Petition for Writ of Certiorari — Universal City Studios, Inc. v. Nintendo Co.
Supreme Court brief1986
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JOSEPH F. SPANTOC, ae.
| HSER CLERK
IN THE
Supreme Court of the United States
OCTOBER TERM, 1986
>
UNIVERSAL CITY STUDIOS, INC.,
Petitioner,
—against—
NINTENDO Co., LTD. AND NINTENDO OF AMERICA, INC.,
Respondents.
ON WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT
PETITION FOR A WRIT OF CERTIORARI
Of Counsel: MICHAEL W. SCHWARTZ*
WACHTELL, LIPTON, ROSEN
& KATZ
299 Park Avenue
New York, New York 10171
(212) 371-9200
Counsel for Petitioner
J. THOMAS MCCARTHY Universal City Studios, Inc.
University of San Francisco
Law School
2130 Fulton Street
San Francisco, California 94117
(415) 666-6517 *Counsel of Record
LAURENCE H. TRIBE
1525 Massachusetts Avenue
Griswold Hall, 307
Cambridge, Massachusetts 02138
(617) 495-1767
QUESTIONS PRESENTED
The Court of Appeals for the Second Circuit upheld an
attorney’s fee award against petitioner of more than $1.1
million, and hundreds of thousands of dollars more in pur-
ported state law punitive damages. The sole premise for these
sanctions was petitioner’s assertion of a federal statutory claim
of trademark infringement. The claim was asserted on advice
of counsel, and was supported by substantial prior authority—
including a prior federal court judgment expressly adjudicating
the rights of petitioner’s predecessor-in-interest.
The massive award of sanctions was upheld by the Second
Circuit without a threshold determination that petitioner’s
legal position lacked arguable legal merit, or was frivolous, or
without foundation. Nor, despite the sheer magnitude of the
fee award, was there any determination that the amount of the
fee was reasonable; indeed, respondents offered no evidence of
reasonableness. The purported state law damage award was
upheld only because of an apparently deliberate refusal by the
Second Circuit to follow, or even consider, the most recent
decision by the highest court of New York declaring applicable
state law.
The questions presented by this petition are these:
1. Whether, before awarding attorney’s fees to a prevail-
ing defendant, a federal court must specifically deter-
mine that the plaintiff’s federal claim was frivolous
or without foundation, as many of the Circuits have
required, or whether the fees of a prevailing defen-
dant can be shifted to the plaintiff without such a
determination, as the Second Circuit permitted be-
low?
2. Whether a federal court can award more than $1.1
million in attorney’s fees to a prevailing defendant
without making any determination, or hearing any
evidence, that the amount of the award is reasonable?
ii
ETE SSP
3. Whether a federal court can impose purported state
law tort damages, including punitive damages, while
refusing even to consider the most recent, and
seemingly controlling, ruling of the highest court of
the state concerning applicable state law?
Parties to the Proceeding
Petitioner Universal City Studios, Inc. (“Universal”), a :
wholly-owned subsidiary of MCA Inc., a Delaware corpora- |
tion, was appellant-cross appellee in the court below.* Re-
spondents Nintendo Co., Ltd., a Japanese corporation, and its
wholly-owned subsidiary, Nintendo of America, Inc. (collec-
tively, “Nintendo”), were appellees-cross appellants in the
court below.
At AS I
x The following list of parents, subsidiaries and affiliates is supplied in
compliance with Rule 28.1 of this Court’s rules:
MCA Inc. Jove Publications, Inc.
MCA Videodisc, Inc. Coward-McCann, Inc.
MCA Home Video, Inc. Grosset & Dunlap, Inc.
MCA New Ventures, Inc. Richard Marek, Publishers, Inc.
MCA Records, Inc. Cineplex Odeon Corp.
MCA Distributing Corp. LJN Toys, Ltd.
MCA Television Ltd. Spencer Gifts, Inc.
Merchandising Corp. of America, Inc. Womphopper’s, Inc.
The Putnam Publishing Group, Inc. Yosemite Park and Curry Co.
Berkley Publishing Corp.
, |
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TABLE OF CONTENTS*
PAGE
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oS een ee 2
STATEMENT OF THE CASE:
OE 8 ee 2
ee, WI IID cee tb ccseusecsece 4
Te) Le ee 5
2. The vacated Universal Judgment ........ 7
3. Universal’s purchase of Cooper’s rights .. 10
S, “EROMOY HOME once cass 2 SAE 1]
5. Universal’s Lanham Act litigation....... 12
6. The sanctions proceedings.............. 14
7. ‘tne Second Circuit’s opinion ........... 16
REASONS FOR GRANTING THE WRIT:
I. As respects the fee award (first and second ques-
tions presented):
A. The Second Circuit’s approach in imposing
sanctions conflicts with decisions of this and
ee cr clk ep yeas ka dex kek’ 18
: A separate appendix contains opinions of the courts below, statutes
cited herein and other materials.
