Pacific Sunwear of California, Inc. v. Olaes Enterprises, Inc.

DISCUSSION

PacSun contends that the trial court erred in ruling, as a matter of law, that SNCL’s trademark infringement claim was not a rightful claim. PacSun argues that, “at the very least,” there is a disputed factual issue as to whether the claim is “rightful,” precluding summary judgment. We agree.

California Uniform Commercial Code section 2312 states as follows:

“(1) Subject to subdivision (2) there is in a contract for sale a warranty by the seller that

“(a) The title conveyed shall be good, and its transfer rightful; and

“(b) The goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.

“(2) A warranty under subdivision (1) will be excluded or modified only by specific language or by circumstances which give the buyer reason to know

As explained below, the commentary to Uniform Commercial Code section 2-312^[2] demonstrates that, contrary to Olaes’s position, the term “rightful claim” as used in the statute is intended to broadly encompass any nonffivolous claim of infringement that significantly interferes with the buyer’s use of a purchased good.

Official comment 3 to Uniform Commercial Code section 2-312 states that subdivision (1) creates a duty on the part of the seller “to see that no claim of infringement of a patent or trade-mark by a third party will mar the buyer’s title.” (U. Com. Code com., par. 3, reprinted at 23A pt. 1 West’s Ann. Cal. U. Com. Code (2002 ed.) foil. § 2312, p. 290, italics added.) The commentary further explains that the subdivision’s purpose is to “reject[]” case law that had required a buyer to be “expressly prevented from using the goods” by an infringement claim prior to obtaining relief. (U. Com. Code com., par. 4, reprinted at 23A pt. 1 West’s Ann. Cal. U. Com. Code, supra, foil. § 2312, p. 290.) The commentary thus explains that under the Uniform Commercial Code, “ ‘eviction’[^[3] ] is not a necessary condition to the buyer’s remedy since the buyer’s remedy arises immediately upon receipt of notice of infringement.” (U. Com. Code com., par. 4, reprinted at 23A pt. 1 West’s Ann. Cal. U. Com. Code, supra, foil. § 2312, p. 290, italics added.) The comment quoted above, by stating that the seller warrants there will be “no claim of infringement,” and by asserting that the buyer’s remedy arises immediately upon notice of infringement (i.e., well before resolution of the claim), strongly suggests that any significant claim of infringement—whether or not ultimately meritorious—triggers the section 2312(3) warranty.^[4] (U. Com.

The parameters of the section 2312(3) warranty are further clarified by the official commentary to an analogous warranty in subdivision (1) of Uniform Commercial Code section 2-312.^[5] The subdivision (1) warranty requires a seller to warrant that title to a purchased item “shall be good, and its transfer rightful.” (U. Com. Code, § 2-312, subd. (l)(a); see Cal. U. Com. Code, § 2312, subd. (l)(a).) The accompanying commentary states that the requirement that the transfer be “rightful” obligates the seller to ensure that the goods are free from any significant claims against title—not simply those claims that ultimately will prove successful in litigation. (U. Com. Code com., par. 1, reprinted at 23A pt. 1 West’s Ann. Cal. U. Com. Code, supra, foil. § 2312, p. 290.) The Uniform Commercial Code section 2-312, subdivision (1) warranty thus “makes provision for a buyer’s basic needs in respect to a title which he in good faith expects to acquire by his purchase, namely, that he receive a good, clean title transferred to him also in a rightful manner so that he will not be exposed to a lawsuit in order to protect it.” (U. Com. Code com., par. 1, reprinted at 23A pt. 1 West’s Ann. Cal. U. Com. Code, supra, foil. § 2312, p. 290, italics added.)

In line with the above commentary, the majority view of the courts is that the Uniform Commercial Code section 2-312, subdivision (1) warranty is not inapplicable simply because the underlying claim against the buyer’s title ultimately lacks merit. (See Maroone Chevrolet, Inc. v. Nordstrom (Fla.Dist.Ct.App. 1991) 587 So.2d 514 , 518 (Maroone Chevrolet) [agreeing with the “majority view” that “there need not be an actual encumbrance on the purchaser’s title or actual disturbance of possession to. permit a purchaser to recover for a breach of warranty of title,” and explaining that this view “ ‘is supported by the policy that a purchaser should not be required to engage in a contest over the validity of his ownership’ ”]; Frank Arnold Contractors v. Vilsmeier Auction Co. (3d Cir. 1986) 806 F.2d 462 , 464-465 (Frank Arnold Contractors) [noting that the “majority” of courts hold that “there need not be an actual encumbrance on the purchaser’s title to permit

There are also strong public policy arguments that support interpreting the section 2312(3) warranty to encompass all nonfrivolous claims of infringement, and not solely those claims that ultimately prove (or are expected to prove) successful in litigation. (People v. Jefferson, supra, 21 Cal.4th at p. 94 [directing courts to look to the “ ‘ “public policy” ’ ” underlying a statutory enactment in discerning meaning of ambiguous text].)

