted and that ruling also will dispose of all counts of the counterclaim. However, if summary judgment is denied as to Count II, it necessarily will be denied as to the counterclaim, because Jay Franco has made no separate argument as to those Counts.

II. Facts

A. Local Summary Judgment Standards

The Court takes the relevant facts from the parties' respective Local Rule ("L.R.") 56.1 statements.*fn3 The Court takes no position on whose version of disputed factual matters is correct.

L.R. 56.1 requires that statements of facts contain allegations of material fact, and that the factual allegations be supported by admissible record evidence. See L.R. 56.1; Malec v. Sanford, 191 F.R.D. 581, 583-85 (N.D. Ill. 2000). The Seventh Circuit teaches that a district court has broad discretion to require strict compliance with L.R. 56.1. See, e.g., Koszola v. Bd. of Educ. of the City of Chicago, 385 F.3d 1104, 1109 (7th Cir. 2004); Curran v. Kwon, 153 F.3d 481, 486 (7th Cir. 1998) (citing Midwest Imports, Ltd. v. Coval, 71 F.3d 1311, 1317 (7th Cir. 1995) (collecting cases)).

Where a party has offered a legal conclusion or a statement of fact without offering proper evidentiary support, the Court will not consider that statement. See, e.g., Malec, 191 F.R.D. at 583. Additionally, where a party improperly denies a statement of fact by failing to provide adequate or proper record support for the denial, the Court deems admitted that statement of fact. See L.R. 56.1(a), (b)(3)(B); see also Malec, 191 F.R.D. at 584. The requirements for a response under L.R. 56.1 are "not satisfied by evasive denials that do not fairly meet the substance of the material facts asserted." Bordelon v. Chicago Sch. Reform Bd. of Trs., 233 F.3d 524, 528 (7th Cir. 2000). In addition, the Court disregards any additional statements of fact contained in a party's response rather than in its statement of additional facts. See, e.g., Malec, 191 F.R.D. at 584 (citing Midwest Imports, 71 F.3d at 1317).

B. Pertinent Facts for Purposes Motion for Summary Judgment

Plaintiff Jay Franco is incorporated and has its principal place of business in New York. It is in the business of importing, marketing, distributing, and selling bedding, bath, beach, and kitchen accessories. Pl. SOF ¶ 1. Plaintiff distributes its products to Walmart Stores, Inc. ("Walmart") and Target Corporation ("Target"), among other retailers. Id.

Franek conceived the idea of marketing and selling a round beach towel around 1985. Def. SOF ¶ 2. In 1985, Defendant Franek and others founded CLM Design, Inc. ("CLM"), d/b/a Son International, Inc. or Sons, Inc. Pl. SOF ¶ 3.*fn4 CLM was an Illinois corporation engaged in the business of marketing, selling, and distributing beach accessories, including round beach towels. Id. CLM has maintained offices, affiliates or subsidiaries in California and Rhode Island. Id. On October 29, 1986 CLM filed a Trademark Application for a "round or circular" configuration of a beach towel (hereinafter the "Round Towel Mark"). Id. at ¶ 4. The first use of the round beach towel was on August 15, 1985. Def. SOF ¶ 3. In its Trademark Application, CLM submitted a depiction of a white disc and stated that that application sought registration for a mark "used in connection with beach towels, beach towel product configuration, packaging, promotional materials and labels." Pl. SOF ¶ 12. The application for that trademark claimed that CLM first used the Round Towel Mark in interstate commerce on February 14, 1986. Id. ¶ 4.

The USPTO issued a First Office Action refusing registration of the application on the ground that the requested mark constituted "a configuration of the goods" and as such, was "merely descriptive of the goods." Pl. SOF ¶ 14. The First Office Action stated that "[i]n the absence of evidence that * * * [the mark] ha[d] a secondary meaning or had become distinctive, as applied to the goods, it * * * [could] not be registered on the Principal Register." Id. The First Office Action further requested a copy of any patent applications for the round towel configuration that had been submitted by CLM. Id.

CLM submitted a response to the First Office Action addressing the concerns of the USPTO and offering support for its position that the Round Towel Mark was distinctive, had acquired secondary meaning, and was therefore entitled to registration. Pl. SOF ¶ 15. Among the documents submitted to the USPTO in response to the First Office Action was a copy of a design patent application for the round towel configuration submitted by Franek. Id. ¶ 16. The USPTO issued a Priority Office Action requesting still further information including commercials of the round beach towel and sales figures which later were provided by CLM. Id. ¶¶ 20-21.

The USPTO withdrew its original rejection of CLM's application because CLM had overcome the concerns based on the "configuration" of the Round Towel Mark being "merely descriptive of the goods." Pl. SOF ¶ 22. The USPTO approved and published CLM's Round Towel Mark in the Official Gazette on April 5, 1988. Id. ¶ 23. A corporation requested an extension of time to file an opposition to the federal registration, but that request was withdrawn on May 24, 1988. Id. ¶ 24. The USPTO registered the Round Towel Mark as U.S. Trademark Registration 1,502,261 (the '261 trademark) on August 30, 1988. Id. ¶¶ 5, 25. The USPTO has accepted the Trademark's Section 15 Declaration making it incontestable. Def. SOF ¶ 7.