iV
PAGE
B. The Second Circuit’s failure to require a spe-
cific finding of reasonableness conflicts with
prior rulings of this and other courts........ 21
C. The Second Circuit’s decision implicates other
important federal questions................ 23
Il. As respects the award of state law damages (third
question presented):
The Second Circuit has deliberately refused to
follow the highest court of New York........... 24
Ds te ee ee eh OR RRS 27
TABLE OF AUTHORITIES
CASES: PAGE
Alyeska Pipeline Service Co. v. Wilderness Society, 421
Ses ROE ok 3g Kv hoe od CRESS ee 18
Application of Mogen David Wine Corp., 328 F.2d 925
A cee: SUNG 4 Kao hw etek Ke ener e eae 7n
Arbrook, Inc. v. American Hospital Supply Corp., 645
ye ee Be Ee. |} RR rrp eet yn 20n
Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571
|) SR erare pr 177, RAMEE spe ROE kr miserge apr fee) 25n
Blau Plumbing, Inc. v. S.O.S. Fix-It, Inc., 781 F.2d 604
BUEN Gi PIE hk occ boo UN edie een ae eee en 20n
Blum v. Stenson, 465 U.S. 886 (1984)................ 21
Boeing Co. v. Van Gemert, 444 U.S. 472 (1980)....... 3
Broussard v. Southern Pacific Transp. Co., 625 F.2d
Fae Ce Ss Re ha vas hs KG ee 25, 26
Christiansburg Garment Co. v. EEOC, 434 U.S. 412
NOTE 32 55 Was SHER aed veo eae tee 3, 42
City of Riverside v. Rivera, ecu So
PO TR os ea tucndeaens sce es vane ca wieneyee 21n
Curiano v. Suozzi, 63 N.Y.2d 113, 480 N.Y.S.2d 466, 469
ee Be eer ees panera ener 18, 24-26&nn
Donovan v. City of Dallas, 377 U.S. 408 (1964)....... 25n
Edgar Rice Burroughs, Inc. v. Manns Theatres, 195
ee he ek Oe > a | pares ever 6n
Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).... 25
F-D. Rich Co. v. United States, 417 U.S. 116 (1974) ... 18
vl
PAGE
Fleischmann Distilling Corp. v. Maier Brewing Co., 314
F.2d 149 (9th Cir.), cert. denied, 374 U.S. 830 (1963). 8n
Frederick Warne & Co. v. Book Sales, Inc., 481 F. Supp.
PoE eE ES MOTE ui ch se KASAM CaN OR RRR ES On 6n, 7n
Guard-Life Corp. v. S. Parker Hardware Mfg. Corp.,
50 N.Y.2d 183, 428 N.Y.S.2d 628, 406 N.E.2d 445
AG Sa seek te eae aa wpas uae ea ce wesw kee 26&n
Hensley v. Eckerhart, 461 U.S. 424 (1983) .......... 4, 21-22
International Olympic Committee v. San Francisco Arts
& Athletics, 781 F.2d 733 (9th Cir.), amended on other
grounds, 789 F.2d 1319 (9th Cir. 1986) ............. 22
Levi Strauss & Co. v. Blue Bell, Inc., 632 F.2d 817 (9th
SE Sk ow dee yee ne ee RMR cone eres ke 9n
Mennen Co. v. Gillette Co., 565 F. Supp. 648 (S.D.N.Y.
1983), aff'd mem., 742 F.2d 1437 (2d Cir. 1984) ..... 20n
Nash v. Florida Industrial Comm’n, 389 U.S. 235 (1967) 25n
Noxell Corp. v. Firehouse No. 1 Bar-B-Que Restaurant,
771 F.2d 521 (D.C. Cir.), rehearing en banc denied,
POE BE CIOs 0 bv b tenn che dudensde ewe‘ ck 19
Pennsylvania v. Delaware Valley Citizens’ Council for
Clean Air, __. U.S. ___., 106 §. Ct. 3088 (1986)... 2in
Scotch Whiskey Ass’n v. Barton Distilling Co., 489 F.2d
SE Sle CETED Ui 2 x0 hos aoe ab eae oe 20n
Sealy, Inc. v. Easy Living, Inc., 743 F.2d 1378 (9th Cir.
Er rer a ene ihren ak ted eed eerie 22
Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225 (1964) 25n
Silverman v. CBS Inc., 632 F. Supp. 1344 (S.D.N.Y.
Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417
SP ee err rt trees eo aie Are 6n
Vil
PAGE
Steak & Brew, Inc. v. Beef & Brew Restaurant, Inc., 370
fe Me Oe re 22n
Stevenson v. Sears, Roebuck & Co., 713 F.2d 705 (Fed.
3 | rr a wan ear ee ern rare ee Fae 19
Tempo Communications, Inc. v. Columbian Art Works,
Inc., 223 U.S.P.Q. 721 (N.D. Ill. 1983), certification
of interlocutory appeal denied, No. 80 C 1709 (N.D.
Ill. Oct. 14, 1983) (available on LEXIS)............ 7n
The Trade-Mark Cases, 100 U.S. 82 (1879) ........... 6n
Truck Equipment Service Co. v. Fruehauf Corp., 536
F.2d 1210 (8th Cir.), cert. denied, 429 U.S. 861 (1976) 9n
Vandenbark v. Owens-Illinois Glass Co., 311 U.S. 538
DRESS REIN iar eri A Oa ake at nr Sk bell a gra ae 25
Vaughan v. Atkinson, 369 U.S. 527 (1962)............ 3
Warner Bros. Pictures v. Columbia Broadcasting Sys-
tem, 216 F.2d 945 (9th Cir. 1954), cert. denied, 348
Sos Pe Ms bc Pe KCe ean ake twee eae ees 6n
Zatarains, Inc. v. Oak Grove Smokehouse, Inc., 698
eg gk eR Ge eager era ee On
Zilg v. Prentice-Hall, Inc., 717 F.2d 671 (2d Cir. 1983),
curt. Genied, 466 US. Faw UFO) «occ ccc cccceses 26&n
STATUTES AND RULES:
Lanham Act
eg SB gS. oy . . nee mre 6n
Re ER Fae | Serer passim
Section Say, 35 US. OTIS)... 0 ce vec cas seis 12
Be De Se ee 5-6, 8n, 20
pg ES oe 2 Sa ee err ret eee re re sre 19
Vili
CONGRESSIONAL MATERIALS:
S. Rep. No. 1400, 93d Cong., 2d Sess., reprinted in 1974
U.S. Code Cong. & Admin. News 7132............ 19
OTHER MATERIALS:
ABA Section of Litigation, Sanctions: Rule 11 and
I a 3
R. Callman, The Law of Unfair Competition, Trade-
marks & Monopolies (4th ed. 1983)................ 9n
S. Kassim, An Empirical Study of Rule 11 Sanctions
(Wem@eral Jutecsel Center 1965) ook n om ok nk ecsnccn. 3
J. McCarthy, Trademarks and Unfair Competition (2d
OE, eA Scr ee 6n, 7n, 9n
IN THE
Supreme Court of the United States
OCTOBER TERM, 1986
a
ee
UNIVERSAL CITY STUDIOS, INC.,
Petitioner,
—against—
NINTENDO Co., LTD. AND NINTENDO OF AMERICA, INC.,
; Respondents.
