Scott E. Mollen

Commercial Landlord Tenant—Watchmaker Awarded $1.1 Million in Damages Against Landlord Based on Landlord's Contributory Infringement of Federally Registered Trademarks—Landlord Knew or Had Reason to Know Counterfeit Goods Were Being Sold on the Premises—Permanent Injunction Granted—Attorney Fees and Prejudgment Interest Denied—Contributory Trademark Infringement Claim Against a Landlord Was “Somewhat Novel”

A jury found that a defendant landlord had “failed to take remedial steps to prevent trademark infringement at [its building] even after it knew or had reason to know that counterfeit goods were being sold on the premises.” The jury found the landlord liable for contributory trademark infringement and awarded the plaintiff statutory damages of $1.1 million. The plaintiff had moved to amend the final judgment, to include a permanent injunction, attorney fees and prejudgment interest.

The plaintiff had alleged that the landlord had knowingly leased the subject premises to a tenant who sold counterfeit watches. The jury had found that the infringing marks were counterfeit and the landlord's conduct had been willful. The jury awarded the plaintiff $275,000 for each of the four trademarks, for a total of $1.1 million.

The Lanham Act authorizes trial courts to enter permanent junctions to prevent “future trademark infringement by a defendant.” However, the power to “enjoin future conduct…is not unfettered. Courts 'cannot lawfully enjoin the world at large,'…and 'injunctive relief should be no more burdensome to the defendant than necessary to provide complete relief to the plaintiffs.'” The “federal rule limits the binding effect of an injunction 'the parties, the parties' officers, agents, servants, employees, and attorneys,' and other persons with whom they are in active concert or participation, 'provided they receive 'actual notice.'”

The landlord did not oppose the motion for a permanent injunction. However, it sought to strike parts of the plaintiff's proposed judgment which allegedly sought to “bind buildings other than [the subject building] and legal entities other than [landlord]; place affirmative burdens on [landlord] 'far more onerous than necessary to redress the minimal risk of future harm to [plaintiff].'” The landlord also argued that certain proposed provisions of the injunction were redundant.

The plaintiff had prevailed at trial “based on the sale of a counterfeit watch at a specific location-namely, [the subject building].” However, the proposed amended judgment would bind the landlord, together with its “parent, subsidiaries, divisions, predecessors, partners, stockholders, members, affiliates, officers, directors, attorneys, agents, employees, representatives, and all persons in active concert or participation with any of them who will receive actual notice,” and also would apply to the “land and building located [subject location] as well as any other real property owned or managed by [landlord].”

The court found that the proposed judgment was “overbroad and inconsistent with the judgment rendered at trial.” Thus, the court adopted the landlord's proposed alternate language which, inter alia, removed all references to “any other real property owned or managed by (landlord).”

The court rejected the landlord's objection to certain proposed “affirmative burdens” embodied in the proposed judgment. The plaintiff sought to require the landlord to “require any future tenant or sub-tenant to agree, through 'express, written condition of any new lease or sub-lease' to 'be bound by the terms of this permanent injunction' and 'provide copies of such leases or sub-leases to (plaintiff) within 30 days of their execution.'”

The jury found that the landlord had failed to take remedial steps to prevent trademark infringement even after it knew it had reason to know that counterfeit goods were being sold on the premises. Moreover, the landlord “remains willing to rent its vacant retail space to souvenir shops in the future.” The court opined that to include an express “lease provision binding future tenants is hardly onerous; it is reasonably tailored to address (plaintiff's) proven risk of future harm.”

The court also found that certain other language which barred the landlord from infringing on plaintiff's trademarks and permitting the subject premises to be used to promote the sale of merchandise that infringes the plaintiff's trademarks, was not redundant. Each proposed provision imposed a “distinct burden, consistent with the judgment.”

The court denied attorney fees and prejudgment interest.

