Real Estate Broker Entitled to Recover the Value of Its Services

March 2, 2015

Goli Realty Corp., commenced an action for the recovery of brokerage commissions. Goli sued Halperin claiming to have brought a buyer that was ready, willing and able to purchase certain real property that Halperin and his entity, SPJ LLC, were looking to sell. Goli prepared marketing packages for Hess Oil, Walgreens, and others, detailing the property's attributes. Hess and Walgreens responded with interest, and Goli showed the property to Hess. Hess had Goli send Halperin a proposal which provided for the minimum rent required by Halperin. Goli sent its commission agreement to Haleprin with Hess's proposal. Thereafter, Halperin contacted Hess directly. Shortly thereafter, Halperin informed Goli that he was not interested in a gas station as a tenant and claimed that Goli had promised to provide an agreement with Walgreens. A few days later, Goli presented Halperin with a proposal from Walgreens, also with the minimum rent. Goli claimed that Halperin agreed to proceed with negotiations with both prospective tenants and to consider how to buy an adjacent property. Despite what Goli had been told, it learned that Halperin had signed a lease with Hess. Goli sued for its brokerage commissions.

Reviewing how the Court discussed the facts and party testimony makes clear that it found Haleprin's testimony to not be credible. At one point, the Court states that outright. Among other things, the Court seemed troubled by Halperin's inability to explain why SPJ did not agree to a lease with Walgreens, as brokered by Goli, if Halperin would not accept a gas station tenant, especially as it ultimately signed with Hess.

At the end, the Court was able to find that an enforceable brokerage agreement existed despite the absence of a formal writing. There was no question that Goji was asked to find a tenant and did so, securing two acceptable tenants. Thus, Goji was entitled to the value of its services, which were the same as the commission that he demanded in his proposed brokerage agreement (even though the Court noted that those commission may have been a bit higher than market rates). The Court did not allow that amount to be awarded against the individual Halperin defendants, however, because Goji had done the work for SPJ, LLC.

This point is critical in any lawsuit as it highlights the importance of obtaining some security when dealing with entities. While Goli obtained an award of $293,962, that award was against SPJ, LLC only. If for some reason SPJ cannot pay that amount and has no assets, Goli collects little or nothing. Had Goli had some agreement with the individual defendants, collecting would be far less of a concern. At a minimum, the judgment could have been obtained against an individual and not just a potentially worthless entity.

This case does two things: It highlights the general rule that a broker is entitled to commissions if it is asked to find a tenant and does so, even if that agreement is not in writing. It also illustrates the pitfalls of entering into an agreement with an entity without any security or guaranty from the individuals behind that entity. The broker might be entitled to a fee but without the ability to collect from a defunct entity.

Transfer of Looted Company Held Valid

February 10, 2015

Steve Hong is the sole shareholder of Koryeo International Corp. Hong sued his mother, Kyung Ja Hong for looting Koryeo before she transferred the corporation to him.

Hong worked for the corporation after law school. His parents promised to transfer the corporation to him in exchange for his agreement to work for a minimal salary. After the death of Hong's father, Mrs. Hong assumed sole ownership and control of corporation. In 2012, Mrs. Hong transferred ownership and control of the corporation to Hong. Upon that transfer, Hong learned that the corporation's bank account held some $50,000, despite revenue in the millions of dollars. Hong and the Corporation sued his mother, claiming that she looted the corporation prior to its transfer, leaving him with a virtually worthless entity. Mrs. Hong sought dismissal of the claims.

Initially, the court found that because Mrs. Hong was the sole shareholder when she allegedly looted the corporation, the corporation could not be a plaintiff against her. The Court would not find anything wrongful in the corporation's actions, or claims of a wrong, when those actions were sanctioned by its sole shareholder. The Court then held that the vague promise to Hong, made 20 years before the transfer, was too indefinite to create a true contract. Moreover, found the court, Hong received exactly what he was promised--the corporation--and even if looted, that was all he was promised.