ON WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT
—~<_>—
PETITION FOR A WRIT OF CERTIORARI
Petitioner Universal respectfully prays that a writ of cer-
tiorari issue to review the judgment of the United States Court
of Appeals for the Second Circuit entered in the above-entitled
proceeding on July 15, 1986.
Opinions Below
The Court of Appeals opinion which gives rise to this
petition is reported at 797 F.2d 70 (2d Cir. 1986), and reprinted
at pages Al-16 of the appendix hereto.’ The judgment of the
Court of Appeals is reprinted at Al14-15. The District Court
opinion is reported at 615 F. Supp. 838 (S.D.N.Y. 1985),
A65-113. Earlier opinions in this case are reported at 578 F.
] References to “A____” are to the separately-bound appendix to this
petition.
be
Supp. 911 (S.D.N.Y. 1983), A17-50, aff’d on appeal pursuant
to Rule 54(b), 746 F.2d 112 (2d Cir. 1984), A5S1-64.
Jurisdiction of this Court
Jurisdiction over this petition is conferred upon this Court
by 28 U.S.C. § 1254(1).
STATEMENT OF THE CASE
A. Overview of the Case.
This petition seeks review of rulings by the Court of Appeals
for the Second Circuit which subjected Universal—and expose
every federal court litigant—to capricious, retaliatory litigation
sanctions, unlimited as to amount. The Second Circuit’s deci-
sion invites a wholesale increase in “sanctions” litigation in the
federal courts, even where an unsuccessful claim cannot be
labeled frivolous or without foundation.
Universal was subjected to more than $1.5 million in attor-
ney’s fees and state law tort damages, including punitive
damages, for asserting Lanham Act claims of trademark viola-
tion. Universal had asserted trademark rights in the name and
character of the famous King Kong gorilla. It did so only after
receiving the advice of experienced trademark counsel that it
“was on firm ground to bring this complaint and this action.”
Universal’s claims were premised on a prior federal court
judgment declaring that its predecessor-in-interest owned “all
rights in and to” the name and character of King Kong. The
counsel whose advice it followed was fully familiar with the
complex litigation in which the prior judgment had been
entered. The sole basis for the award was Universal’s assertion
of rights, not any abuse of discovery or other post-complaint
misconduct.
The Second Circuit evidently took it for granted that the
federal courts should be conducting extensive collateral pro-
ceedings over “sanctions” even if it is not first specifically
found that a claim was frivolous or groundless. The Second
Circuit also evidently assumed that a federal court can award
every dollar in fees claimed by a prevailing defendant without
determining that the amounts were in any sense reasonable—
notwithstanding that the statute which supposedly permitted
the award (§ 35 of the Lanham Act) authorizes the shifting of
fees only in “exceptional” cases, and then only in a “reason-
able” amount.
The decision below merits this Court’s scrutiny because it is
part of a rapidly expanding area of federal court litigation—
what may generically be described as “sanctions” litigation—
which the rulings below threaten to expand beyond any
conceivable purpose. This proliferating “sanctions” litigation
arises under, inter alia, the 1983 amendments to Rule 11 of the
Federal Rules of Civil Procedure; the so-called “bad faith”
exception to the “American Rule” concerning attorney’s fees,
first recognized by this Court in Vaughan v. Atkinson, 369
U.S. 527 (1962); and, as in this case, certain of the fee award
statutes enacted by Congress. See, e.g., ABA Section of
Litigation, Sanctions: Rule 11 and Other Powers 3 (1986); S.
Kassim, An Empirical Study of Rule 11 Sanctions 6 (Federal
Judicial Center 1985); The New York Times, Oct. 2, 1986, at
D1, col. 3.
This Court has approved the imposition of sanctions where a
claim was “frivolous, unreasonable, or without foundation,”
while cautioning the lower courts against imposing sanctions
based on “hindsight logic.” Christiansburg Garment Co. v.
EEOC, 434 U.S. 412, 421-22 (1978). Members of this Court
have recognized that “a great deal of litigation” is being
spawned by attempts to shift attorney’s fees. See, e.g., Boeing
Co. v. Van Gemert, 444 U.S. 472, 483 (1980) (Rehnquist, J.,
dissenting). However, this Court has never had occasion to
decide whether or not a specific determination of frivolousness
or groundlessness must precede the imposition of sanctions.
In the absence of such a ruling from this Court, some of the
lower courts have required a prevailing defendant to establish
4
as a threshold matter that his adversary’s case was frivolous or
groundless before imposing sanctions, and have carefully scru-
tinized such claims. Some of the lower courts have also closely
scrutinized the amount of fee awards, consistent with the
principles announced by this Court in Hensley v. Eckerhart,
461 U.S. 424 (1983).
By contrast, the Second Circuit’s decision in this case—be-
cause it was not based on a specific finding of frivolousness,
and did not find the fee award reasonable—invites a second
trial on “sanctions” in every case. If Universal can be severely
sanctioned for not anticipating that a prior federal court
judgment which expressly awarded “a// rights in and to” King
Kong in fact awarded “no rights”—which is what the decision
below boils down to—a substantial increase in “sanctions”
litigation is inevitable. Moreover, the sheer magnitude of the
windfall financial bonanza which the Second Circuit permit-
ted—most of it under a statute expressly limited to “reason-
able” fees—encourages every prevailing litigant to “take a
flyer” on a “sanctions” application. The resulting increase in
collateral “sanctions” litigation would be wholly unjustifiable.