A warranty against all nonfrivolous claims of infringement also accords with California Uniform Commercial Code section 2312’s status as an implied warranty, present in every sale involving a merchant who regularly deals in the goods sold, that can be altered by the contracting parties’ agreement. (Linear Technology Corp. v. Applied Materials, Inc. (2007) 152 Cal.App.4th 115 , 127 [ 61 Cal.Rptr.3d 221 ] (Linear Technology Corp.) [noting that § 2312(3) “expressly recognizes an exception for agreements to the contrary”].)^[7] In the most common scenario—i.e., the situation best suited to a generally applicable implied warranty—buyers will be unwilling to make a purchase unless assured by the seller that the goods are not subject to any nonfrivolous infringement claims. Average buyers simply do not anticipate

The alternate warranties contained in section 2312(3) also set up a clean dividing line delineating which party (buyer or seller) will be required to bear the burden of infringement claims arising from the use of purchased goods. This dividing line provides a degree of certainty to parties entering into a commercial transaction as to who will bear the costs of potential third party infringement claims. It would disrupt this finely crafted statutory allocation of risk, with little apparent benefit, to refocus the inquiry, as Olaes requests, on the ultimate validity of the potential third party infringement claim— something that will be difficult to discern at the time of sale (particularly for the buyer).

Finally, if the section 2312(3) warranty were determined by reference to the ultimate success or failure of third party infringement litigation, the buyer would be placed in an untenable position when a third party sues, contending infringement of a trademark, patent or copyright. Only by losing the lawsuit—or helping the third party claimant to maintain an appearance of success prior to settlement—would the buyer preserve the right to recover from the seller under Uniform Commercial Code section 2-312.^[8] This would create a perverse incentive that would undermine the adversary process—a public policy outcome unlikely to have been intended by California Uniform Commercial Code section 2312’s drafters. (Cf. Cover v. Hydramatic Packing Co., Inc. (Fed. Cir. 1996) 83 F.3d 1390 , 1394 [stating that a construction of “ ‘rightful claim’ ” as synonymous with actual infringement “would not lead to judicious public policy inasmuch as parties would eschew settlement and be forced to go to trial to discern whether a ‘rightful claim’ exists under federal patent law”], quoted in Linear Technology Corp., supra, 152 Cal.App.4th at p. 128.)^[9]

While our analysis is analogous to that of the Sun Coast court, we believe some modification of the standard set forth in Sun Coast is necessary. First, the phrase “claim ... of a substantial nature” (Sun Coast, supra, 922 A.2d at p. 797) should be understood to mean a nonfrivolous claim. Unlike “substantial,” “nonfrivolous” is a term that can be readily applied to the evaluation of legal claims and is thus more conducive to concrete application. (See, e.g., Code Civ. Proc., § 128.5, subd. (b)(2) [defining “ ‘[fjrivolous’ ” in the context of attorney or party sanctions to mean, inter alia, “totally and completely without merit”]; In re Marriage of Flaherty (1982) 31 Cal.3d 637 , 650 [183 Cal.Rptr.508, 646 P.2d 179 ] [defining “frivolous appeals” as those that “indisputably ha[ve] no merit”].) Second, contrary to the potential implication of the Sun Coast standard quoted above, the existence of litigation is neither necessary nor, in itself, sufficient to establish that a claim is “rightful.” A claim of infringement may be rightful under section 2312(3) whether or not it is ultimately pursued in litigation. For example, a claim may be deemed rightful if the buyer, prior to any litigation, voluntarily ceases to use purchased goods due to a third party claim of infringement. And, contrary to PacSun’s suggestion, the mere filing of litigation will not necessarily establish that a claim is “rightful.”^[10] As the courts are well aware, a third party may file a complaint and pursue litigation despite the absence of any merit to the underlying contention. (See Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553 , 575 [ 21 Cal.Rptr.3d 331 , 101 P.3d 140 ] [recognizing that some lawsuits result in settlement even though they achieve that result “ ‘ “by dint of nuisance and threat of expense” ’ ” rather than “ ‘ “by threat of victory” ’ ”].) Consequently, while we are generally in accord with the discussion in Sun Coast, we set forth a different formulation of the applicable standard for purposes of California law. A rightful claim under section 2312(3) is a nonfrivolous claim of infringement that has any significant and adverse effect, through the prospect of litigation or otherwise, on the buyer’s ability to make use of the purchased goods.

