Opinion ID: 474193
Heading Depth: 2
Heading Rank: 1

Heading: Universal's Cease and Desist Letters to Nintendo Licensees

Text: 28 The district court found that Universal tortiously interfered with Nintendo's contractual relations when it sent cease and desist letters to Donkey Kong licensees on January 3, 1983. The district court found that, as the result of these letters, six licensees 2 stopped manufacturing Donkey Kong products and refused to pay to Nintendo the guaranteed royalities specified in their licenses. This resulted in damages of $94,219.56, which the district court awarded to Nintendo. 29 To establish a claim for tortious interference with contractual relations under New York law (which the parties agree is applicable), Nintendo must establish: (1) a valid contract between Nintendo and a licensee; (2) Universal's knowledge of the contract and inducement of a breach; and (3) resulting damage to Nintendo. Strobl v. New York Mercantile Exchange, 561 F.Supp. 379, 386 (S.D.N.Y.1983); Israel v. Wood Dolson Co., 1 N.Y.2d 116, 120, 151 N.Y.S.2d 1, 5, 134 N.E.2d 97, 99 (1956). 30 Universal mounts on appeal a two-pronged attack against the district court's finding. First it argues that the threat of litigation, without anything more, cannot amount to tortious interference with contractual relations. Second, it asserts that the district court's findings were clearly erroneous. 31 At the outset, it is clear that under New York law litigation or the threat of litigation can give rise to a claim for tortious interference with contractual relations. When the New York Court of Appeals considered the basis for this tort in 1980, it described the nature of the action and included civil suits among the wrongful means that could give rise to liability. Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 N.Y.2d 183, 191, 428 N.Y.S.2d 628, 632, 406 N.E.2d 445, 448 (1980). Further, the Guard-Life decision expressly endorsed the provisions in the Restatement (Second) of Torts establishing this tort. Id. Under the Restatement, a lawsuit or the threat of a lawsuit is wrongful if the actor has no belief in the merit of the litigation. Restatement, supra, Sec. 767, comment c. It is also wrongful if the actor, having some belief in the merit of the suit, nevertheless institutes or threatens to institute the litigation in bad faith, intending only to harass the third parties and not to bring his claim to definitive adjudication. Id. See also Zilg v. Prentice-Hall, Inc., 717 F.2d 671, 677-78 (2d Cir.1983), cert. denied, 466 U.S. 938, 104 S.Ct. 1911, 80 L.Ed.2d 460 (1984). 32 The question here is whether the district court's findings in this case were clearly erroneous. Fed.R.Civ.P. 52(a). As this court has stated so often, this means that we must not disturb the findings below unless we are 'left with the definite and firm conviction that a mistake has been committed.'  Avis Rent a Car System, Inc. v. Hertz Corp., 782 F.2d 381, 384 (2d Cir.1986), quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948). The court below found that Universal knew that it did not have a trademark in King Kong, and that it threatened suit not to adjudicate its trademark claim, but to coerce others into sharing their Donkey Kong profits. 33 Judge Sweet was fully justified in finding on the record of this case, that Universal did not have a good faith basis for its conduct. In assessing this case, we return to the 1975 litigation against RKO in which Universal successfully urged that the name King Kong had not acquired any secondary meaning. If anyone knew what the law was on this point under the facts of this case, it was Universal. 3 34 Of course, there may be a legitimate explanation for an about-face, such as new law or changed circumstances, among others. However, Universal offered no explanation for its change in position, and in fact completely ignored the fact that it reversed course. 35 There was sufficient other evidence to buttress the decision below. 36 First, it was clear from the evidence that Sidney Sheinberg, president of Universal and MCA and also an attorney, personally knew the facts, background and nuances of the 1975 litigation. He stated that the 1975 case was his case and there was no intermediary. He knew that RKO and DDL owned copyrights in the verbatim visual images from the 1933 and 1976 movies. The evidence unequivocally indicated that Sheinberg and Joseph Di Muro, a legal consultant and former general counsel of Universal, both repeatedly concluded that Universal could not copy the verbatim movie images of the King Kong gorilla because RKO and DDL owned those images. 37 Sheinberg must have known that these RKO and DDL visual image rights were irreconcilable with the existence of any universal trademark rights in King Kong. Under the Lanham Act: 38 The term 'trade-mark' includes any word, name, symbol, or device or any combination thereof adopted and used by a manufacturer or merchant to identify his goods and distinguish them from those manufactured or sold by others. 39 15 U.S.C. Sec. 1127. The existence of the legally protected RKO and DDL King Kong images meant that the public could not possibly associate some undefined third King Kong image and distinguish it from these other sources. In this regard it is noteworthy that Universal never created another image of King Kong. 40 Further, in depositions, Sheinberg either refused or was unable to identify the nature of Universal's rights in King Kong, an indication that Sheinberg did not believe in the assertion made in Universal's complaint and letters. Also consistent with such a lack of belief was Universal's less than vigorous efforts to enforce any trademark rights it thought it possessed. Before Donkey Kong was marketed, Universal did nothing to protect any rights in King Kong when trademark searches indicated third party uses of the name. Finally, this failure to act is consistent with the fact that Di Muro and Loretta Sifuentes, a lawyer and vice president of MCA, concluded that Universal had no rights to license King Kong. 41 Even in conjunction with Donkey Kong, Universal simply threatened legal action against numerous third party licensees of Donkey Kong, and then invited them to quickly settle their disputes. When licensees such as Coleco and Atari agreed to settle, Universal obtained handsome royalties. When other licensees refused to settle, however, Universal did not pursue its claims by filing actions in court. This further indicates that Universal used litigation and the threat of litigation merely to obtain quick settlement payments from third parties, and not to bring its claims to definitive adjudication. 