B. Factual Background.
The underlying litigation herein concerns the valuable com-
mercial right to control trademark exploitation of the famous
King Kong gorilla. The litigation turned on the interrelation-
ship of copyright and trademark principles as applied to a
prior federal court judgment in favor of Universal’s predeces-
sor-in-interest. Universal was severely sanctioned for assert-
ing—on the advice of counsel fully familiar with the litigation
leading to the prior judgment—that, under its terms, Universal
could claim trademark rights in the name and character of
King Kong. As will be explained, the Second Circuit’s affirm-
ance of sanctions rested on legal conclusions which were
contrary to substantial authority, including the District Court
in this very case; and which had the net effect of rendering the
core provisions of the prior federal court judgment a nullity.
1. The Cooper Judgment.
The prior federal court judgment (the “Cooper Judgment”)
was first entered in 1976 by the United States District Court for
the Central District of California (the “California Federal
Court”). A116-20. It resolved a long-standing dispute between
Major Richard Cooper and RKO General, Inc. (“RKO”) over
the ownership of tue King Kong property. Universal sued
below as Major Cooper’s transferee and successor-in-interest
under the Cooper Judgment.
It was Major Cooper’s father who created the name, charac-
ter and story of King Kong. The senior Cooper had licensed
RKO to make the famous 1933 movie, “King Kong.” In
purported reliance on this license, RKO went on to exploit
King Kong by marketing King Kong toys and other King Kong
products. A16-37.
The Cooper Judgment resolved in Cooper’s favor his con-
tention that these marketing activities were unauthorized by
the license. A116-20, 126, 128, 133-37. The Judgment declared
that Cooper, not RKO, owned “all rights in and to the use of
the name, character, and story ‘King Kong.’” A117. The
Judgment declared that, to the extent RKO had exploited King
Kong other than in making its licensed movie, it had done so as
a constructive trustee for Major Cooper. A118. It expressly
directed RKO to convey to Cooper all outstanding product
licenses, and to account to him for past profits. Al118-19.
The Cooper Judgment reserved to RKO only the copyright
in its 1933 movie (and in a little-known 1934 sequel). The
Second Circuit in this case ultimately held that RKO’s copy-
righted movie, and the copyrighted “re-make” released by
Dino De Laurentiis Corp. in 1976, “were irreconcilable with
the existence of any Universal trademark rights in King Kong,”
and that Universal “must have known” this. 797 F.2d at 76;
A9-10.
However, the Second Circuit cited no legal authority except
the statutory definition of “trademark” in § 45 of the Lanham
§
Act, 15 U.S.C. § 1127. It cited no authority holding or suggest-
ing that § 45, which specifically recognizes that a “name” or
“symbol” can constitute a trademark, means that a claim of
trademark in a popular name or character is precluded by
copyrighted movies.* To Universal’s knowledge—then and
now—there is no such authority, whatever Universal “must
have known.”*
The Second Circuit also read the Cooper Judgment as
determining that the senior Cooper’s original King Kong novel
had fallen into the public domain. 797 F.2d at 73; A3-5. This is
a copyright term of art meaning that the novel had lost
2 The text of § 45 is found at A179 of the appendix hereto.
3 The Second Circuit’s view of the relationship between copyright and
trademark is contrary to substantial authority. Thus:
1. There are “fundamental differences” between the purpose and
scope of copyright and trademark. Sony Corp. v. Universal City
Studios, Inc., 464 U.S. 417, 439 n.19 (1984). Copyright protects
original works for limited terms; trademark protects names or
symbols under which products are sold for indefinite terms. The
Trade-Mark Cases, 100 U.S. 82, 93-94 (1879); 1 J. McCarthy,
Trademarks and Unfair Competition § 6:1, at 147-48 (2d ed.
1984).
2. Fictional characters, such as King Kong, may be entitled to
separate protection (1) as copyrightable original works and (2)—
wholly apart from copyright—as trademarks that serve to identify
a product with a single source of origin. See, e.g., Silverman v.
CBS Inc., 632 F. Supp. 1344, 1350 (S.D.N.Y. 1986); Frederick
Warne & Co. v. Book Sales, Inc., 481 F. Supp. 1191, 1196-97
(S.D.N.Y. 1979).
3. A motion picture license does not give the licensee any further
interest in the name or character being licensed, or the right to
exclude the licensor from exploiting it. E.g., Warner Bros. Pictures
v. Columbia Broadcasting System, 216 F.2d 945 (9th Cir. 1954),
cert. denied, 348 U.S. 971 (1955). Motion picture licenses do not
preclude the licensor from being the “single source” which is
required for trademark. See, e.g., Edgar Rice Burroughs, Inc. v.
Manns Theatres, 195 U.S.P.Q. 159 (C.D. Cal. 1976); 15 U.S.C.
§ 1055. Indeed, this is precisely what the Cooper Judgment held
concerning RKO and King Kong.
copyright protection because the original copyright certificate
was not properly renewed under the Copyright Act of 1909.
The Second Circuit held that there is a fatal inconsistency
between public domain status of the novel—i.e., its loss of
copyright protection—and a claim of trademark under the
Cooper Judgment. Jd. at 78; Al3.
While elsewhere stating that this conclusion was “clear” (id.
at 73, A5), the Second Circuit cited no authority for it
anywhere. Yet the District Court had ruled precisely to the
contrary, recognizing that “even words that are in the public
domain may possess trademark significance.” 578 F. Supp.