Keep in mind: There are few exceptions to the rule that any business agreement--even with one's mother--should be set out in a detailed writing. Oral or indefinite agreements are fertile grounds for long-term legal battles.

The Kati Dispute

February 4, 2015

A dispute between The KatiRoll Company, Inc. and Kati Junction, Inc., both of which sell Indian food, produced a court decision useful in examining trademark/servicemark and trade dress issues.

In 2002, KatiRoll opened its first store-front in New York City. That location would expand to two additional restaurants in Manhattan. It sold distinctive food items, offered discounts on multiple purchases, and used an orange and white color scheme on its employee uniforms, signage and marketing. The location setup was consistent in all of the stores, so that each store had front windows, limited seating and an open kitchen. Finally, each store had wood trim in its interior. Because KatiRoll invested much time and expense in developing its natural menu items, each employee signed a non-disclosure agreement in addition to agreeing in their employee manuals that these food items were of secret formulations.

Kati Junction opened a restaurant some three blocks from a KatiRoll location. Kati Junction's color scheme, menu, specials, store layout, and trim were nearly identical to those used by KatiRoll. Kati Junction hired seven current and former KatiRoll employees for this new store. Since Kati Junction opened, KatiRoll customers asked management if the Kati Junction store was part of the KatiRoll chain.

KatiRoll sued Kati Junction and the seven employees, alleging infringement of a registered service mark, trade dress infringement, unfair competition, and other claims addressed to the unfair business practices and theft of trade secrets. Kati Junction sought dismissal of almost all of the claims.

Addressing the trade dress claim in this context, the court highlighted the basic definition of trade dress, as "'the total image of a business' and which 'may include the shape and general appearance of the exterior of the restaurant, the identifying sign, the interior kitchen floor plan, the decor, the menu, the equipment used to serve food, the servers; uniform and other features reflecting the total image of the restaurant.'" This protection was intended to protect the goodwill and the company's ability to distinguish itself from its competitors. To establish this claim, the plaintiff must establish the elements and details of how the trade dress is expressed, and must satisfy certain minimum requirements to show that the trade dress is legitimate and enforceable, and representative of that business.

Because KatiRoll had set out sufficient details to establish these claims, the court refused to dismiss any of its claims. The Court's decision also indicates that it saw the allegations against Kati Junction credible on multiple grounds, and on claims beyond those described in this article, which spells trouble for Kati Junction's defense.

S&P Is Forced to Provide Broad Access of its Books to Shareholders

November 3, 2014

One of the repercussions of the mortgage meltdown was the subsequent scrutiny of the bond rating agencies, including S&P. Claims were made that the rating agencies ignored bond risks and overstated the quality of certain bonds so that the agencies would earn more fees from the increased volume of bonds they reviewed and rated. Because those companies issuing bonds would not patronize the agencies that did not endorse the bonds issued, the agencies did not properly police the quality and reliability of the bonds. In the ensuing collapse, numerous federal and state agencies pointed fingers at the rating agencies and launched investigations into the agencies' business practices. This setting provides the basis for this action.

Under State statute, in certain circumstances, a shareholder of a corporation is allowed to review the corporation's books and records. Forcing compliance requires a lawsuit, but it is more streamlined than a typical lawsuit and the issues before the court are narrow. The documents to be provided under statute are limited, but a judge has the authority under common law, meaning laws developed over time by the courts, to provide more information than what the statutes allow.

In the S&P case, the shareholders, an individual and a retirement fund, sought access to S&P's books and records. The shareholders claimed that they were entitled to review a host of S&P's internal business records to determine how S&P conducted its business and whether management acted improperly (one wonders if the damage to S&P's stock price had something to do with these demands). S&P disagreed that the shareholders were permitted access to the extensive list of documents demanded, and agreed to provide only the limited information allowed under the statutes.

