Duncan McCoy Alex Dorsett, and Alex-Duncan Shrimp Chef, Inc. v. Mitsuboshi Cutlery, Inc., and Admiral Craft Equipment Corporation

Citation: 67 F.3d 917Docket: 95-1087

Court: Court of Appeals for the Federal Circuit; October 29, 1995; Federal Appellate Court

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Duncan McCoy, Alex Dorsett, and Alex-Duncan Shrimp Chef, Inc. filed a lawsuit against Mitsuboshi Cutlery, Inc. and Admiral Craft Equipment Corp. for infringement of McCoy's intellectual property rights and business torts. McCoy had engaged Mitsuboshi to manufacture shrimp knives covered by his patents and trademarks but refused to pay for a substantial order of 150,000 knives produced by Mitsuboshi. Consequently, Mitsuboshi sold some of these knives to Admiral Craft after McCoy’s refusal to accept them.

A jury found Mitsuboshi liable for patent and trademark infringement, tortious interference, and unfair competition, but also determined that McCoy breached the contract by not paying for the knives. The trial court awarded McCoy $2.6 million in damages, attorney fees, and costs, while also granting Mitsuboshi $89,337 on its counterclaim for breach of contract. The Federal Circuit Court reversed the judgment, emphasizing that Mitsuboshi had the right to resell the knives due to McCoy's breach. McCoy had previously acknowledged responsibility for the payment refusal and did not appeal the jury's finding of breach. Mitsuboshi had made efforts to negotiate payment and indicated its intention to mitigate damages by reselling the knives, ultimately selling 6,456 units to Admiral Craft, which then distributed them in the U.S. market.

McCoy initiated a lawsuit against Mitsuboshi and Admiral Craft for patent and trademark infringement, unfair competition under federal and Texas law, and various Texas state law torts. Admiral Craft reached a settlement, while Mitsuboshi counterclaimed for breach of contract. The trial court denied Mitsuboshi's motions for judgment as a matter of law regarding its right to resell the knives. The jury ruled against Mitsuboshi on the infringement, unfair competition, and tortious interference claims but found in favor of Mitsuboshi on the breach of contract claim. Mitsuboshi's renewed motion for judgment was also denied, leading to an appeal.

The appeal presents a legal question regarding how McCoy's breach of contract affects his intellectual property rights in the knives, a matter not previously addressed by this court. It is established that a patent grants the holder the right to exclude others from making, using, or selling the patented item, but these rights are subject to the holder's contractual obligations. A patent owner can waive the right to exclude, either wholly or partially, contingent upon patent, contract, antitrust laws, and equitable considerations. Licensing arrangements, whether express or implied, are governed by standard contract law principles. An implied license may arise from the conduct between the patent owner and the alleged infringer, which can infer consent to use the patent. However, any implied license must not exceed what is necessary to fulfill the contract's intent.

The law may imply a license for a patent holder when selling or authorizing the sale of a patented product, thereby placing that product beyond the reach of the patent. This principle is supported by cases such as United States v. Univis Lens Co. and Intel Corp. v. ULSI Sys. Technology, which establish that an authorized sale rewards the patent holder for their invention and signifies a relinquishment of patent rights over that product. 

In certain instances, an implied license can arise even without authorization from the patent holder, as demonstrated in Wilder v. Kent, where a purchaser acquired rights to a patented machine through a sheriff's sale, leading the court to dismiss the infringement claim. Justice Story in Sawin v. Guild further articulated that patent laws should not allow actions against sheriffs for the sale of patented products at execution sales, as it could lead to significant public mischief.

Additionally, the Second Circuit in Platt. Munk Co. v. Republic Graphics, Inc. extended the implied license doctrine to scenarios where an aggrieved seller sells products to remedy a buyer's breach, emphasizing the legal recognition of such transactions in the context of patent rights.

The Second Circuit remanded the case to the trial court to assess whether Platt & Munk justifiably refused payment for toys. If found unjustified, the court was instructed to lift the injunction against resale of the toys, allowing Republic to resell them despite any copyright protections. This ruling, based on New York contract law, affirms a seller's right to mitigate damages from a contract breach. The court emphasized that the copyright status does not hinder resale rights when the buyer unjustifiably refuses payment. This decision extends the implied license doctrine to include self-help sales, allowing aggrieved parties to enforce contract obligations related to patented goods.

