Friday, October 10, 2008
Court Clarifies Rules for Breach of Warranty Claims
By SHERRI M. OKAMOTO, Staff Writer
A trademark infringement claim need not be proven successful in litigation for the defendant to bring a breach of warranty claim against its supplier under the Uniform Commercial Code, the Fourth District Court of Appeal held yesterday.
Holding that a nonfrivolous complaint of trademark infringement against a retailer over the sale of goods may give rise to a breach of warranty action by that retailer against its supplier if the infringement action significantly and adversely affects the retailer’s ability to make use of purchased goods, Div. One reversed a trial court’s grant of summary judgment in favor of a supplier to clothing retailer Pacific Sunwear of California Inc.
Pacific Sunwear filed suit against Olaes Enterprises Inc. after the retailer was itself sued in the U.S. District Court for the District of Hawaii by clothing maker Smile Now Cry Later for trademark infringement over the sale of T-shirts depicting a monkey drinking a bottle of hot sauce on the front above the words “Smile Now,” and the same monkey in apparent pain and expelling fire on the back above the words “Cry Later.”
After the district court declined to issue an injunction preventing the sale of the shirts upon its determination that Smile Now Cry Later had not established a likelihood of consumer confusion between the shirts and its registered trademark, which depicted ancient Greek comedy and tragedy masks above the words “Smile Now” and “Cry Later”, the parties settled and Pacific Sunwear filed suit against Olaes alleging a violation of California Commercial Code Sec. 2312(3).
The section requires certain sellers to warrant that their goods are “free of the rightful claim of any third person by way of infringement or the like.”
As the district court had not found any likelihood of confusion and trademark infringement, San Diego Superior Court Judge Jacqueline M. Stern determined as a matter of law that the underlying claim did not meet the plain meaning of the word “rightful” and granted Olaes’s motion for summary judgment.
However, in an opinion by Justice Joan Irion, the Court of Appeal reversed Stern’s decision, noting that the official commentary to the code stated that the requirement that the transfer be “rightful,“ and obligated the seller to ensure that the goods were free from any significant claims against title, not simply those claims that ultimately will prove successful in litigation.
Irion explained that public policy supported an interpretation of Sec. 2312(3) as encompassing more than just those claims proven successful in litigation as well because such an approach would place buyers in the “untenable position” of having to either lose a lawsuit against them or help the third party claimant maintain an appearance of success in order to preserve their right to recover from the seller.
Because it is unnecessary for an infringement claim to ultimately prove successful, Irion reasoned, the claim could still be “rightful” under Sec. 2312(3) even if it not pursued in litigation, and she gave as an example a situation where a buyer voluntarily ceases to use purchased goods due to the third party’s infringement claim.
However, Irion cautioned that the filing of litigation also would not necessarily establish that a claim was “rightful” because neither the statutory text, nor the policy rationales, could support extension of the seller’s warranty to frivolous claims of infringement.
Justices Patricia D. Benke and Richard D. Huffman joined Irion in her opinion.
The case is Pacific Sunwear of California, Inc. v. Olaes Enterprises, Inc., 08 S.O.S. 5657.
Copyright 2008, Metropolitan News Company