911, 919, 926 n.6; A17,29, 42 n.6. Remarkable as it may seem,
the Second Circuit did not even mention this District Court
ruling, or the authority on which it was based.*
2. The Vacated Universal Judgment.
Apart from its confusion of copyright and trademark princi-
ples, the Second Circuit’s highly restrictive construction ‘of the
Cooper Judgment was based on a misreading of the California
Federal Court record. That misreading, and its supposed
bearing on this case, were announced for the first time when
the Second Circuit affirmed the sanctions award. Once again,
the Second Circuit ruled contrary to a ruling of the District
Court. Once again, the District Court’s contrary ruling was not
mentioned by the Second Circuit.
4 Prior authority on this public domain/trademark issue supports the
District Court and Universal—not the Second Circuit and Nintendo. Indeed,
every lower court case of which we are aware is contrary to the Second
Circuit: “Simply stated, the expiration of a copyright or a patent does not ©
bar an action under the Lanham Act for trademark infringement.” Tempo
Communications, Inc. v. Columbian Art Works, Inc., 223 U.S.P.Q. 721
(N.D. Ill. 1983), certification of interlocutory appeal denied, No. 80 C 1709
(N.D. Ill. Oct. 14,1983) (available on LEXIS). Accord Application of Mogen
David Wine Corp., 328 F.2d 925, 930 (C.C.P.A. 1964); Frederick Warne &
Co. v. Book Sales Inc., 481 F. Supp. 1191, 1196-97 (S.D.N.Y. 1979). It is
simply a “non-sequitur” to equate public domain status for copyright
purposes with a lack of trademark status. 1 J. McCarthy, supra, Trademarks
and Unfair Competition § 6:1, at 148.
8
The California litigation had begun when Universal sued
RKO, claiming that it, not Dino De Laurentiis, was entitled to
produce a “re-make” of “King Kong.” These claims were
decided in Universal’s favor, and gave rise to a judgment (the
“Universal Judgment”). A141-61. However, RKO, De Lauren-
tiis and Universal ultimately settled all issues among them.
Universal permitted De Laurentiis to make its movie, and
Universal received a substantial share of its profits. Upon
being apprised of the settlement, the Court of Appeals for the
Ninth Circuit vacated the Universal and Cooper Judgments.
A162-65. The Cooper Judgment was later reinstated by the
California Federal Court, in 1981; however, the Universal
Judgment was never reinstated. A116-20, 138-40.
The District Court in this case rejected a variety of claims by
Nintendo based on the vacated Universal Judgment, including
the claim that that judgment “survived” in the Cooper Judg-
ment. 578 F. Supp. 911, 919-21; A28-32. The Second Circuit,
however, held that a vacated finding of fact which accompa-
nied the vacated Universal Judgment defeated any claim of
trademark under the separate, unvacated Cooper Judgment.
According to the Second Circuit—in a “construction” of the
Cooper Judgment first announced in affirming the award of
sanctions—“Cooper plainly did not obtain any trademark
rights in his judgment against RKO, since the California
district court specifically found that King Kong had no second-
ary meaning.” 797 F.2d at 76; Al1.° Based on this statement of
what the California Federal Court “specifically found,” the
Second Circuit held that, “If anyone knew what the law was on
this point”—i.e., on the point of secondary meaning— “under
the facts of this case, it was Universal”; and that, despite the
5 “Secondary meaning” is a trademark term of art meaning identifica-
tion of a trademark with a single source of origin for the goods or services
sold under the mark. The consuming public does not have to know the
identity of the source. It can be “anonymous.” 15 U.S.C. § 1127; Fleisch-
mann Distilling Corp. v. Maier Brewing Co., 314 F.2d 149, 155 (9th Cir.),
cert. denied, 374 U.S. 830 (1963).
9
broad “all rights” language of the Cooper Judgment, Cooper
owned only “[pjerhaps ... some undefined ‘merchandising
rights.’ ” Id. at 75, 76; A9, 11.
But the California Federal Court demonstrably had made no
finding that King Kong could not have secondary meaning. Its
only “secondary meaning” finding was that RKO had offered
no evidence on the issue: “There is no evidence that the title
‘King Kong’ has a secondary meaning by which the public [in
1976] identifies such title with RKO or the Motion Picture.”
A159.
Hence, ai/ the California Court had ever found was that
RKO had failed to prove that there was secondary meaning, in
1976, in the title of its 1933 movie. That finding, later vacated,
did not even purport to decide what secondary meaning there
might be in the King Kong name or character, then or thereaf-
ter. It did not decide what ruling might result from actual
contested litigation of the secondary meaning issue. Nor, since
it was made in 1976, could it have decided what secondary
meaning might have been generated after 1976 by the highly
successful release of the Dino De Laurentiis re-make in that
year, and the extensive trademark licensing of King Kong
products in 1976 and thereafter. De Laurentiis acknowledged
that Universal was “fully entitled to exploit [that] goodwill.”
A169.
Accordingly, there was no basis for the Second Circuit’s
statements that, when the present case arose, in 1982, Univer-
sal or its counsel “knew” from this vacated finding that “the
law” was that the King Kong name and character could not
have secondary meaning. To the contrary, given what the
California Court had actually done—i.e., treated “secondary
meaning” as a matter of evidentiary dispute—Universal
“knew” no more than that secondary meaning was a factual
matter, which a finder of fact might resolve one way or
another.°
6 It is familiar law that secondary meaning is an intensely factual
question turning on factual issues of public perceptions and consumer
10
3. Universal’s Purchase of Cooper’s Rights.
Universal purchased all of Major Cooper’s rights under the
Cooper Judgment shortly after it was entered. Universal paid
more than $200,000 for these rights.
Thereafter, Universal was consistently recognized by all
members of the entertainment industry knowledgeable about
King Kong as having the sole right to license any commercial
exploitation of King Kong, including trademark uses. For
example, Paramount Pictures Corp., which had been Dino De
Laurentiis’ trademark licensing agent, recognized Universal as
“the licensing source for products and services sold under the
King Kong name and character. . . [emphasis added].” A176.
