Universal Furniture International, Inc. v. Frankel , 538 F. App'x 267 ( 2013 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-1928
UNIVERSAL FURNITURE INTERNATIONAL, INC.,
Plaintiff - Appellee,
v.
PAUL FRANKEL,
Defendant - Appellant,
and
LEONARD FRANKEL,
Defendant.
Appeal from the United States District Court for the Middle
District of North Carolina, at Greensboro. William L. Osteen,
Jr., District Judge. (1:08-cv-00395-WO-JEP)
Argued: May 15, 2013 Decided: August 20, 2013
Before Sandra Day O’CONNOR, Associate Justice (Retired), Supreme
Court of the United States, sitting by designation, and FLOYD
and THACKER, Circuit Judges.
Affirmed by unpublished per curiam opinion.
John F. Bloss, HIGGINS BENJAMIN PLLC, Greensboro, North
Carolina, for Appellant. W. Swain Wood, WOOD JACKSON PLLC,
Raleigh, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
In Universal Furniture International, Inc. v. Collezione
Europa USA, Inc., 618 F.3d 417 (4th Cir. 2010), this Court
affirmed a judgment in favor of Universal Furniture, making
Collezione liable for $11 million in damages for various
infringements on Universal’s intellectual property. But
Collezione’s bankruptcy kept it from satisfying that judgment,
and so Universal decided to pursue individual liability against
defendant Paul Frankel and his brother Leonard -- Collezione’s
principal owners and managers. Leonard defaulted, but Paul
contested his liability. The district court granted summary
judgment to Universal largely by giving preclusive effect to
issues resolved in the first lawsuit. Paul appeals, asserting
that this preclusion holding was erroneous and that he had
viable individual defenses to liability. We disagree and
affirm.
I.
Because the facts of the underlying dispute are fully
developed in previous opinions and mostly irrelevant to this
appeal, we offer only an abbreviated discussion.
Collezione was admittedly in the “knock-off” furniture
business -- in general, it made money by producing approximate
versions of others’ designs at a lower price. It ran into
trouble when it did so with certain copyrighted designs
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belonging to Universal, and its problems were compounded by its
display of actual Universal furniture as its own during a major
furniture show called the High Point Market. After Universal
sent a cease-and-desist letter, Collezione agreed to redesign
the relevant furniture collections. But it again produced a
design rather close to Universal’s and then used it to pursue
customers who were originally induced to deal with Collezione
through its previous actions. Universal sued, and prevailed.
This Court’s opinion in the first lawsuit resolved that
Universal had valid and enforceable copyrights, that Collezione
infringed them, that Collezione also violated federal and state
unfair trade laws by passing off Universal’s product as its own,
and that it owed some $11 million in damages. See Universal
Furniture, 618 F.3d at 424-27.
Collezione was owned and managed almost entirely by
defendant Paul Frankel and his brother, Leonard. The brothers
founded Collezione together and were its only corporate
officers. Leonard was the President, but Paul was Vice
President, Secretary, and Treasurer, and had responsibility for
the financial aspects of the business, as well as certain
distribution matters. In the first trial, Paul testified that
he was aware of the cease-and-desist letter and told his brother
that it would be a good idea to redesign the furniture. He also
testified that he was present at the High Point Market when a
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photographer took pictures of the apparently-Collezione-but-
actually-Universal furniture, and that he received those
pictures and distributed them to salespeople (although he
maintains that he was not aware of any intellectual property
violations). Finally, Paul was involved in the decision to hold
orders during the redesign of the furniture to give customers a
chance to purchase the new design, and personally contacted at
least one of those potential buyers. He had responsibility for
the flow of Collezione product, and as a co-owner of the
business, he was generally familiar with its operations. See
Universal Furniture Int’l, Inc. v. Frankel, 835 F. Supp. 2d 35,
45-48 (M.D.N.C. 2011).
Finally, although he maintains that Leonard “controlled”
the first round of litigation, Paul clearly played a
considerable role in that suit. Paul gave substantial
deposition testimony as Collezione’s Rule 30(b)(6) witness, was
the sole in-court representative for Collezione, and was the
only Collezione employee to submit any sworn statements on its
behalf. Paul and Leonard owned equal shares in the company, and
so held an equally serious stake in the outcome of that case.
Id. at 41-42.
In this case, Universal pursued individual liability
against Paul for his role in Collezione’s infringing activities.