The Round Towel Mark originally was in the name of CLM using an assumed name of Son International. Def. SOF ¶ 4. Franek was President of CLM. Id. ¶ 5. CLM was dissolved on July 1, 1994. Id. ¶ 6. The rights to the '261 trademark registration were assigned, nunc pro tunc, from CLM (still dissolved at this point) to Franek. Id. ¶ 6; Def. SOF ¶ 5. Franek currently owns the '261 trademark, which has been used since the date of first use. Def. SOF. ¶¶ 1, 6. CLM and Franek have expended resources, time, and money to market and sell the round beach towels. Id. ¶ 9.*fn5 Franek has been involved in designing, marketing and selling beach towels -- and specifically round beach towels -- since 1985. Id. ¶ 10. CLM adopted the round shape of the towel to distinguish it from other beach towels and identify the beach towels as coming from a single source, namely CLM. Id. ¶¶ 11, 13. At the time that CLM began selling round beach towels, the vast majority of existing beach towels were rectangular or square in shape. Id. ¶¶ 11, 21. Rectangular and square beach towels had been used for decades prior to CLM's introduction of the round beach towel. Id. To the best of Franek's knowledge, no one was selling round beach towels prior to CLM's introduction of the round beach towel. Id. ¶ 12. CLM advertised the shape of its round towel in all of its advertisements and proclaimed it to be "the most radical fashion item since the bikini." Id. ¶ 14. It was also supported through advertisements such as "Bound to be Round" and "Don't be Square." Id. ¶ 15.

Jay Franco has referenced several utility patents which refer to or include circular towels:

* U.S. Patent No. 2,803,845 ('845 patent) entitled "Circular Towel" was filed on June 14, 1954, granted on August 27, 1957, and expired on August 27, 1974. Pl. SOF ¶¶ 26, 49. The specification of expired patent '845 states that "[a]n object of this invention is to provide a towel which is constructed in circular form and includes means for suspending the same from a towel rack." Id. ¶ 28. The '845 patent claimed: "In combination, a towel and suspension means therefore comprising, a circular fabric body, a reinforcing disc for said body, a pair of cross straps positioned on said disc with the ends of said straps extending under the edge of said disc, stitching extending through said body, said disc and said straps securing said body, said disc and said straps together, with said disc disposed centrally of said body, and adjustable elastic suspension member extending under said crossed straps for suspending said body, and means joining the opposite ends of said elastic suspension members to form a closed loop." Id. ¶ 29. The '845 patent only refers to fabric having a circular or disc shape. Id. ¶ 30. Figure 1 of 'the '845 patent shows a circular configuration. Id. ¶ 31. The '845 patent also states "[t]he circular form of the towel body [] provides a relatively large area of toweling for use by small children and by suspending the body [] with an elastic strap or band the tapes [] and [] will not be placed under undue tearing strain if the towel is pulled laterally or downwardly with respect to rack bar []." Id. ¶ 32.

* U.S. Utility Patent No. 4,794,029 ('029 patent) entitled "Towel that Converts into a Bag" was filed on February 24, 1987 and granted on December 27, 1988. Pl. SOF ¶ 33. In the section entitled "Brief Summary of the Invention," the '029 patent states, that "[i]t is an object of this invention to provide a circular section of woven terry fabric that when used as a towel for sunbathing requires no repositioning toward the changing angle of the sun." Id. ¶ 34. The '029 patent specifies that "[t]he circular shape of the towel allows for the repositioning of the human body toward the changing angle of the sun while the towel remains stationary, thereby eliminating the need for continual repositioning of the towel as with the conventional rectangular sunbathing towel." Id. Claim 2 of the '029 patent provides "[a] towel-bag construction as set forth in claim 1 wherein said towel is circular in shape, whereby a user while sunbathing may reposition his or her body towards the changing angle fo the sun while the towel remains stationary." Id. ¶ 35. Figure 1 of the '029 utility patent shows a circular towel configuration. Id. ¶ 36.

* French Utility Patent No. 2,399,229 ('229 French patent) was granted on April 9, 1979. Pl. SOF ¶ 37. The '229 French patent states that "[t]he towel or cloth suspended from a hook is designed to have the shortest possible hanging length, and is therefore pref. circular." Id. ¶ 38. Figure 1 of the '229 French patent illustrates a circular configuration. Id. ¶ 39.

* U.S. Utility Patent No. 4,991,978 ('978 patent) entitled "Towel Bag Combination Apparatus" was filed on January 16, 1990 and was granted on February 12, 1991. Pl. SOF ¶ 40. Under the "Summary of the Invention," the '978 patent states that "[t]he invention is directed to a towel-bag apparatus which is adapted to move easily between an open position wherein a generally circular fabric towel element provides a towel for drying purposes or to be laid on the beach for sunning purposes and to a closed or partially closed position with the employment of a draw cord on the generally circular towel element to provide an enclosed bag, and further with the draw cord also providing a carrying strap for the bag. In particular, the towel bag apparatus of the invention employs the generally circular fabric towel element such as terrycloth, having a reinforced peripheral web and a plurality of draw holes, such as of metal and plastic grommets, in the reinforced web." Id. ¶ 41. The specification of the '978 patent states that "[t]he drawings illustrate a towel-bag apparatus [] of the invention which comprises a generally circular terrycloth towel fabric [] having a diameter of 4 to 6 feet and a generally reinforced fabric or canvas peripheral 1" to 11/2 " webbing * * *." Id.