Notwithstanding the Second Circuit’s view that Universal
trademark rights were “irreconcilable with” RKO’s rights,
RKO too recognized Universal’s rights. Indeed, RKO actually
confirmed to Universal that Universal’s trademark claims
against Nintendo—i.e., the claims involved in this very ac-
tion—did not invade RKO’s retained rights. A177.’
Contrary to statements by the Second Circuit on the point,
797 F.2d at 73, AS, Universal conducted itself as a trademark
proprietor following its purchase of Cooper’s rights, consistent
with the industry-wide understanding that it was “the licensing
source.” The uncontradicted record showed that Universal
issued King Kong trademark licenses, warned others against
practices. See, e.g., Zatarains, Inc. v. Oak Grove Smokehouse, Inc., 698
F.2d 786, 794-96 (Sth Cir. 1983); Levi Strauss & Co. v. Blue Bell, Inc. 632:
F.2d 817, 821 (9th Cir. 1980); 3 R. Callman, The Law of Unfaii Competition,
Trademarks & Monopolies § 19.27 (4th ed. 1983). Secondary meaning may
exist at one time or in one area, and not in another. See, e.g., Truck
Equipment Service Co. v. Fruehauf Corp. , 536 F.2d 1210, 1221-22 (8th Cir.),
cert. denied, 429 U.S. 861 (1976); see generally 1 & 2 J. McCarthy, supra,
Trademarks and Unfair Competition chs. 17, 26.
7 To be sure, Universal had to respect RKO’s (and Dino De Lauren-
tiis’) copyright rights. But neither RKO nor De Laurentiis regarded Univer-
sal’s trademark, or its claims against Nintendo, as “irreconcilable with” their
copyrights. A177, 169.
11
licensing uses of King Kong, and invested substantial sums in a
proposed “King Kong” motion picture, which would have
generated still additional trademark licensing revenues. It also
spent millions of dollars to build a “King Kong” attraction at
its Universal Studio Tour amusement park in Los Angeles.*
4. “Donkey Kong.”
Beginning in 1981, Nintendo manufactured and licensed a
videogame which depicted a giant gorilla on top of a large
building holding a heroine whom a rescuer tries to reach.
Nintendo called its videogame, and the gorilla character which
was its star, “Donkey Kong.” The gorilla character, the story
context in which it was used, and the name “Kong” all
obviously evoked King Kong.’ Nonetheless, Nintendo mar-
keted and licensed “Donkey Kong” without attempting to
obtain Major Cooper’s or Universal’s permission.
When Universal learned of “Donkey Kong,” it consulted its
regular intellectual property counsel, Stephen A. Kroft, as to
whether the game violated Universal’s rights. Kroft had repre-
sented Universal in the California Federal Court litigation
which produced the Cooper Judgment and the vacated Univer-
sal Judgment. He was fully familiar with the complex litigation
context in which the Cooper Judgment had been entered. Kroft
advised Universal that “it was on firm ground” to assert
Lanham Act claims against “Donkey Kong.”
8 Contrary to another statement by the Second Circuit, to the effect
that Universal never created an “image of King Kong” different from the
movie images, 797 F.2d at 76, Al0, Universal’s Studio Tour attraction—a
tram car ride past a gigantic articulated figure of the ape—obviously did
involve Universal’s creation of its own “image of King Kong.” Universal’s
proposed motion picture—which was ultimately scrapped when its producer
was incapacitated by a serious heart attack—would also have involved
another “image of King Kong.”
9 Cooper’s original character was named “Kong.” He was called
“King Kong” because of the majestic qualities suggested by the story. There
is no donkey in “Donkey Kong.”
12
Before bringing suit, Universal attempted to settle the
“Donkey Kong” matter with Nintendo and with Nintendo’s
most important licensee, Coleco Industries, Inc. (“Coleco”).
Coleco, advised by its own experienced trademark counsel,
acknowledged Universal’s claim of King Kong rights by agree-
ing to pay a substantial royalty in return for Universal’s
covenant not to bring suit against it. Nintendo, however, did
not settle.'°
5. Universal’s Lanham Act Litigation.
Universal brought suit against Nintendo in the United States
District Court for the Southern District of New York. It alleged
that it held a valid trademark in the name King Kong, and
variants thereof, in conjunction with the symbol of a gigantic
ape. It alleged that “Donkey Kong” was trading on the
goodwill associated with this name and character in violation
of § 43(a) of the Lanham Act (and analogous state law).
Universal alleged the derivation of its rights through the prior
Cooper Judgment, and its agreement with RKO settling the
California Court litigation between them."’
After it sued Nintendo, Universal continued to pursue settle-
ments of its “Donkey Kong” claims, sometimes successfully,
sometimes not. The Second Circuit ultimately held that this
conduct was “tortious” under New York law, and established
that Universal was in “bad faith,” because Universal did not
10 Coleco later sought to capitalize on Nintendo’s litigation success
against Universal by bringing an action to undo its settlement agreement.
Coleco Industries, Inc. v. Universal City Studios, Inc. 84 Civ. 2596
(S.D.N.Y., filed April 12, 1984). That action is presently pending in ihe
District Court.
11 Given the Second Circuit’s focus on RKO’s copyright rights, and on
the “public domain” status of Cooper’s original novel, it should also be
emphasized that Universal did nor allege any infringement of copyright—its
own, or Cooper’s, or RKO’s or anyone else’s. Federal jurisdiction was based
on the Lanham Act, 15 U.S.C. § 1121, on 28 U.S.C. § 1338, and on
principles of pendent jurisdiction.