42 Universal seeks to rebut this wide array of evidence by arguing that Cooper received in the Cooper Judgment, and then transferred to Universal, trademark rights that had been held by RKO. Perhaps Cooper did receive and transfer some undefined merchandising rights, but Cooper plainly did not obtain any trademark rights in his judgment against RKO, since the California district court specifically found that King Kong had no secondary meaning. 43 Universal seeks nonetheless to avoid liability by asserting that it relied on the opinion of outside counsel Steven Kroft that it had a valid claim. Under the Restatement, a party is not liable in tort for threatening legal action if it relied upon the advice of counsel, sought in good faith, after full disclosure of all relevant facts within its knowledge and information. Restatement, Sec. 675. 44 In this case, Universal failed to call Kroft as a witness at trial. The district court inferred from the absence of Kroft's testimony and his continuing close relationship with Universal that, had he testified, his testimony would have been unfavorable to Universal on the subject of its trademark claim. 615 F.Supp. at 847. Given Kroft's position in the RKO litigation that King Kong had no secondary meaning, and the fact that Kroft, as a witness, was essentially under Universal's control, it is reasonable to infer that Kroft's testimony would not have supported Universal. Indeed, it would have been interesting to hear him explain the consistency of any advice to Universal that it had trademark rights with his statements to the California district court on this point. The Award of Attorney's Fees 45 The district court awarded Nintendo $1,142,545.70 for the attorney's fees incurred in defending Universal's trademark infringement and unfair competition claims. It found that this award was proper under Section 35 of the Lanham Act, or alternatively, as punitive damages on the tortious interference claim or pursuant to Rule 11 of the Federal Rules of Civil Procedure. 46 The district court's award of attorney's fees in this case was appropriate under Section 35 of the Lanham Act. 15 U.S.C. Sec. 1117. This section states that [t]he court in exceptional cases may award reasonable attorney's fees to the prevailing party. 47 The district court did not err when it found that Universal brought its Lanham Act claim in bad faith merely to join in the profits from Donkey Kong. It then based its award of attorney's fees in this case on Mennen Co. v. Gillette Co., 565 F.Supp. 648 (S.D.N.Y.1983), aff'd mem., 742 F.2d 1437 (2d Cir.1984). In Mennen, a district court awarded counsel fees to a defendant which had successfully defended against trademark and unfair competition claims because: 48 There is a substantial overtone in this case to warrant an inference that this suit was initiated as a competitive ploy. As such it carries necessary damage to the defendant when the plaintiff's claims are found, as they are here, to have no real substance. 49 565 F.Supp. at 657. 50 The Mennen approach is consistent with that taken by other courts which have considered the attorney's fee issue by focusing on whether a losing party prosecuted or defended a claim in bad faith. South Whisky Ass'n v. Barton Distilling Co., 489 F.2d 809, 813-14 (7th Cir.1973); DC Comics, Inc. v. Filmation Associates, 486 F.Supp. 1273, 1284 (S.D.N.Y.1980); Steak & Brew, Inc. v. Beef & Brew Restaurant, Inc., 370 F.Supp. 1030, 1038 (S.D.Ill.1974). 51 Given this conclusion, there is no need for this court to determine whether an award of attorney's fees was justified as punitive damages or pursuant to Rule 11 of the Federal Rules of Civil Procedure. The Award of Punitive Damages 52 The district court also awarded $222,498.28 as punitive damages on Nintendo's tortious interference counter-claim. This amount represented funds which Nintendo disbursed in defending against Universal's Lanham Act claim, but which were not spent on attorney's fees and which were not taxable as costs under Civil Rule 11 of the Rules of the Southern District of New York. 53 Under New York law, an injured party can recover punitive damages when the tortious act complained of involved a wanton or reckless disregard of the plaintiff's rights. Giblin v. Murphy, 97 A.D.2d 668, 671, 469 N.Y.S.2d 211, 215 (3d Dept.1983); Le Mistral, Inc. v. Columbia Broadcasting System, 61 A.D.2d 491, 494-95, 402 N.Y.S.2d 815, 817 (1st Dept.1978), appeal dismissed, 46 N.Y.2d 940 (1979). The New York courts have considered punitive damages to be particularly appropriate for tortious conduct involving deliberate action systematically conducted for profit. See Walker v. Sheldon, 10 N.Y.2d 401, 406, 223 N.Y.S.2d 488, 492, 179 N.E.2d 497, 499 (1961). 54 An award of punitive damages was appropriate under the facts of this case. First, Universal knew that it did not have trademark rights in King Kong, yet it proceeded to broadly assert such rights anyway. This amounted to a wanton and reckless disregard of Nintendo's rights. 55 Second, Universal did not stop after it asserted its rights to Nintendo. It embarked on a deliberate, systematic campaign to coerce all of Nintendo's third party licensees to either stop marketing Donkey Kong products or pay Universal royalties. 56 Finally, Universal's conduct amounted to an abuse of judicial processes, and in that sense caused a larger harm to the public as a whole. Depending on the commercial results, Universal alternatively argued to the courts, first, that King Kong was part of the public domain, and then second, that King Kong was not part of the public domain, and that Universal possessed exclusive trademark rights in it. Universal's assertions in court were based not on any good faith belief in their truth, but on the mistaken belief that it could use the courts to turn a profit. 57 Based on these facts the district court's award of punitive damages was not an abuse of discretion. 58