The Appellate Division, First Department, sided with the shareholders. The court held that so long as the shareholders' purpose behind their demands were legitimate and reasonable, S&P could not refuse their requests. Thus, S&P was forced to provide access to the broader list of documents and information allowed under common law and could not hide behind the narrow provisions of the statutes.

Retirement Plan of Gen. Empls. of City of N. Miami Beach v. The McGraw-Hill Companies, Inc.

Violating Confidentiality Agreements

October 23, 2014

Confidentiality provisions are common in many different settings, including settlements, business transactions and intellectual property agreements. The cost of violating a confidentiality provision often leads to litigation and damages, and significant aggravation. While a few months old, a recent article I read highlighted some real-life examples. Have a look here and here.

Before signing a confidentiality provision, non-compete, or any agreement, know what is being bound---many times the one agreeing is unaware of some of the sweeping terms of the agreement made. The wake-up can be painful.

Arbitration Proceeding Held on Sunday Invalidates Arbitration Award

September 19, 2014

A dispute involving the distribution of an estate was submitted to arbitration. The parties proceeded to court where one party sought to have the arbitration decision confirmed, while the other requested that it be vacated.

One of the grounds for vacatur was the claim that one of the arbitration hearings took place on a Sunday, something prohibited under Judiciary Law ยง5. While that law addresses court business, the court in this case extended that rule to arbitration, because "arbitrators perform a judicial function." With that, the court refused to enforce the arbitration proceeding.

The court also found that the arbitrators exceeded their authority on a number of grounds. One of those grounds dealt with the arbitrators' direction to transfer a property free and clear of liens or mortgages. Because the party holding the lien or mortgage was not party to the arbitration, such directive could not be enforced.

This type of overbroad decision is found from time to time and parties to any arbitration or related court proceeding are well advised to make sure that a decision only addresses topics included in the parties' arbitration agreement. In addition to lien-free property transfers, arbitrators sometimes provide for an award of costs or attorneys' fees. Unless that is agreed to in the arbitration agreement, that provision should not be enforced by a court.

Bauer v. Bauer (Supreme Court, Kings County)

Protective Order Renders Commercial Contract Impossible to Perform

September 15, 2014

Plaintiff Kolodin is a singer who lived with her agent, defendant Valenti. Despite the deterioration of their relationship the parties maintained a professional arrangement and Kolodin continued to sign with Valenti and his company, Jayarvee.

At some point, their relationship turned worse and Kolodin obtained an order of protection against Valenti, which prevented him from contacting her. This protective order was extended on consent a number of times. Kolodin then sued seeking recision of the last contract she signed with Jayarvee arguing that fulfilling the terms of that contract was impossible due to the order of protection signed by Kolodin and Valenti. The parties resolved the issues underlying the order of protection by signing a stipulation by which they agreed to have no further contact with each other. The draft of that stipulation had language allowing contact with employees of Jayarvee, but that language was dropped from the final version. Once this stipulation was in place, the court agreed that the parties' contract could not be fulfilled and should be terminated due to its impossibility of performance.

In affirming that decision, the First Department first discussed the narrow grounds for recision of a contract based upon of impossibility of its performance. Those grounds are where the "'the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against n the contract.'" Because the parties' stipulation "destroyed the means of performance by precluding all contact" between the parties, the First Department found that the parties' stipulation "rendered objectively impossible by law" the terms of the parties' contract. As such, the Appellate Division agreed that the contract could be rescinded and cancelled. The court went further and noted that this contract, by its nature, would not allow any relationship, finding that because Valenti had a "central role" in the performance of the Jayarvee contract, his input was material and necessary for the execution of the parties' responsibilities under the contract.