13
seek “definitive adjudication” of its claims. 797 F.2d at 75, 76;
A8, 10. The court offered no reason why “definitive adjudica-
tions” are preferable to negotiated settlements. Nor did it
recognize that Universal—no less than Nintendo—expended
very large sums to obtain a “definitive adjudication” in this
very case.
After discovery, Nintendo moved for summary judgment. In
its first opinion herein, the District Court granted the motion
on three grounds: 1) that the Cooper Judgment “did not
successfully transfer RKO’s trademark rights to Cooper” be-
cause the Judgment was an impermissible “assignment in
gross”; 2) that the Cooper Judgment, by recognizing RKO’s
movie copyright, had impermissibly “split up” the rights in
King Kong, depriving King Kong of “secondary meaning” as a
matter of law; and 3) that, also as a matter of law, there was
no “likelihood of trademark confusion” between “Donkey
Kong” and King Kong. 578 F. Supp. 911 (S.D.N.Y. 1983);
A17-50.
The District Court did not hold that Universal’s claims were
frivolous or groundless. It did not hold that any of the vacated
findings of the California Federal Court precluded Universal’s
present claims. To the contrary, it rejected Nintendo’s argu-
ment that the vacated Universal Judgment “survived” in the
Cooper Judgment. 578 F. Supp. at 919; A29. It also rejected
Nintendo’s argument that public domain status of the King
Kong novel precluded a trademark, stating that “even words
thai are in the public domain may possess trademark signifi-
cance.” Id. at 919, 926 n.6; A29, 42 n.6.
On appeal, the first in this case, the Second Circuit affirmed
on the trademark confusion issue only. 746 F.2d 112 (2d Cir.
1984); A5S1-64. It expressly declined to reach the District
Court’s “assignment in gross” theory, or its ruling that RKO’s
derivative copyright precluded a showing of secondary mean-
ing for trademark purposes. Jd. at 115; A55. It did not hold
that Universal’s claims were frivolous or groundless. Its opin-
ion contained not a hint that the issue of secondary meaning
14
had been definitively resolved against Universal’s position by
the vacated finding of the California Federal Court. Nor did its
opinion hold or suggest that public domain considerations
precluded a trademark. The Second Circuit first announced
those views in affirming the award of sanctions, on the second
appeal herein.'”
6. The Sanctions Proceedings.
The District Court then proceeded to hold a week-long trial
on Nintendo’s claim that Universal should be subject to attor-
ney’s fees and damages, including punitive damages, for hav-
ing asserted trademark claims. It awarded Nintendo nearly
$1.5 million in attorney’s fees and damages. 615 F. Supp. 838
(S.D.N.Y. 1985); A65-113. Of this amount, $1,142,545.70
consisted of attorney’s fees for defending against Universal’s
complaint, $222,498.28 consisted of non-recoverable other
“costs,” and $94,219.41 consisted of compensatory damages."
The District Court based its rulings on 1) Section 35 of the
Lanham Act, which authorizes “reasonable” fees in “excep-
tional” cases, 2) Rule 11 of the Federal Rules of Civil Proce-
dure, and 3) New York law of “tortious interference with
contract” and punitive damages."
12 It should also be noted that the Second Circuit’s trademark confu-
sion holding on the first appeal was nor the basis for the award of sanctions
affirmed on the second appeal. At vo time, in any of the proceedings in this
case, did the courts below hold that Universal’s position on the trademark
confusion issue was frivolous or groundless. As explained below, the sole
basis on which Universal was sanctioned was for asserting that the Cooper
Judgment gave Cooper—and therefore Universal as his successor—the right
to assert trademark claims relating to King Kong.
13 The sum of these figures, $1,459,263.39, together with interest
accruing prior to issuance of the mandate by the Second Circuit ($96,594.20),
totaled $1,555,857.59.
14.‘ The District Court’s Rule 11 ruling, which was not reached or
affirmed by the Second Circuit, 797 F.2d at 77, Ai2, rested on Rule 11 as it
existed prior to the 1983 amendments thereto, Universal having brought suit
in 1982. In that pre-amendment version, Rule 1: permitted sanctions only
—
15
The District Court made no express finding that Universal’s
trademark claims were groundless or without foundation.
Rather, it held that Universal “knew” it had “no rights” in
King Kong. The basis for this ruling was evidence showing—as
indeed was true—that Universal recognized RKO’s and De
Laurentiis’ derivative copyrights in the “visual representa-
tions” of King Kong contained in their movies. The District
Court held that Universal’s recognition of these copyrights
proved that Universal knew it could not claim a trademark in
King Kong. It did not even mention the undisputed evidence
that neither RKO, nor De Laurentiis, nor Paramount held any
such view. A177, 169, 176."
The District Court also held that Universal was not entitled
to rely on the advice of its counsel, Kroft—the stated reason
being that Kroft had not been called as a trial witness. The
Court therefore disregarded Kroft’s advice that Universal was
“on firm ground” to bring suit, as a Universal witness had
testified without objection. The Court also criticized Universal
for not producing Kroft’s “research or memoranda analyzing
the claim.” 615 F. Supp. at 846-47, 862; A78, 108. It cited no
authority for these hoidings.
The District Court made no determination that the amount
of the award was reasonable. Indeed, Nintendo had offered no
evidence as to the reasonableness of more than $1.3 million in
attorney’s fees and costs for legal services which involved only
discovery and a summary judgment motion. Nintendo had
against a lawyer who signed a pleading in subjective bad faith. However, the
District Court made no finding that Universal’s trial counsel—a different
lawyer than its iniellectual property counsel—had acted in bad faith in
signing Universal’s complaint. To the contrary, it repeatedly praised the
highly professional conduct of trial counsel. E.g., 615 F. Supp. at 841; A66;
578 F. Supp. at 914; Al9.
15 The District Court did not hold that the vacated findings of the
California Federal Court precluded Universal’s claims. The District Court
also did not retreat from its earlier view that “words in the public domain
may possess trademark significance.”
