Kashwere, LLC v. Kashwere USAJPN, LLC , 771 F.3d 1006 ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 13-3535, 13-3730
TMG KREATIONS, LLC, et al.,
Plaintiffs/Appellants, Counterdefendants/Cross-Appellees,
v.
PETER SELTZER; FLAT BE CO. LTD.; et al.,
Defendants/Appellees, Counterplaintiffs/Cross-Appellants.
____________________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 12 C 5018 —Samuel Der-Yeghiayan, Judge.
____________________
ARGUED SEPTEMBER 18, 2014 — DECIDED NOVEMBER 13, 2014
____________________
Before WOOD, Chief Judge, and POSNER and MANION, Cir-
cuit Judges.
POSNER, Circuit Judge. This is a complex commercial case,
involving a number of claims and counterclaims and no
fewer than eight parties. Five of the eight, however, are af-
filiated with the three named in the caption, and can be ig-
nored. The lawyers, drowning in detail, have done a poor
job of presenting the facts and issues in an orderly, compact,
2 Nos. 13-3535, 13-3730
and comprehensible form. We shall simplify for the sake of
clarity.
The basis of federal jurisdiction is diversity of citizenship.
The parties agree that Illinois law supplies the applicable
substantive doctrines. The district court dismissed the entire
litigation on cross-motions for summary judgment, and both
sides have appealed, each arguing that the evidence does not
support the grant of summary judgment to the other side.
One side includes Peter Seltzer and a company partially
owned by him called Kashwere USAJPN LLC, plus a com-
pany called Flat Be that is allied with him though not an af-
filiate; it is owned by a Japanese man named Hiroshi Miya-
kawa. We’ll generally refer to Seltzer plus his company sim-
ply as “Seltzer,” although we’ll have occasion to mention
Kashwere USAJPN LLC (we’ll call it just “USAJPN” for
simplicity) separately. The other side of the litigation con-
sists of two affiliated companies plus two of their owners.
We’ll call that entire group “TMG.”
In or about 1999 Peter Seltzer registered the word
“Kashwére” as a trademark for attractive and comfortable
soft goods, such as bathrobes, shawls and other apparel, and
bedspreads, that he intended to manufacture out of cotton or
other materials by a production process that originated in
the eighteenth century. Yarn or fabric manufactured in ac-
cordance with that process (which produces a fuzzy surface
on the fabric) is called “chenille.” Here is a photo of a che-
nille bedspread:
Nos. 13-3535, 13-3730 3
In 2009, having encountered severe financial problems,
Seltzer decided to sell his company’s principal assets, includ-
ing the Kashwére trademark, to two of the company’s prin-
cipal officers. They formed a company, TMG, which bought
the assets from Seltzer the following year. As part of the deal
TMG granted Seltzer an exclusive license to sell chenille
products under the Kashwére name in Japan, though only
through Flat Be, which in 2006 Seltzer had made the exclu-
sive distributor of Kashwére products in Japan. And so Selt-
zer—formerly the world’s only producer of chenille prod-
ucts under the Kashwére label—was displaced by TMG ex-
cept in the Japanese market.
As part of the same transaction that confined his
Kashwére business to Japan, Seltzer entered into a “non-
compete” agreement with TMG that forbade him to try to
persuade any of his customers to reduce its purchases of
chenille products from TMG or to disparage TMG or its
4 Nos. 13-3535, 13-3730
principals. It should really be called a “non-solicitation” or
“non-disparagement” agreement, but “non-compete agree-
ment” is the parties’ name for it so that’s what we’ll call it.
Thus when the dust settled there was an asset-purchase
agreement between TMG and Seltzer, an exclusive license
granted by TMG to Seltzer covering the Japanese market for
Kashwére products, and a non-compete agreement between
the two. The agreements left neither party with a world mar-
ket, though TMG got the lion’s share. In this litigation each
accuses the other of wanting the whole world and engaging
in nefarious practices to oust the other.
We begin with TMG’s claims, of which there are two sets.