The district court granted summary judgment to Universal, making
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two sets of determinations that Paul challenges here. First,
the district court determined that Paul could be collaterally
estopped from re-litigating important matters resolved during
the first trial (such as the validity of Universal’s copyrights,
and Collezione’s infringement thereof). The district court held
that, given Paul’s substantial role in the first suit and the
absence of any evidence that he would have conducted himself
differently had personal liability been at stake, Paul had a
“full and fair opportunity” to litigate the relevant issues,
making collateral estoppel appropriate. Second, the district
court held that there were no genuine issues of material fact
surrounding Paul’s individual liability. The court found that,
on the admitted facts, Paul’s role in the distribution of
infringing furniture was sufficient to find either direct or
vicarious liability for infringement, and that Paul either did
know, should have known, or willfully blinded himself to the
passing off of Universal furniture that occurred at the High
Point Market. Paul challenges both these holdings, and we
discuss each in turn.
II.
Paul first argues that the district court erred in applying
collateral estoppel to the issues resolved in the first
litigation. The grant of summary judgment on a collateral
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estoppel issue is reviewed de novo. See Henson v. Liggett Grp.,
Inc., 61 F.3d 270, 274 (4th Cir. 1995).
The form of issue preclusion applied in this case is
sometimes called “offensive, non-mutual, collateral estoppel”:
“offensive,” because it is being invoked by a plaintiff to
foreclose a defense to liability; “non-mutual,” because at least
one of the parties did not participate in the first litigation;
and “collateral estoppel,” because it estops the defendant from
arguing again about what was resolved in an earlier, separate
case. The Supreme Court has counseled that this form of
preclusion is somewhat disfavored because it creates the
potential for gamesmanship by plaintiffs and unfairness to
defendants. See Parklane Hosiery Co. v. Shore, 439 U.S. 322,
329-31 (1979); In re Microsoft Corp. Antitrust Litig., 355 F.3d
322, 326-27 (4th Cir. 2004). But for the reasons that follow,
we find the tests for its application satisfied and the
allegations of unfairness wanting.
This Court’s previous cases have identified various factors
that trial courts must consider before applying collateral
estoppel -- factors bearing on the extent to which the relevant
issues were conclusively resolved and the extent to which the
party suffering estoppel had a chance to defend itself on these
issues in the original litigation. See In re Microsoft Corp.,
355 F.3d at 326; Polk v. Montgomery Cnty., 782 F.2d 1196, 1201
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(4th Cir. 1986). Paul’s challenge addresses only two of these
factors: (1) whether he was “in privity” with Collezione, the
defendant in the first action; and (2) whether he had “a full
and fair opportunity” to litigate in that case. The district
court correctly resolved these related issues.
Two parties can be said to be in privity when “the
interests of one party are so identified with the interests of
another that representation by one party is representation of
the other’s legal right.” Weinberger v. Tucker, 510 F.3d 486,
491 (4th Cir. 2007) (citation omitted). It does not require “an
exact identity of parties,” id. at 492; a party with closely
aligned interests who controls the litigation of another can be
considered in privity with the party it controls. See Martin v.
Am. Bancorporation Ret. Plan, 407 F.3d 643, 651 (4th Cir. 2005).
The district court correctly identified this relationship
between Paul Frankel and Collezione -- the closely held company
he owned and controlled equally with his brother. The
uncontested evidence showed that, as co-owner and manager, Paul
had every incentive to make Collezione contest the copyright
validity and infringement issues resolved in the first case, and
his substantial role in that case indicates that he had a full
and fair opportunity to do so.
Paul asserts that, given Collezione’s impending bankruptcy,
he did not have a full incentive to contest the first case. But
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he has not pointed to any argument or evidence that he would
have offered had he appeared in the first litigation as an
individual defendant, let alone suggested any material effect
that such evidence could have had on the issues that case
resolved. The same is true of his allegation that his brother
Leonard “controlled” the first litigation: Even in this Court,
he has not explained how his interests could have departed at
all from his brother’s or their company’s; he has not indicated
why he lacked the ability to contest his brother’s alleged
decisions given his equal ownership; he has not identified a
decision that he would have contested; and he has not offered
any evidence of how such a decision could have affected the
outcome of the case. Accordingly, we can find no fault in the
district court’s holding that Paul came forward with “no
evidence to suggest that [he] would have conducted himself any
differently . . . had he been a named party in [the] prior
action.” Universal Furniture, 835 F. Supp. 2d at 43.
