Wednesday, February 20, 2013

What happens to a trademark in bankruptcy?

Harrell v. Colonial Holdings, Inc., 2013 WL 550424 (E.D. Va.)

The bit of interest in this case is the relationship between trademark and bankruptcy law, which isn’t resolved on this motion to dismiss but is worth watching.  The mark at issue is “Strawberry Hill Races” for a century-old steeplechase horse racing tradition in Richmond, Virginia. As the court explained, in early 2012, defendants were arranging to hold the event at Colonial Downs racetrack in the summer.  But, shortly before the race, plaintiffs bought the registered mark at a bankruptcy auction and sent a C&D even before title was officially transferred.  The defendants held the race anyway, and plaintiffs sued for trademark infringement and false advertising.  The defendants counterclaimed for defamation, breach of contract, and a variety of business torts.

From 1973 to 2012, the State Fair of Virginia (SFVA) operated the Strawberry Hill Races.  Since 2000, it was hosted at Colonial Downs, a racetrack operated by an affiliated entity of Colonial Holdings (CH); Ian Stewart is the president of Colonial Holdings and other affiliated entities.

After SFVA filed for Chapter 11 bankruptcy, the future of the Strawberry Hill races was in doubt.  SFVA negotiated an agreement with CH to partner to hold the races, but its bankruptcy was converted into Chapter 7 liquidation.  The bankruptcy trustee notified Colonial Holdings that its agreement was rejected (which defendants argue was a breach of contract by SFVA).  In addition, the trustee told CH that it needed a temporary license to use the mark to proceed with the event under that name.  Defendants, however, maintained that any transfer of the mark was subject to the license they already had from SFVA.

In a footnote, the court noted legal uncertainty about the effect of the trustee’s rejection of the agreement between SFVA and defendants.  One possibility is that the rejection is a breach of contract for which only damages are available, and defendants lost the right to use the mark.  The other is that a trademark licensee may retain the right to use a mark after a licensing agreement is rejected.  The Bankruptcy Code might ultimately play a role in determining the effect of the trustee’s action.

The parties disputed whether the ownership of the mark transferred before or after the race, held on June 2—the bill of sale transferring the mark was dated June 1, but the letter transmitting the bill of sale was dated June 4.  (The C&D was sent on May 30, so there really wasn’t much time before the race.)  The parties also disputed the extent to which the mark was associated with the event; defendants contended that they worked in good faith to strip the event of any reference to “Strawberry Hill Races” once the dispute arose. On the day of the event, however, a Richmond newspaper reported that Colonial Downs had acquired sole ownership of the Strawberry Hill Races.

Relations deteriorated thereafter; plaintiffs accused defendants of falsely representing that they’re the legitimate owners of the mark; defendants held a contest inviting the public to rename the event formerly known as the Strawberry Hill Races.  Plaintiffs sent a letter to defendants accusing them of trademark infringement and other wrongs, including failure to pay vendors for the June 2 race.  They cc’ed the letter to the National Steeplechase Association and the Virginia Racing Commission, which was behind the various counterclaims.

The court refused to dismiss the plaintiffs’ claims, even though they targeted the defendants generally: the defendants were plausibly alleged to be under the same control and acting together with respect to the mark.  Likewise, the defendants’ counterclaims survived.  On tortious interference, the defendants identified a specific contract, pled plaintiffs’ knowledge thereof, and pled interference that deprived defendants of the benefit of their bargain—the use of the “Strawberry Hill Races” name.

Likewise, on a motion to dismiss, the defamation claim survived; the court rejected plaintiffs’ argument that their statements were absolutely privileged settlement communications, because they didn’t need to disseminate the letter to the other organizations, whose legal rights wouldn’t be affected by the dispute.  Nor were the allegedly defamatory aspects of the letter pure opinion.  Failure to pay vendors is falsifiable and thus actionable—perhaps even defamation per se as prejudicial to defendants’ profession or trade.  In addition, the court found that allegations of “illegal” conduct were “clearly” actionable, “because an accusation that a person's conduct is ‘illegal’ is objectively provable,” not mere legal opinion.  “Ultimately, it will be proven or disproven whether Defendants engaged in the conduct at issue and whether such conduct is, in fact, illegal.”  In Virginia, defamation per se includes any statement alleging the commission of a crime of moral turpitude for which the target may be convicted; though that wasn’t necessarily what happened here, “the two [situations] are sufficiently analogous to draw one conclusion—allegations of ‘illegal’ conduct are not opinions. There is a difference between offering a legal opinion, which is usually framed as an educated assessment, and unequivocally accusing another of ‘illegal’ activities.”  (Stated this broadly, this conclusion just seems wrong.  Are all threat letters therefore plausibly the basis of a defamation counterclaim if publicized?)

Counterclaims for civil conspiracy, unjust enrichment, and breach of contract (the last two in the alternative) also survived.

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