The main claim in the first set is that Seltzer violated the
terms of his exclusive license to sell chenille products under
the Kashwére mark in Japan. He created the company that
he called USAJPN and transferred to it “all rights, title, and
interests” conferred by his license from TMG. USAJPN has
no other significant assets—no employees, no office, and no
revenue—and apparently does nothing at all. Seltzer gave
Miyakawa, the owner of Flat Be, Seltzer’s exclusive Japanese
distributor, a 10 percent interest in USAJPN—why we don’t
know. Flat Be proceeded to register trademarks for
Kashwére products in Japan. It almost certainly did that as a
licensee of Seltzer. Remember that Miyakawa owns Flat Be
and that Seltzer gave him a 10 percent interest in USAJPN,
the Seltzer company whose only significant asset is Seltzer’s
license. It appears that the sole function of USAJPN was to
create an appearance of distance between Seltzer and Flat
Be. Although USAJPN is the nominal license holder, Flat Be
pays royalties to Seltzer rather than to USAJPN. Seltzer’s
business in Japan had been delegated entirely to Flat Be,
Nos. 13-3535, 13-3730 5
making it TMG’s actual licensee of Kashwére products sold
in Japan. Seltzer received a share of Flat Be’s revenues,
doubtless as compensation for the transfer to it of TMG’s li-
cense authorizing Seltzer to sell Kashwére products in Japan.
By transferring his license to Flat Be, Seltzer violated his
deal with TMG by failing to obtain TMG’s permission for the
transfer. He points out that there was no “written offer” by
Flat Be for the license, and that his license agreement with
TMG forbade him to transfer his TMG license to a third
party in response to a written offer without giving TMG a
right of first refusal. But this can’t mean that Seltzer was au-
thorized to transfer the license without consulting TMG as
long as the offer he received was oral; what sense could that
make? The agreement specified a written offer so that TMG
would know what Seltzer wanted to do with the license and
knowing this could decide whether to permit the license to
be transferred. That the offer be written was an implicit term
of the parties’ agreement.
Nor was Flat Be authorized to register a Kashwére
trademark; only TMG was. Seltzer’s license from TMG states
that the “Licensee shall not apply to register as a trademark
the Licensed Mark or any other trademarks owned by Licen-
sor.” Seltzer argues that he didn’t need TMG’s permission to
transfer his license because the license stated that “the right
of refusal … shall not apply if the proposed third party is an
entity in which Peter Seltzer owns a majority of the equity
ownership or maintains managerial control,” USAJPN was
such an entity. But Seltzer’s assignment of the TMG license
to USAJPN provided that “Flat Be … hereby will receive
100% of all rights, protections, and privileges as set forth in
the Kashwere Japan License … and share equally in all these
6 Nos. 13-3535, 13-3730
rights, protections and privileges as per this agreement.”
Even though Seltzer owned a majority interest in USAJPN,
he needed TMG’s approval for the further transfer of rights
to Flat Be.
Besides making and selling Kashwére products author-
ized by the license, Flat Be created a line of fabrics that it
sells, which it calls Kashwére Re but which is not chenille.
Seltzer’s license does not authorize the sale under the
Kashwére name of products that are not chenille, but he ar-
gues that one of TMG’s owners approved the Kashwére Re
project. His principal evidence is an email chain in which a
representative of Flat Be told the TMG owner that Flat Be
was developing new products unlike the Kashwére products
sold theretofore, and the TMG owner responded by asking
for a list of all the new products; neither party referred to the
Kashwére Re line. Other evidence concerning the alleged
approval was in conflict; a trial would be needed to resolve
the conflict.
And finally even if as it appears USAJPN was merely a
conduit through which Seltzer’s license from TMG passed to
Flat Be, before the completion of the passage USAJPN held
the license and failed to comply with a term that requires the
licensee, if it uses the Kashwére mark as part of its corporate
name, to disclose that it is a licensee of TMG—and recall that
the full name of USAJPN is “Kashwere USAJPN LLC.”