It is important to recognize this outcome because the contract was between Kolodin and Jayarvee, not between Kolodin and Valenti. The court disregarded this normally critical distinction because it recognized the underlying involvement of Valenti and essentially extended the Kolodin-Jayarvee contract to Valenti. And this outcome was not just a by-product of the core decision. The court specifically rejected Valenti's argument that because only he was party to the stipulation, but not Jayarvee, there was no reason why Kolodin could not perform for Jayarvee. The Court determined that "[p]ractically speaking [ ] Jayarvee's employees answer to Valenti, and the company's decisions are ultimately made by Valenti. It would be impossible for Jayarvee, without Valenti's input, to engage in communication with Kolodin. It is of no moment that Jayarvee could hypothetically perform the contract[ ] absent Valenti's involvement; to do so would require a sort of firewall, the very establishment of which would necessitate (direct or indirect) communication between Valenti and plaintiff. Valenti's own admissions as to his role managing Jayarvee compel the conclusion that the contracts could not be performed without his involvement and, thus, without violating the stipulation."

Finally, the appeals court noted that even if the breakdown of the relationship could have been a foreseeable act at the time the parties entered into the contract, so that impossibility could not be established, it was the parties signing the stipulation that was the trigger for creating impossibility of performance of the parties' contract. Thus, what was foreseeable at the time the contract was signed was not relevant.

Kolodin v. Valenti (1st Dept. 2004)

Board Member's Vote for Disputed Conduct Not Deemed Bias for Demand in Derivative Action

August 25, 2014

Often, litigation involving a corporation will be framed as a derivative action meaning, that the shareholder that is suing is doing so on behalf of the corporation but not individually. A prerequisite for a derivative action is the suing shareholder's demand on the board to act on behalf of the corporation. However, one way to avoid this demand, is to demonstrate to a judge that because the entity's board members are biased against the demand, any demand would be futile. Upon such a showing, the demand will be waived.

In a case involving Life Medical Technologies, Inc., Suffolk County commercial division judge, Elizabeth Emerson, held that a board member's vote for the conduct in question did not equate to bias so that a demand may not have been futile. That meant that just because the board member agreed to take the action that is now the subject of the lawsuit did not mean that a demand on that board member to sue would be useless. The court held that the board member, when faced with a demand, could change his or her mind.

I suppose.

The brief facts here involve the company's failure to take steps to recover certain stock grants to a consultant and company officer (both of whom sat on the company's board). There was no dispute that the other board members voted in favor of the grants and failed to take action to recover them.

When the shareholder commenced a derivative action against the company and board members, he alleged that any demand to the board to act on behalf of the company would have been futile and he was thus relieved from making the demand. The Court disagreed, finding that while the two that received the shares would be deemed interested and biased, the other board members, notwithstanding their votes in favor, would not be automatically biased against a demand to recover the grants. Therefore, the allegation that a demand would have been futile was denied, and the case was dismissed.

This decision highlights the fine line often present in derivative litigation, and whether or not to make a demand must be carefully considered. Do not act alone in making that decision, as the dismissal of an otherwise meritorious lawsuit may result.

Court Finds the Word "Control" to Be Ambiguous and Affirms $17.2 Million Malpractice Award

August 18, 2014

In interpreting deal documents, an issue arose as to the definition of the word "control" when used in an attempt to obtain "control" over a board of directors. For that reason, and others, the law firm that drafted those documents was found liable to its client to the tune of $17.2 million. The details are a bit complex, but worth a read. Have a look here. Read the comments too.

Bottom line: Write what you mean. As simply as possible.

Important--Required--Reading for Employers and Employees

August 12, 2014

We have written and counseled on an employer's right to access an employee's personal email account from a work computer. Here is an article that goes beyond email, to an employer's ability to access an employee's social media account, for a host of reasons, even if accessed from a personal computer.

Its a bit technical, so please let us know if you have any questions.

New York State High Court Refuses to Force Parties to Negotiate Forever

July 14, 2014

Tyco and IDT entered into a joint venture agreement. Numerous litigations commenced, which were settled by a 2000 settlement agreement. That settlement agreement provided for IDT to use Tyco's yet unbuilt infrastructure, upon the parties' mutual agreement. As time went on, negotiations failed to produce mutually agreeable terms and conditions for IDT's use, and litigation followed.