In a related scenario, McCoy placed an order for 150,000 knives with Mitsuboshi, who fulfilled the order. After McCoy breached the contract by not paying, Mitsuboshi attempted to negotiate payment before ultimately selling some knives to an American company. Under Texas's version of the Uniform Commercial Code, Mitsuboshi was entitled to resell the goods following McCoy's wrongful refusal to pay. The court recognized that the implied license supports Mitsuboshi’s right to mitigate losses and enforces McCoy's obligation to pay. The ruling aligns with the principle that intellectual property rights do not shield owners from fulfilling state contract obligations, affirming that federal patent and trademark laws do not preempt state contract enforcement rights.

Mitsuboshi's right to resell goods under Texas law does not require prior adjudication of McCoy's wrongful refusal to pay for knives. Under Section 2.706(a) of the Texas Uniform Commercial Code (UCC), a seller can resell goods without needing judicial confirmation if the buyer fails to make a required payment. If the resale is conducted in good faith and commercially reasonable, the seller can recover the difference between the resale price and the original contract price, minus any saved expenses. Mitsuboshi can resell the knives as a self-help remedy without first proving McCoy's breach in court.

Additionally, the case of Platt does not necessitate prior adjudication for resale. In Platt, a preliminary injunction against resale was upheld pending a decision on payment obligations, but no such injunction was sought or obtained by McCoy regarding Mitsuboshi's intended resale. Consequently, Mitsuboshi acted within its rights under Texas law to resell the knives, which does not infringe on McCoy's patent or trademarks.

Regarding unfair competition, Title 15 of the U.S. Code prohibits misleading practices that cause confusion regarding goods or services. Liability under 15 U.S.C. § 1125(a)(1)(A) hinges on whether the actions are likely to cause confusion. The Fifth Circuit views likelihood of confusion as a factual question, but established that no confusion arises from the sale of genuine goods, even if unauthorized, as seen in Matrix Essentials, where the court ruled that selling genuine products that originate from the same source does not constitute trademark infringement or unfair competition.

The Fifth Circuit dismissed Matrix's claims, emphasizing that Emporium's sale of Matrix products could not confuse consumers regarding manufacture or sponsorship since the goods were legitimately produced and labeled by Matrix. It reaffirmed the principle that trademark law does not apply to the sale of genuine goods with a true mark, even without the mark owner's consent. The court noted that a consumer purchasing authentic goods receives precisely what is expected, negating any possibility of confusion. 

In the case involving Mitsuboshi, the knives resold were genuine and would have been supplied to McCoy had payment not been refused. Thus, Mitsuboshi's resale did not cause consumer confusion, regardless of McCoy's lack of authorization for resale. McCoy's argument regarding consumer confusion was rejected, mirroring Matrix’s failed claims, with the court stating that unauthorized stocking of a trademark owner's products does not constitute misleading representation.

The court affirmed the district court's summary judgment in favor of Emporium on trademark and unfair competition claims, asserting that the sale of genuine goods, even unauthorized, cannot lead to confusion or claims of trademark infringement or unfair competition. Additionally, the jury's finding of tortious interference and unfair competition under Texas law was flawed because it did not consider whether Mitsuboshi acted in good faith, which is a factual determination. The court concluded that Mitsuboshi had the legal right to resell the knives, rendering the jury's conclusion incorrect as a matter of law.

The court determined that there is no need to remand for a jury to assess Mitsuboshi's good faith in reselling the knives, as the record conclusively shows Mitsuboshi acted in good faith, negating claims of tortious interference with McCoy’s prospective business relations. For McCoy to prevail on its unfair competition claim under federal law, it was required to demonstrate that Mitsuboshi's resale created a likelihood of confusion; however, the genuine nature of the knives sold negates this likelihood. McCoy argued that Texas state law allows for broader unfair competition claims without such proof, citing Schoellkopf v. Pledger, which acknowledges "unlawful business injury" as unfair competition but requires an independent tort or illegal conduct for liability. The court noted that Schoellkopf's ruling reversed unfair competition findings when no independent tort was found. Similarly, Mitsuboshi did not commit any independent tort or illegal conduct, such as patent or trademark infringement or tortious interference, which would support a verdict for unfair competition. Consequently, the court reversed the unfair competition verdict and concluded that Texas law allowed Mitsuboshi to resell the knives after McCoy's wrongful refusal to pay. The trial court was found to have erred in denying Mitsuboshi judgment as a matter of law on all counts of McCoy's complaint. Each party is to bear its own costs, and the court's decision is reversed.