On the basis of what appears to be multiple violations by
Seltzer of the license granted him to sell Kashwére products
in Japan, TMG asked the district court to order the license
cancelled or alternatively to enjoin future violations and
award TMG damages. The district judge refused, but on un-
convincing grounds. He ruled that Flat Be, because it had
Nos. 13-3535, 13-3730 7
been Seltzer’s exclusive distributor in Japan before TMG was
created and Seltzer became TMG’s licensee in the Japanese
market, could continue as before. And indeed the license
agreement “confirmed and approved” the 2006 license that
Seltzer had issued to Flat Be. But Flat Be didn’t continue as
before. It became a licensee of TMG, replacing Seltzer. That
switch wasn’t authorized. Moreover, while as Seltzer’s ex-
clusive distributor Flat Be had been authorized to place the
Kashwére mark on the Kashwére products that it sold on
Seltzer’s behalf, it had no authority to affix the mark to prod-
ucts that were not chenille; indeed doing so was a trademark
violation as well as a contractual violation. And a jury could
find that Seltzer had approved the Kashwére Re project. For
such conduct both Seltzer and Flat Be (which remember is
also a defendant) would be liable to TMG for breach of con-
tract and violation of trademark.
The evidence of these license violations was strong, and
the ground on which the district judge rejected it unsound.
Seltzer’s motion for summary judgment should have been
denied.
It’s a separate question whether, should TMG prevail on
remand, the proper remedy would be cancellation of Selt-
zer’s license, one of the alternatives sought by TMG. Cancel-
lation would drive Seltzer out of the Japanese market for
products sold under the Kashwére name—his only market—
and so probably destroy the business without which there
might never have been a TMG. That would be a draconian
remedy. TMG has asked in the alternative that the court en-
join Seltzer and his affiliates, and Flat Be and any successors
to it or to him as distributors of Kashwére products, from
violating Seltzer’s license from TMG. Should the case reach
8 Nos. 13-3535, 13-3730
the remedy stage the district court should give careful con-
sideration to this alternative, gentler remedy, but should
make clear that any further violations by Seltzer will result
in the cancellation of its license. An award of damages for
past harm to TMG’s business caused by Seltzer’s and Flat
Be’s violations would also be a proper form of relief.
We move to the second set of claims by TMG. These are
claims, two in number, that Seltzer violated the non-compete
agreement with TMG. For unexplained reasons the district
judge did not discuss the first of these claims, though he im-
plicitly rejected it in dismissing all the claims and counter-
claims in the litigation. That first claim, for which there is
compelling evidence, is that Seltzer made strenuous efforts
to damage TMG’s business—efforts that not only violated
the non-compete agreement but could well support a tort
action for defamation and product disparagement. Illustra-
tive is an email that Seltzer sent to the person who was
shortly to become TMG’s liaison with Asian manufacturers
of TMG’s Kashwére products, stating that TMG was en-
gaged in illegal activities, sold inferior chenille products un-
der the Kashwére name in Japan, and “has a long history of
lying.” The first two statements are false; the truth or falsity
of the third remains to be determined. In another email to
the soon-to-be liaison Seltzer said that he was seeking an in-
junction against TMG that if granted might prevent the
Asian manufacturers from being paid for the chenille prod-
ucts they were making for and selling to TMG. There is also
evidence that Seltzer tried to sell chenille products in China
that would compete with the chenille products that TMG
sold there, in further violation of the non-compete agree-
ment.
Nos. 13-3535, 13-3730 9
TMG’s second claim in this set involves the settlement of
a suit brought by USAJPN and Flat Be against TMG and
fourteen distributors of TMG’s Kashwére products. The suit
had charged the distributors with infringing Seltzer’s exclu-
sive right to serve the Japanese market, by reselling in Japan
the Kashwére products they bought from TMG. The suit
ended in a settlement, to which TMG was not a party,
whereby with one exception each distributor agreed to stop
buying Kashwére products from TMG.