The Lanham Act authorizes courts “in exceptional cases” to award reasonable attorney fees to the prevailing party. The U.S. Supreme Court construed “exceptional cases” as “simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”

The courts will weigh the “'totality of the circumstances' and consider relevant factors including 'frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.”' In 2018, the U.S. Court of Appeals for the Second Circuit held that it would no longer limit attorney fees to cases involving “fraud or bad faith or willful infringement.” The Circuit Court held that “bad faith did not automatically entitle a prevailing party to attorney's fees.”

The plaintiff sought attorney fees of approximately $1 million, based on fees incurred during the time from when the court decided the plaintiff's prior motion for sanctions through resolution of the case at trial. The plaintiff contended that the case is exceptional “based on both the jury's finding of willfulness and (landlord's) litigation conduct after the case was set for trial,” which in the plaintiff's view “significantly and unnecessarily increased the fees and costs plaintiff had to incur to obtain a judgment.”

The court found that this case was not exceptional since it did not “stand out from others in regard to its frivolousness or objective reasonableness.” The plaintiff's initial four counts against multiple defendants had been reduced to a single count against a single defendant by the time of trial. The strength of the plaintiff's trademarks was undisputed. The court acknowledged that the plaintiff's “contributory trademark infringement against a landlord was somewhat novel.” Courts in other circuits had “extended contributory trademark infringement liability to landlords but…the Second Circuit has only 'assumed without deciding' the issue.”

The plaintiff had emphasized that the landlord had “years of notice of counterfeiting activities at the premises.” However, the court noted that the trial “ultimately turned on a much narrower question-did a subtenant…sell a (single counterfeit)…watch after (landlord) knew or had reason to know such goods were being sold on the premises?” The court determined that the landlord's decision to defend itself in the litigation and to “proceed to trial was neither frivolous nor unreasonable” and that the landlord's “litigation conduct” did “not rise to a level sufficient to justify a fee award.”

The court acknowledged that some of the landlord's conduct, such as “repeatedly asking the court to consider issues already decided, a refusal to stipulate to an issue ultimately conceded in summation, and a failure to confer with plaintiff on pretrial submissions, led to inefficiencies.” However, the court explained that the standard of litigation conduct “typically relied upon to justify a fee award, however, is a higher one.”

A prior federal court decision had explained that the type of misconduct that “supports an attorney's fees award includes not only willful infringement, but also willful defiance and protraction of judicial processes attempting to stop the illegalities.” Moreover, the plaintiff's lack of actual damages also “points away from an award of fees and prejudgment interest, as a primary justification for an award of attorney's fees is to compensate the prevailing party.” The court further noted that prejudgment interest is “within the discretion of the trial court and is normally reserved for exceptional cases.”

Additionally, the court stated that the “sizable statutory damages award in this case, coupled with the entry of a permanent injunction, are sufficient to deter (landlord's) future conduct without the need for additional costs or fees.” The jury's finding of willfulness did not alter the courts conclusion since such finding “did not necessarily require an award of fees and interest.” The court emphasized that “willfulness alone is not dispositive” and the court's decision was based on other relevant factors.

Omega SA v. 375 Canal LLC, U.S. District Court, SDNY, Case No. 12 Civ. 6979, decided June 12, 2019, Crotty J.

Land Use—Zoning Board of Appeals' Denial of Off-Street Parking Variance Annulled-Was Not Based on Substantial Evidence—Owner Made Substantial Investment in Reliance on Building Permit that Was Valid When it Was Issued—Vested Rights—Generalized and Unsubstantiated Complaints Cannot be the Basis for a ZBA Decision

A petitioner sought an order vacating and annulling a decision of the respondent Zoning Board of Appeals (ZBA), which denied the petitioner's application for an off-street parking variance. In 2014, the town had granted the petitioner a permit to construct a pad site in a shopping center owned by the petitioner. The permit had been extended three times without issue, in 2015, 2016 and 2017. After the petitioner did excavation work and poured the foundation, the town issued a stop work order.

