Choice Hotels Int'l, Inc. v. Wright, 355 B.R. 192 (Bankr. C.D. Cal. 2006) (full-text).
Factual Background Edit
Plaintiff franchised hotels, inns, and resorts under the registered marks COMFORT, COMFORT INN, and COMFORT SUITES, among others. Plaintiff offered reservation services to its franchisees and allowed customers to reserve rooms over the Internet or through its toll-free telephone numbers. Defendant Wright, doing business as Dreamco, manufactured and sold footwear and, in 1990, acquired the toll-free number "1-800-COMFORT" and used it to promote his shoes. However, defendant also received numerous calls from customers seeking to make reservations with plaintiff. Defendant initially told these callers that they had reached the wrong number, but later decided to diversify his business to include "opportunities in the travel service industry."
In 1996, defendant contracted with ANZ Travel, an independent travel agent with a pre-existing travel service agreement with plaintiff, such that defendant would receive a portion of the 10% commissions ANZ received from plaintiff for reservations coming from defendant's "1-800-COMFORT" phone number. In 1997, plaintiff learned that defendant, not ANZ, owned the "1-800-COMFORT" number. Plaintiff rejected defendant's proposals for an independent travel service agreement and demanded that both defendant and ANZ stop using the phone number for travel-industry-related services. For the next 14 months, defendant limited his use of the phone number to his shoe sales, but he continued to seek an agreement for travel-related services with plaintiff despite plaintiff's repeated rejections.
In late 2001 and early 2002, defendant registered the domain names "comfortcallcenter.com" and "1-800-comfort.com." By this time, defendant had stopped selling shoes. Defendant also incorporated a company called Comfort Call Center, Inc. ("CCC"), with the specific plan to profit from plaintiff's COMFORT marks through his websites and reservation hotline. In late 2002, CCC registered the domain names "1-888-comfort.com," "comfortgoldcard.com," "comfortsilvercard.com," "comfortbronzecard.com," and "comfortowners.com." Defendant solicited business for its call center and websites directly from plaintiff's franchisees. Defendant's websites featured plaintiff's various "COMFORT" marks.
Trial Court Proceedings Edit
Plaintiff sued defendant and the district court granted plaintiff's motion for summary judgment and permanently enjoined Wright, Dreamco, and CCC from using plaintiff's COMFORT marks, the "COMFORT"-formative domain names they registered and the "1-800-COMFORT" phone number. The court also awarded plaintiff $45,720 in royalty fees for defendants' unauthorized use of plaintiff's marks and $525,000 in statutory damages under the ACPA ($75,000 per name).
Bankruptcy Court Proceedings Edit
In 2005, Wright filed for Chapter 7 bankruptcy. Plaintiff held an unsecured, non-priority claim against defendant for $570,720 from the district court's judgment. Plaintiff brought this proceeding to establish that the district court's money judgment against defendant could not be discharged in defendant's bankruptcy. Plaintiff argued that 11 U.S.C. §523(a)(6) of the Bankruptcy Code prevented debtors from discharging debts that resulted from "willful and malicious injury by the debtor to another entity or to the property of another entity."
The court defined a "willful" injury as one where "the debtor had a subjective motive to inflict injury or that the debtor believed that injury was substantially certain to occur as a result of his conduct." The court defined a "malicious" injury as "(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse." Plaintiff argued that it was entitled to summary judgment on its §523(a)(6) claim because the district court had previously decided the issues of willfulness and maliciousness in the prior trademark case and thus had preclusive effect for purposes of this bankruptcy case. Plaintiff conceded that bad faith and intent were not essential elements of its causes of action for infringement and unfair competition, but argued that the district court's findings regarding Wright's violation of the ACPA satisfied the "willfulness" and "maliciousness" requirements of §523(a)(6). Defendant disagreed and argued that the issues of "willfulness" and "maliciousness" were not "raised, actually litigated, or necessary."
Regarding the five elements required for issue preclusion or collateral estoppel, the court found that the parties were the same as in the prior action, both cases involved defendant's alleged liability for misuse of plaintiff's trademarks, defendant actively participated in the prior action and had a full and fair opportunity to litigate these issues, and the prior judgment against the defendant was a final judgment on the merits.
According to the court, the last issue-preclusion factor, whether the issue decided in the previous action was "identical" to the issue being decided again, presented a closer question. After examining plaintiff's claims for trademark infringement, unfair competition, dilution, unjust enrichment, and cybersquatting, the court held that only the district court's decision on cybersquatting justified the use of issue preclusion to grant summary judgment. Regarding infringement and unfair competition, despite an admission by Wright that he "adopted the Infringing marks for the purposes of trading on the association with the COMFORT marks," the prior decision did not merit issue preclusion here because the district court made no specific finding as to whether defendant's actions were willful or intentional.
Likewise, issue preclusion did not apply to dilution because the district court did not find that defendant's actions were willful or intentional. For both infringement and dilution, the court noted that findings that Wright acted willfully or intentionally were not necessary to establish liability under either claim. And issue preclusion did not apply to unjust enrichment because "restitution does not necessarily require a finding of a deliberate and intentional injury."
However, the court held that the district court's finding in plaintiff's cybersquatting claim that Wright had a bad-faith intent to profit from plaintiff's trademarks "constituted a categorically harmful activity which necessarily caused injury to [plaintiff] within the scope of §523(a)(6)." The court also found that Wright's violation of the ACPA was "malicious" for purposes of §523(a)(6) because it was "wrongful, done intentionally, necessarily caused injury to Choice Hotels, and [were] done without just cause or excuse." Accordingly, the court granted summary judgment to plaintiff and excepted the $525,000 award of statutory damages from discharge in Wright's bankruptcy.
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