The suit had, as we’ll see shortly and as the district judge
noted, no merit. But as the judge concluded, it was not frivo-
lous; and the non-compete agreement was not intended to
strip Seltzer of all rights to defend himself against possibly
unlawful activities by TMG. The settlement is another mat-
ter. TMG was not a party to it, is therefore not bound by it,
and it went well beyond what Seltzer could reasonably de-
mand by way of protection against illegal activities of TMG.
The settlement would have required TMG to reconstitute its
chain of distribution, something difficult to do because any
new distributors would have to worry about being sued by
Seltzer, like the old ones, especially if they resold Kashwére
products in Japan, though as we’ll see they’re not forbidden
by Seltzer’s license to do so.
We turn to Seltzer’s cross-appeal, which presents two
claims. One is a mirror image of TMG’s claim that Seltzer
violated the non-compete agreement. It is that TMG knew
that some of its distributors were reselling in Japan, knew
that the Kashwére products they were reselling were inferior
in quality to Kashwére products made and sold by Flat Be,
and assisted these distributors by providing them with
“hang tags” in Japanese to affix to the Kashwére products
10 Nos. 13-3535, 13-3730
they were selling in Japan, and that as result of these she-
nanigans the resales violated both Seltzer’s exclusive right to
market such products in Japan and the trademarks that Flat
Be had obtained.
Of course Seltzer may have lost his rights under the li-
cense by virtue of the maneuvers with Flat Be that we dis-
cussed earlier; and Flat Be had no right to affix the Kashwére
trademark to its Kashwére Re products, since they are not
chenille. It claims, however, that the Kashwére chenille
goods (as distinct from the Kashwére Re goods) that it sells
in Japan are actually superior to Kashwére products that
TMG distributors are reselling in Japan because Flat Be’s
products have a higher thread count and Flat Be maintains a
stricter system of quality control. That’s neither here nor
there; what is critical is that nothing in Seltzer’s license re-
quired TMG to prevent resales in Japan by its distributors.
Seltzer could have negotiated for including in the exclusive
license a provision requiring TMG to forbid its distributors
to resell to Japanese customers, but didn’t do so. The only
express limitation on distribution is the prohibition (with an
irrelevant exception) against TMG’s making direct sales to
Japanese customers. The existence of that limitation rein-
forces the conclusion that TMG was placed under no duty to
prevent its distributors from selling in Japan. It suggests that
the parties negotiated with respect to distribution but not
with respect to resales by distributors.
Express limitations on resale by distributors are common.
And Seltzer must have known that purchasers of TMG’s
chenille products elsewhere in the world might resell in the
large Japanese market and that if they did so this would re-
duce Seltzer’s own sales through Flat Be. It’s true that before
Nos. 13-3535, 13-3730 11
he sold his company to TMG, Seltzer had interpreted his dis-
tribution agreement with Flat Be—which remember pre-
ceded the license agreement with TMG—to forbid distribu-
tors of Kashwére products to resell in Japan, that is, in com-
petition with Flat Be, the exclusive distributor of Kashwére
products in Japan. But his “interpretation” may have been
bluff, as no such limitation had been included in the agree-
ment with Flat Be.
It would be possible in principle to interpret an exclusive
distribution contract as implicitly forbidding a roundabout
process by which exclusivity is destroyed by resale by other
distributors to whom the grantor of the exclusive distribu-
torship sells. An exclusive distributor is required to use his
best efforts to sell his supplier’s product, rather than make
his contract worthless to the supplier by substituting prod-
ucts of other suppliers. See Wood v. Lucy, Lady Duff-Gordon,
118 N.E. 214, 215 (N.Y. 1917) (Cardozo, J.), where we read
that the distributor’s “promise to pay [the supplier] one-half
of the profits and revenues resulting from the exclusive
agency and to render accounts monthly was a promise to
use reasonable efforts to bring profits and revenues into exis-
tence.” The common law interpolates a best-efforts clause
into an exclusive distributorship contract silent about best
efforts—and likewise it could be argued that the grantor of
an exclusive distributorship should be forbidden to impair
the value of exclusivity to the distributor by failing to pre-
vent his other distributors from reselling in the exclusive dis-
tributor’s territory.