Applying the above standard to the facts of the instant case, we conclude that the trial court erred in granting Olaes’s motion for summary judgment.

A motion for summary judgment “shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that

The evidence presented on Olaes’s summary judgment motion demonstrated that there was at least a “triable issue of material fact” as to whether SNCL’s infringement claim was a rightful claim.^[11] (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826 , 850 [ 107 Cal.Rptr.2d 841 , 24 P.3d 493 ].) SNCL based its claim on a registered trademark that bore at least some semblance to the Hot Sauce Monkey T-shirts. Further, the claim quickly blossomed into full-blown litigation in federal district court, causing PacSun to appear, answer the complaint and litigate a preliminary injunction motion. The case continued after the Hawaii court denied the request for an injunction (in a 20-page order), ultimately resulting in a settlement. (Cf. Linear Technology Corp., supra, 152 Cal.App.4th at p. 130 [recognizing settlement of a claim as potential factor to be considered in determining whether the claim is rightful, and quoting discussion in indemnity case that a “ ‘settlement is presumptive evidence of liability of the indemnitee and of the amount of liability, but it may be overcome by proof from the indemnitor that the settlement was unreasonable . . .’”].) While these factors may, or may not, ultimately prove dispositive, they create, at the least, a triable question as to whether SNCL’s claim was a rightful claim, i.e., whether the claim constituted a nonfrivolous claim of infringement that had a significant and adverse effect on PacSun’s ability to make use of the purchased goods. On this record, the trial court could not properly resolve that question, as a matter of law, in favor of Olaes. (Code Civ. Proc., § 437c, subd. (c).)

Olaes next contends that even if we disagree with the trial court’s interpretation of rightful claim, we can still affirm the summary judgment ruling on an alternate ground not ruled on by the trial court: that Olaes’s breach of the warranty was not the proximate cause of PacSun’s damages. (See Dominguez v. American Suzuki Motor Corp. (2008) 160 Cal.App.4th 53 , 57 [ 72 Cal.Rptr.3d 354 ] [appellate court “may affirm an order granting summary judgment on a ground not relied on by the trial court, if the parties have been afforded the opportunity to brief the issue”], citing Code Civ. Proc., § 437c, subd. (m)(2).) We disagree.

Olaes does not dispute that PacSun would be entitled to its litigation expenses in the underlying infringement litigation (the primary relief sought by PacSun) if the fees were “proximately caused” by Olaes’s breach of the warranty. (See De La Hoya v. Slim’s Gun Shop (1978) 80 Cal.App.3d Supp. 6 , 10-12 [ 146 Cal.Rptr. 68 ] [discussing circumstances under which party may

Again, the evidence presented on Olaes’s summary judgment motion did not meet the threshold for a ruling in Olaes’s favor. (Code Civ. Proc., § 437c, subd. (c).) “Proximate cause ... is generally a question of fact for the jury . . .” (Hoyem v. Manhattan Beach City Sch. Dist. (1978) 22 Cal.3d 508 , 520 [ 150 Cal.Rptr. 1 , 585 P.2d 851 ]) that cannot be resolved on a motion for summary judgment “unless from the facts only one reasonable conclusion could be drawn.” (Koepke v. Loo (1993) 18 Cal.App.4th 1444 , 1450 [ 23 Cal.Rptr.2d 34 ].) The meager facts adduced by Olaes on appeal do not support a ruling, as a matter of law, on the question of proximate cause. Olaes points out only that SNCL sued PacSun’s subsidiary, d.e.m.o., and clothing maker Ecko prior to PacSun’s purchase of the Hot Sauce Monkey T-shirts, and that the lawsuit included an allegation that SNCL possessed the “Smile Now Cry Later” trademark. Olaes fails to establish, and PacSun disputes, however, (i) that the lawsuit against PacSun’s subsidiary necessarily demonstrated PacSun’s knowledge of SNCL’s trademark; (ii) that the lawsuit against PacSun’s subsidiary was sufficiently similar to the instant infringement claim that it provided the requisite notice of the “defect” in the goods offered for sale by Olaes; and (iii) that PacSun’s knowledge of SNCL’s trademark immunizes Olaes, as a matter of law, from any damages based on a breach of the section 2312(3) warranty. In short, we cannot conclude that the evidence offered by Olaes leads to “only one reasonable conclusion” (Koepke, at p. 1450), excluding the breach of the section 2312(3) warranty as the proximate cause of PacSun’s damages. Consequently, we cannot affirm the trial court’s ruling on this alternative ground.^[12]