Paul also suggests that collateral estoppel should be per
se unavailable because Universal failed to join him in the first
action when it could have. To be sure, the district court found
that there was “no reason why [Universal] could not have easily
joined [Paul] as an individual party to the Collezione
Litigation,” id. at 42, and this Court has said that offensive
non-mutual collateral estoppel may be inappropriate where a
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plaintiff seeking to use it could have joined issue with the
current defendant in the previous litigation, see, e.g., Polk,
782 F.2d at 1202. Accordingly, Paul argues that it would be
unfair to him to allow Universal to leave him out of the first
litigation, only to use that litigation against him later.
Paul takes this doctrine out of context however, and so
fails to identify the unfairness it means to address. The
Supreme Court has noted that offensive non-mutual collateral
estoppel can be unfair when it encourages plaintiffs to adopt a
“wait and see” attitude towards litigation. In particular, a
plaintiff who is not a party to a particular litigation might
have an incentive to sit on the sidelines and see if the first
plaintiff prevails: if so, she can use non-mutual collateral
estoppel to free-ride on the victory; if not, she can use non-
mutuality to get a second bite at the apple by litigating
herself. See Parklane Hosiery Co., 439 U.S. at 329-30. Thus,
plaintiffs who opt not to join a case must be precluded from
making offensive use of its results to prevent gamesmanship, as
the rule in Polk provides. But the problem for Paul is that
Universal was a party to the first litigation, and would
unquestionably have been bound to its result, win or lose. In
other words, had Collezione prevailed in the first litigation,
Universal’s party status would prevent it from re-litigating
that case with Paul as a new defendant. Given the district
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court’s correct determination about the alignment of interests
between Paul and Collezione, there is no reason this result
should not run both ways. Indeed, given the finding that
Collezione and Paul were in privity, the estoppel in this case
is only garden-variety, mutual estoppel between the plaintiff in
the first action (Universal) and the defendant in that action or
its privy (Collezione/Paul). Accordingly, we find that the
application of collateral estoppel was correct, and the district
court properly gave preclusive effect to those issues
definitively resolved in the prior litigation.
III.
We next address Paul’s arguments regarding his personal
defenses to liability. We again review the district court’s
grant of summary judgment on these issues de novo, and again
agree with its determination.
A.
First, we agree with the district court that the
uncontested evidence established at least vicarious liability
for copyright infringement. It is copyright infringement not
only to copy another’s design, but to authorize distribution of
such copies to the public for sale. See 17 U.S.C. § 106(3).
And a party may be guilty of vicarious infringement if it: “(1)
possessed the right and ability to supervise the infringing
activity; and (2) possessed an obvious and direct financial
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interest in the exploited copyrighted materials.” Nelson-
Salabes, Inc. v. Morningside Dev., LLC, 284 F.3d 505, 513 (4th
Cir. 2002). By his own admission, Paul was involved in: the
“operations and financial side of the business,” including
transactions with the Collezione warehouse; “order fulfillment;”
“purchasing and flow of product;” “general operation of the
sales [department];” and “supervision of . . . [the]
distribution center.” J.A. 38, 59. Given his status as a co-
owner, and his expression of his opinion that the furniture
should be redesigned, we can easily agree with the district
court’s finding that Paul had both the ability to supervise
infringing distribution and an obvious financial interest in the
exploitation of the copyrighted furniture. He had every
incentive to see that his company successfully marketed its
knock-off furniture, and to ensure that it did so without
committing copyright infringement. His failure to prevent
infringing distribution thus leaves him at least vicariously
liable for that infringement.
B.
Finally, we also agree with the district court’s holding
regarding Paul’s personal liability for Collezione’s “reverse
passing off” of Universal’s furniture under both federal and
state law. Paul was admittedly present in the showroom when
this passing off occurred and when the furniture was
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photographed, and he admittedly distributed those photographs to
Collezione’s salespeople. Even after he became aware of
Universal’s allegations in its cease-and-desist letter, he was
involved in the distribution of furniture to customers initially
induced to deal with Collezione through its false designation of
Universal’s furniture as its own. He also profited directly
from those sales and failed as a co-owner to do anything to
prevent them, even after becoming aware of a significant risk of
continued infringement through Universal’s communications.
Accordingly, we can locate no error in the district court’s
finding that Paul either knew or should have known of
Collezione’s infringement, or was at least willfully blind to
its misdoings.
IV.
At bottom, it is clear that Paul’s strategy in this action
was to pin both the conduct of Collezione’s first trial and its
entire operation as a knock-off furniture business on his absent
brother Leonard. But we agree with the district court that
Paul’s evident involvement in the first trial and his own
testimony regarding his role in the business make that strategy
untenable. We therefore agree with the application of
collateral estoppel and the grant of summary judgment on Paul’s
asserted personal defenses, and affirm the judgment below.
AFFIRMED
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