There is a remarkable paucity of cases that address the is-
sue, and no consensus on how the issue should be resolved.
In Compania Embotelladora Del Pacifico, S.A. v. Pepsi Cola Co.,
12 Nos. 13-3535, 13-3730
650 F. Supp. 2d 314, 323–25 (S.D.N.Y. 2009) (New York law),
for example, the court rejected a Peruvian bottler’s argument
that its contract with Pepsi Cola—which gave the bottler ex-
clusive distribution rights in designated parts of Peru—
obligated Pepsi to prevent bottlers in other parts of the coun-
try from reselling Pepsi products in the plaintiff’s exclusive
territory. See also Jackson Dairy, Inc. v. H. P. Hood & Sons, Inc.,
596 F.2d 70, 73 (2d Cir. 1979) (concurring opinion); Parkway
Baking Co. v. Freihofer Baking Co., 255 F.2d 641, 646–47 (3d
Cir. 1958) (Illinois law).
A case that came close to implying such a duty also in-
volved Pepsi Cola: Pepsi-Cola Bottling Co. of Pittsburg, Inc. v.
PepsiCo, Inc., 431 F.3d 1241, 1258–59 (10th Cir. 2005), deemed
such a duty implicit in an exclusive distribution agreement,
but it did so on the basis of evidence that Pepsi had prom-
ised bottlers that it would protect their territories from en-
croachment by other Pepsi bottlers and had even established
a program to detect sales by a bottler into another’s territory
and had advertised the program in an attempt to persuade
bottlers to enter into exclusive agreements with the com-
pany. The opinion contains language suggesting that impo-
sition of such a duty would make sense generally in the con-
text of exclusive distribution agreements, but it is not clear
that the court would have imposed it in the absence of the
evidence that we’ve just summarized.
Societe Marocaine des Establissements P. Parrenin v. Gardner-
Denver Co., 137 F. Supp. 210, 212 (S.D.N.Y. 1956), holds that
“under Illinois law [which the parties had specified would
govern any dispute between them over their contract] a
manufacturer is liable for violation of an exclusive sales
agency agreement where it is shown that he directly sold his
Nos. 13-3535, 13-3730 13
goods into the distributor’s exclusive territory. Where the
sale is not made directly by him, he may also be held upon a
showing that he had knowledge that the destination of the
product sold by him to a third party was within the exclu-
sive territory covered by the contract” (footnote omitted). As
the basis for its holding the court cited two old Illinois
cases—Ed. C. Smith Furniture Co. v. Peter & Volz, 205 Ill. App.
379, 380 (1917), and Marshall v. Canadian Cordage & Mfg. Co.,
Limited, 160 Ill. App. 114, 121 (1911)—that indeed are on
point.
Yet recall that the Third Circuit in the Parkway case, also
applying Illinois law, later reached the opposite conclusion.
It did not cite the two intermediate-appellate cases on which
the district court in the Societe Marocaine case had relied, but
relying on other Illinois contract cases reasoned that “in Illi-
nois the intention of the parties to a contract is determined
by the language of the contract itself, and the courts may not
construe into a writing provisions that are not there. What is
more, contracts which restrict the free and unlimited ex-
change of services or commodities are strictly construed, and
the restrictions will be extended no further than the lan-
guage of the contract absolutely requires. Applying these
legal principles to the Parkway contract, we cannot construe
the terms of that writing so as to add a term precluding a
sale and delivery of ‘Hollywood’ bread [made by Parkway]
to American Stores within Parkway’s territory, regardless of
any use the American Stores will make of the bread after
they receive it.” 255 F.2d at 646–47 (citations omitted).
There are compelling reasons to reject an implicit duty to
prevent one’s distributors from reselling in an exclusive dis-
tributor’s territory. It is one thing to require a distributor to
14 Nos. 13-3535, 13-3730
use his best efforts to sell his supplier’s product; it is another
to require the supplier to police all his distributors in order
to make sure that none of them sell in any territory in which
the supplier has created an exclusive distributorship. De-
pending on the number and location of the distributors
(TMG’s distributors presumably are spread across the
world, since it sells worldwide—except of course in Japan),
it may be infeasible to police them; and so if Seltzer had
asked for an express provision requiring policing, TMG
would either have refused or have insisted on compensation.