Claim 1 of the '978 patent provides "[a] towel-bag apparatus which is adapted to move between an open and closed position and which in the open position provides a towel suitable for drying and beach purposes, and in the closed position provides an enclosed bag with a carrying strap, and which towel-bag apparatus comprises in combination: (a) a generally circular, fabric towel element having a reinforced peripheral web and a plurality of holes in the web and having a top surface and a bottom surface, the bottom surface having a generally centrally reinforced section; (b) a loop means generally centrally secured to the reinforced section; (c) a ring means secured to the reinforced peripheral web; and (d) a draw cord means having a one and an other end, the draw cord passing through the holes in the reinforced web of the towel element, so as to permit the circular towel element to move between an open position for towel or beach with the draw cord in a relaxed, extended position use and a closed position for bag use with the draw cord in a drawn position, the draw cord means including a clip-type enclosure means at the one end and the other end so as to permit the said clip-type enclosure means to engage the loop means or the ring in the closed position to form a carrying strap for the towel-bag apparatus." Pl. SOF ¶ 42. Claim 2 of the '978 patent reads "[t]he towel bag apparatus of claim 1 wherein the generally circular towel element has a diameter of from four to six feet and wherein the reinforced section is generally circular and has a diameter from about six to eighteen inches." Id. Claim 7 of the '978 patent states that "[a] towel-bag apparatus adapted to be placed in an open position which provides a towel suitable for beach or drying purposes and in the closed position provides an enclosed bag with a carrying strap, and which towel-bag apparatus compromises in combination: (a) a generally circular, terrycloth towel element having a diameter of about 4 to 6 feet and having a reinforced peripheral web edge and plurality of holes in the web and having a top surface and a bottom surface, the bottom surface having a generally circular reinforced section of a non-terrycloth-type material and having a cloth loop centrally secured to the reinforced section and a ring secured to the reinforced peripheral web; and (b) an elastic-type draw cord means having a one and the other end and passing through the holes in the web in an alternating fashion so as to permit the circular towel element to move between the open position for towel-beach use and a closed position for bag use, the draw cord means including a spring laded clip at the one end and the other end so as to permit the draw cord means to pass through the loop and the spring loaded clip to engage the ring in the closed position to form a carrying strap for the towel-bag apparatus in the closed position." Id. Figure 2 of the '978 patent illustrates a circular configuration. Id. ¶ 43.

* U.S. Utility Patent No. 3,660,861 ('861 patent) entitled "Combination Round Towel and Holder" was filed on January 6, 1970 and granted on May 9, 1972. Pl. SOF ¶ 44. The '861 patent states that "[i]n accordance with the present invention, there is provided, in combination, a towel substantially circular in outline configuration detachably anchored to a support adjacent the towel's geometric center." Id. ¶ 46. The '861 patent specifies that "the towel [] is circular in outline configuration as illustrated in FIG. 4 and because of this shape the inner surface of the towel does not become exposed when the towel is suspended from its geometric center. The '861 patent permits a user to have a towel that is decorative on one surface only without detracting from the appearance when suspended from a hanger in a washroom. The circular towel, accordingly, is a decorative item having a neat appearance. The circular towel also has the advantage of being able to be suspended from a minor area portion such that it can remain attached to a hanger leaving the major portion of the towel area for use in drying hands. Id. ¶ 48. Claim 1 of the '861 patent provides "[i]n combination: (a) a hangar including a first portion for anchoring the same to a support and a second portion detachably connectable to an article and including a conically shaped member with an undulating outer surface, said undulations being transverse to the longitudinal axis of said member, facilitating forming folds in a sheet of material suspended therefrom; and (b) a circular towel detachably connected to said portion of said hanger." Id. ¶ 47.

On January 3, 2008, Franek filed suit in this judicial district against Walmart and Target (both Jay Franco's customers), but not against Jay Franco. Pl. SOF ¶ 8. Franek alleged that Walmart's and Target's past advertisements, sales, purchasing, and marketing of round beach towels have violated Franek's alleged rights to trademark '261. Id. Jay Franco claims to be the vendor to Walmart and Target for the round beach towels in question and, by way of indemnification agreements with those retailers, has agreed to hold harmless and defend them. Id. ¶ 9.

The round beach towels sold by CLM and subsequently by licensees and Franek are made using square towel stock from which the material is cut in a circular pattern and hemmed. Def. SOF ¶ 24. According to Franek, there are no inherent advantages from a cost perspective in making a round beach towel and removing the excess material results in waste. Id. ¶¶ 25-26. The round towel is made of cotton. Id. ¶ 26. According to Franek, a round beach towel does not ...


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