The town had advised the petitioner that it “changed its method of calculating the required amount of off-street parking.” Under the “new calculations, the proposed construction of the pad site would now result in a deficient amount of parking….” Under the prior method of calculating the required amount of off-street parking, 557 off-street parking spaces were required. Under the new calculation method, 624 such spaces would be required. The town therefore required the petitioner to apply for a variance as to the off-street parking.

At a public hearing, the petitioner proffered the testimony of a traffic expert who prepared a study which concluded the proposed pad site “would have a minimal impact on traffic, parking, and the area generally.” Members of the community and board members voiced their opposition and letters from town officials were also received.

The petitioner asserted that the ZBA's determination to deny a variance was arbitrary and capricious. The court observed that “[g]eneralized or unsubstantiated complaints from neighbors, unsupported by empirical or expert evidence, are generally insufficient for a zoning board to base its decision….” Moreover, “[w]hen work of a substantial character has been commenced prior to an amendment to a zoning provision or regulation, and enforcement would therefore cause serious loss to the owner, the regulation may be declared inoperative as affecting 'vested rights'”. The court acknowledged that vested rights “cannot be acquired in reliance upon an invalid permit….”

The court held that contrary to the ZBA's position, “the…building permit was valid when issued, and the subsequent change in the method of calculating off-street parking is akin to a change in a zoning regulation rather than an error invalidating the petitioner's permit.” Thus, by “obtaining the subject building permit in 2014, renewing for three consecutive years, excavating the area, and pouring a foundation prior to the stop work order being issued, petitioner has demonstrated a 'vested right' in the planned construction….”

The court further explained that although a zoning board is “typically entitled to rely on its member's personal knowledge and observations, no evidence was offered to substantiate the claims in opposition that the…shopping center has issues with parking or traffic, let alone any evidence of the impact the proposed pad site would have….” The petitioner's expert study “was the only evidence submitted regarding traffic and parking issues, and as such, the ZBA's determination was not based on substantial evidence….”

The court distinguished other legal cases where an expert's testimony supported the ZBA's conclusion. Here, “only generalized and unsubstantiated claims were offered to the contrary (of the petitioners experts report)” and the “determination of the respondent must be annulled.”

Comment: This decision illustrates how, on occasion, a real estate developer/owner will be victimized by a governmental body that will attempt to change its land use rules and regulations or interpretations thereof and apply such change retroactively. Sometimes, a change may be attributable to an honest, good faith effort to improve the rules and regulations. In certain cases, land use regulations should be changed to address current problems, unforeseen issues and/or current goals. However, sometimes a change is motivated by a desire to appease local community and political opposition to a project that complies with current land use requirements. Here, the court noted that community and public officials had opposed the project.

Generally, the law will not permit a retroactive application of a new land use requirement, where a developer had already made a substantial investment and undertaken substantial work, in reliance upon a permit that was valid when it was issued.

Here, an agency had changed its method of calculating the required off-street parking. The court explained that the “change in the method of calculating” the parking was “akin to a change in a zoning regulation.” This is not a case where a permit had been wrongfully issued because it violated the then governing rules, regulations or statutes. Thus, this case is distinguishable from a case in 1990s, wherein a New York City developer was required to remove 12 stories from a new construction high-rise apartment building, because the permit had been issued in violation of a statute.

Project opponents will often enlist the support of elected officials in their effort to convince a public agency to inter alia, change its prior interpretation of land use regulations or to enact new rules to close or address what they call “loopholes.” A “loophole,” is an expression which sometimes refers to something that is presently legal. Generally, since zoning laws are in derogation of the common law, any ambiguity is to be construed in favor of the property owner.

A “non-compliance” with a land use regulation may be deliberate or inadvertent. Some errors could be corrected or otherwise properly addressed. Opponents note that if they find that a developer failed to comply with the law, the public benefits.

Matter of C&B Realty #3 LLC v. Van Loan, Supreme Court, Nassau Co., Case No. 976/18, decided June 10, 2019, Feinman, J.

Scott E. Mollen is a partner at Herrick, Feinstein.