The Court of Appeals agreed with IDT that the settlement agreement was enforceable, but refused to enforce Tyco's obligation to negotiate in good faith to mean that the parties were compelled to negotiate without end. The court stated that an "obligation [to negotiate] can come to an end without a breach by either party. There is such a thing as a good faith impasse; not every good faith negotiation bears fruit." The court extended that position to a case where market conditions made the proposed deal untenable or even uninteresting and one party walked away. As a result, the court dismissed IDT's case, finding that IDT stated no cause of action upon which relief could be granted.

The dissent would not have dismissed IDT's complaint because IDT's allegations did raise questions of Tyco's negotiation tactics. While the dissent addressed dismissal, it clearly disagreed with the majority's finding as to Tyco's conduct and questioned whether Tyco acted in good faith.

Often, preliminary agreements, which are often enforceable--to the surprise of a party--contain language similar to that which was under consideration here. Writing that protects the parties but also binds them, is critical to an enforceable agreement.

Court Enforces Plain Language of Insurance Policy

June 23, 2014

Plaintiff, Castle Oil Corp., operated a fuel oil terminal in the Bronx, receiving and supplying fuel. The terminal was insured by defendant ACE American Insurance Co. for "direct physical loss or damage" during the policy period. The policy included provisions for flood damage, including from storm surges, which carried a $2.5 million annual limit. The policy had a deductible provision specifically for flood damage that was equal to "2% of the total insurable values at risk," with a minimum of $250,000. During Superstorm Sandy, Castle's terminal suffered flood damage of $2.2 million. When Castle submitted an insurance claim, ACE declined to pay claiming that applying the 2% deducible against the entire insurable value of the $124,701,000 policy resulted in a deducible amount of $2,494,202, which was more than the loss.

Castle disputed that computation, claiming that the deductible was not be setoff against the value of the entire property and operation, but only against the property that was "at risk" from flood loss. Because the limit for flood loss "at risk" was $2.5 million, the 2% deductible was $250,000. Castle also pointed out that the $124 million amount was for "premium purposes only," meaning, to determine the policy cost, but not for deductible calculation.

The Court first recited the law applicable to interpreting insurance policies--according to their plain terms and definitions. The Court's role was to look at the policy as a whole and attempt to enforce the policy as intended, so that all provisions of the policy are defined and implemented. In this case, the court noted that "at risk" was not defined in the policy. If the policy was interpreted as ACE argued, the term "at risk" would be redundant and the provision "premium purposes only" would be irrelevant. Finally, the court pointed out that following ACE's logic, the $2.5 million limit on flood damage would also be meaningless, as the deductible amount would always be more than the flood loss limit. Given that the approach proposed by ACE left provisions of the policy without any import or meaning, the Court rejected that position and found for Castle.

Two important lessons can be gleaned here: First, words matter and second, insurance companies try hard to avoid paying on policies.

Applicable Florida Law Held "Truly Obnoxious" and Not to Be Enforced in New York

May 21, 2014

After Johnson was terminated by her employer, a subsidiary of a Florida company, Johnson went to work for a competitor. Claiming that working at Johnson's new job violated a non-compete agreement that she had signed, her prior employer sued Johnson and her new employer. The agreement sued upon contained a provision dictating that Florida law governed the parties' relationship. The Court determined that because the parties contracted to apply Florida law, Florida Law controlled. Notwithstanding that holding, the court refused to apply Florida law.

The court discussed the general rule that while parties to a contract are free to agree to be governed by a particular state's law, that was true so long as that governing state had some relationship to the parties or their transaction, and the law was not "truly obnoxious" to New York's public policy. In this case, the court found that one of the related parties to Johnson's former employer was based in Florida so that Florida law could apply. However, because Florida law on the enforcement of non-compete agreements was "truly obnoxious" to New York's public policy, the court refused to apply that law.