And would the duty extend to a distributor who sold to
another distributor who resold in Japan? When there is no
uniform rule, like the rule of the Duff-Gordon case, that
courts can with some confidence interpolate into an entire
class of contracts, the matter should be left to the contracting
parties to work out.
We can assume that if in an attempt to take over the
Japanese market TMG had encouraged, assisted, bribed, etc.
its distributors to resell in Japan, and to that end to buy more
Kashwére products from TMG than they would otherwise
have done, Seltzer would have a strong argument that TMG
had violated the license it had granted him, by acting in bad
faith. For “good faith” in performance of a contract, like
“best efforts” in the performance of a contract of exclusive
distributorship, is a term that courts interpolate into most
contracts. See, e.g., Wisconsin Electric Power Co. v. Union Pa-
cific R.R., 557 F.3d 504, 510 (7th Cir. 2009). But there is no evi-
dence of bad faith by TMG. The idea that by providing hang
tags, which are simply fancy labels, in Japanese to distribu-
tors who TMG had been informed were reselling Kashwére
products in Japan TMG was encouraging its distributors to
Nos. 13-3535, 13-3730 15
sell there is far-fetched when one considers that a custom
hang tag can be bought for 7 cents. Print Runner, “Hang
Tags,” www.printrunner.com/hang-tags.html?gclid=CKfWr
v7C8MACFQaNaQodhCEAHg&gclsrc=aw.ds (visited Nov.
12, 2014).
All this said, the burden of proving that the license had
some implicit term limiting non-Japanese distributors of
Kashwére products from reselling in Japan was on Seltzer,
who failed to produce any persuasive evidence of it. And
Seltzer’s contention that the sale in Japan by TMG distribu-
tors of a Kashwére product inferior in quality to what Flat Be
was selling violated Flat Be’s trademarks falls with our de-
termination that TMG was not responsible for sales by its
distributors.
Seltzer’s second counterclaim charges TMG with having
made direct sales into Japan, which if true would clearly
have violated his license. But all that the charge is based on
is an unsubstantiated inference from purchase orders of $1.3
million that Flat Be placed—none of them with TMG. Seltzer
contends that the sales were made by TMG in secret, and
that TMG kept for itself whatever profits from the sales
ought to have gone to Seltzer under his license. But Flat Be
obviously would know if it had purchased goods directly
from TMG—and Flat Be is Seltzer’s ally in this litigation—
yet it offered no evidence to support the allegation of secret
sales.
Seltzer raises two other objections to the district court’s
rulings. The first is its dismissal of his promissory-fraud
claim. Although promissory fraud is generally not actionable
in Illinois, there is an exception for cases in which “the false
promise or representation of intention of future conduct is
16 Nos. 13-3535, 13-3730
the scheme or device to accomplish the fraud.” Steinberg v.
Chicago Medical School, 371 N.E.2d 634, 641 (Ill. 1977). Seltzer
argues that before the deal that transferred his Kashwére
business to TMG, the TMG principals were scheming to sell
in Japan in violation of the deal reserving the Japanese mar-
ket to him. But his evidence consists merely of discussions
by the principals of the lucrative character of the Japanese
market; there is no evidence of an actual scheme to violate
any promise that was part of the deal. The second objection
is to the denial of a motion by Seltzer to amend his counter-
claim to add a charge of conversion. The objection is a
throwaway; it is stated but not developed.
In summary, the district judge was correct to grant sum-
mary judgment in favor of TMG on Seltzer’s and Flat Be’s
counterclaims, but incorrect to grant summary judgment in
favor of Seltzer and Flat Be on TMG’s claims. The dismissal
of the counterclaims is therefore affirmed and the dismissal
of TMG’s claims reversed, and the case is remanded for fur-
ther proceedings consistent with the analysis in this opinion
respecting those claims.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.