The court explained that New York disfavors restricting an employee from competing with a past employer once employment has been terminated so that an individual is not prevented from earning a livelihood. Even when non-compete agreements are enforced, they are done so only to the extent that they are not unduly harsh or burdensome. Florida law, however, specifically excludes any consideration of the hardship suffered by the employee when enforcing such an agreement. Florida law further provides that a Florida court must consider the reasonable protection of the legitimate business interest established by the employer, and should not construe the non-compete provision narrowly against the employee. This "anti-employee bias" contained in Florida law, which is almost the mirror image of New York law, was found to be obnoxious and unenforceable in New York. The New York court was not persuaded by the employer's argument that while Florida law was written as such, undue hardship was in fact considered by Florida courts' in their practical application of the statute.

The court also refused to enforce the non-solicitation agreement, finding that it was overbroad in that it precluded Johnson's solicitation of her prior employer's customers even if those customers never had any relationship with Johnson. The court would not modify the agreement to reduce its scope and threw out that claim.

Non-competes in New York are not favored and to have them enforced they must raised, applied and enforced in specific ways. Simply having an employee sign a document often results in an unenforceable agreement and serves no end.

Measuring Damages in Broken Real Estate Transactions

May 1, 2014

An issue that client's grapple with concerns how to measure damages where a contract to buy real property is breached by the purchaser. In 2013, the Court of Appeals (New York State's highest court) addressed this in a comprehensive decision.

Parties to a real estate contract often assume that where a buyer fails to close, and the seller is forced to sell that property to another, the seller is entitled to damages from the first buyer that is equal to the difference between the first contract price and the second contract price (assuming the contract does not limit damages, which is often the case). This assumption is drawn from general legal principles and common-sense intuition. That assumption, however, is wrong.

The court in White v. Farrell addressed this issue. White entered into a contract to purchase a property from Farrell for $1.725 million. As in almost every transaction, the contract had certain contingencies. In an effort to close, the parties agreed to remove the contingencies in exchange for certain promises and a payment. Ultimately, unhappy with a particular issue, White terminated the contract.

White sued Farrell seeking the return of his down payment. White claimed that Farrell could not close under the terms of their agreement and the down payment should be returned. Farrell denied his inability to close, and counterclaimed for damages due to White's refusal to comply with the parties' agreement. During that litigation, Farrell sold the property for some $350,000 less than what White had agreed to pay. The issue that went all the way to the Court of Appeals addresses how much Farrell was entitled to collect as damages for White's breach, if anything.

Farrell demanded the difference between the amount in the White contract and the selling price. At the initial stage of the litigation, the trial judge held that because White breached the agreement he could not recover the down payment. However, the measure of damages that Farrell could potentially recover, was the difference between the price in White's contract and the value of the property on the date of breach, but not simply the difference between the two amounts. Because testimony established that the value of the property was the actual selling price, which was also the value on the date of White's breach, Farrell had no damages that he could recover.

Did The Sale of "Gray Goods" Mushrooms Infringe a Grower's Trademark?

February 14, 2014

Hokto USA is a subsidiary of Japan-based Hokuto Co. Ltd. Hokuto Co. grows non-organic mushrooms in Japan. Hokto USA produces the same mushroom varieties in the United States as Hokuto Co. does in Japan, but Hokto USA's products are certified organic. To earn organic certification, Hokto USA's plants are state of the art and employ robotic machines in temperature controlled environments, all of which are computer controlled. Unlike other growers, Hokto USA does not use manure in its fertilizers. It uses a "sterilized culture medium made of sawdust, corn cob pellets, vegetable protein and other nutrients."

For a time, Hokto USA imported mushrooms from Hokuto Co. These mushrooms were grown in Japan but in a controlled environment so as to meet the requirements for US organic produce. The packaging was in English and not Japanese. A small amount of goods, however, was not organic, but the packaging for those items was obviously different, and identified Hokto USA as a distributor of Hokuto Co.

After obtaining trademarks in Japan, Hokuto Co. sought US trademark registration for word and design marks.

For a number of years, Concord Farms imported Hokuto Co.'s non-organic mushrooms into the United States. Because the purchases were placed through intermediary companies, Hokuto Co. was unaware of Concord Farms. Hokto USA learned that Concord Farms was sometimes marketing the goods it imported from Hokuto Co. as organic and as "made in the USA" although it displayed a Japanese-language label displaying the name of Hokuto Co. Those mushrooms were neither organic nor made in the USA. Concord Farms refused to cease selling these mushrooms and Hokto USA filed suit. Among the arguments made by Concord Farms was that the mushrooms it sold were "gray goods" meaning, that the goods were manufactured by Hokuto Co., and the sale of those Hokuto Co. goods were the actual goods. Concord Farms also argued that because Hokto USA sold some non-organic goods, Concord Farms to do the same. Hokuto Co. prevailed before the trial court, and Concord Farms appealed.

The Ninth Circuit appellate court, in affirming, noted that these issues "implicate[] the set of trademark principles governing so-called 'gray-market goods': goods that are legitimately produced and sold abroad under a particular trademark, and then imported and sold in the United States in competition with the U.S. trademark holder's products." The court decided that Concord Farm's items were not true gray goods because they were not genuine goods. The court recited the general rule that "genuine goods" are excluded from trademark protection and may be sold by any party so long as they are genuine, meaning that they were properly obtained and sold without modification. The court found that the goods sold by Concord Farms were not "genuine goods" and were thus covered by the trademark laws. As such, Hokuto Co. was within its right to force Concord Farms to stop selling the infringing goods.

More broadly, "genuine goods" are defined as those goods bearing a trademark that do not differ in any material way from the goods sold by the trademark holder. These are often referred to as "gray goods." Gray goods can fall into this category because the goods sold in the US and the goods sold overseas are sometimes the same (but are many times not). If material differences are found, they cannot be deemed "genuine" and the sale of the gray goods may infringe on the trademark. This makes sense in the scheme of trademark law. The purpose of a trademark is to ensure that the public recognizes that a product or service meets a specific standard by associating the trademark with the product. The purchaser, recognizing the trademark, relies on the branded item to deliver the expected level of good or service. If the trademark is used by another, but delivers an inferior product or service, that trademark, improperly used, has been damaged as it no longer represents the standard expected by the consumer. The consumer may therefore no longer purchase the trademarked item.

Here, the court noted the rigorous rules and standards under which Hokto USA grew its organic mushrooms. It also noted the absence of any of those rules for Concord Farms' goods. Concord Farm's goods were not organic and carried labels identifying the goods as produced in Japan. In short, the Concord Farms mushrooms were not produced to be organic, were not maintained using the rigorous rules in place at Hokto USA's plants, and the labels were misleading. Therefore, the court found that consumers could be confused by Concord Farms' products and could believe that Concord Farms was selling actual Hokuto Co. or Hokto USA's goods. A bad experience by one buying Concord Farm's goods would negatively impact the goodwill and brand reputation of the trademark holder.

Concord Farms attempted to argue that the trademark itself was defective, either because it was overbroad, to cover items not sold by Hokto USA, or because Hokuto Co. did not properly supervise Hokto USA, so it could not argue that the trademark brand would be damages by a lesser quality product. The court rejected all of these arguments.

They issue of gray goods is interesting because the line separating permissible and impermissible goods is often "gray." A review of the goods' manufacturing, marketing and sales is necessary, while considering elements of trademark law, to determine whether infringement is a viable claim.

Hokto Kinoko Company v. Concord Farms, Inc. (9th Circuit 2013)