16
offered only a single question and answer as to the gross
amount of its claimed fees and costs. The District Court
apparently was content with this record as the basis for its fee
award—although to Universal’s knowledge it is the largest of
its kind ever made.
The District Court’s award of punitive and actual damages
rested on its view that New York law permitted treating
“wrongful civil litigation” as a species of “tortious interference
with contract.” 615 F. Supp. at 860-63; A104-10. It held that
Universal’s conduct in suing Nintendo, and in sending demand
letters based on that litigation to certain of Nintendo’s li-
censees, was actionable under New York law. It held that New
York law would permit punitive as well as compensatory
damages therefor. 615 F. Supp. at 863; A109-10.
7. The Second Circuit’s Opinion.
The Second Circuit affirmed the award of sanctions. 797
F.2d 70 (2d Cir. 1986); Al-16. In an opinion by Senior District
Judge Charles E. Metzner, sitting by designation, it held that:
1) RKO’s 1933 “King Kong” movie, and Dino De Laurentiis’
1976 “re-make,” “were irreconcilable with the existence of any
Universal trademark rights in King Kong,” and that Universal
“must have known” this; 2) that “public domain” copyright
status of the original King Kong novel made it “clear” that
Major Cooper, and therefore Universal as his successor, “did
not hold any trademark rights against the world in King Kong”
but only “perhaps ... some undefined ‘merchandising
rights’ ”; and 3) that Universal had “successfully” established
before the California Federal Court that the “law” was that
King Kong could not have secondary meaning, and that Uni-
versal “knew what the law was” on this point. 797 F.2d at 73,
75-76 & n.3, 78; A3-5, 9-11 & n.3, 13.
The Second Circuit, like the District Court, made no express
determination that Universal’s trademark claims were ground-
less or without foundation. In construing the Cooper Judg-
ment, it did not cite any legal authority disregarded by
17
Universal. Indeed, apart from the statutory definition of
“trademark,” it cited no authority at all. It did not mention
that the District Court had rejected the same public domain
argument which it was accepting. It took no note of the fact
that the District Court had also rejected Nintendo’s argument
that the vacated Universal Judgment “survived” in the Cooper
Judgment. It did not mention the industry-wide recognition of
Universal’s rights.
Like the District Court, the Second Circuit held that Univer-
sal could not rely on the advice of its counsel that it was “on
firm ground” to bring suit, because it had not called him as a
trial witness. Like the District Court, it cited no authority for
the proposition that advice of counsel can only be proved by
putting counsel himself on the stand. 797 F.2d at 76-77; Al1.'°
The Second Circuit allowed the $1.1 million fee portion of
the award to stand solely on the authority of Section 35 of the
Lanham Act; it did not reach the District Court’s alternative
Rule 11 or punitive damage theories as to this sum. 797 F.2d at
77; Al2. Like the District Court, it made no determination that
$1.1 million in fees was reasonable here, although Section 35 is
expressly limited to “reasonable” fees in “exceptional” cases.
It did not seem to realize that this is apparently the largest
award of its kind ever made.
The Second Circuit upheld the remainder of the award on
the theory that New York law permitted some $94,000 in actual
damages, and $222,000 in punitive damages, to be awarded for
16 _ Also like the District Court, the Court of Appeals drew an unspeci-
fied “adverse inference” against Universal for not calling counsel as a
witness. See 797 F.2d at 76-77; All. However, as Universal had shown on its
motion for a partial new trial—which went entirely unmentioned by the
Second Circuit—there was and is no basis for this “adverse inference.”
Kroft’s professional expertise was undisputed, as was his intimate familiarity
with the California Court litigation. And neither Court below suggested a
reason why Universal had to call him to testify that he gave advice which a
Universal witness had already testified, without objection, Universal had
received.
18
“tortious interference with contract” by means of litigation. Its
punitive damage reasoning was directly based on its unsup-
ported holding that public domain status of the King Kong
novel precluded a trademark in King Kong. 797 F.2d at 78;
Al3. Again, it did not mention that the District Court had
rejected this same public domain argument.
In affirming the state law damage awards, the Second
Circuit failed to follow, distinguish, or even cite a 1984 opinion
of the New York Court of Appeals, that state’s highest court,
which was prominently called to the attention of the Second
Circuit, and which squarely holds that wrongful use of civil
proceedings is actionable only where abuse of process or
malicious prosecution occurs. Curiano v. Suozzi, 63 N.Y.2d
113, 480 N.Y.S.2d 466, 469 N.E.2d 1324 (1984). Neither of
these torts was even alleged by Nintendo. The Second Circuit
purported to rely, instead, on dicta in one of its own prior
interpretations of New York law, and in an earlier New York
case. 797 F.2d at 75; A8.
REASONS FOR GRANTING THE WRIT
I. As respects the fee award (first and second questions
presented):
A. The Second Circuit’s approach in imposing sanctions
conflicts with decisions of this and other courts.
It is axiomatic that an award of attorney’s fees or other
sanctions to a prevailing defendant is not justifiable merely
because the plaintiff lost. That is the very core of the ‘‘Ameri-
can Rule’’ respecting attorney’s fees, to which this Court has
consistently adhered. E.g., Alyeska Pipeline Service Co. v.
Wilderness Society, 421 U.S. 240 (1975); F.D. Rich Co. v.
United States, 417 U.S. 116, 126-31 (1974).
The legislative history of Section 35 of the Lanham Act, the
fee award provision on which the Second Circuit relied, makes
it unmistakably clear that Congress was authorizing fee awards
to prevailing defendants only for the purpose of penalizing
19
- “unfounded”’ claims. S. Rep. No. 1400, 93d Cong., 2d Sess.,
reprinted in 1974 U.S. Code Cong. & Admin. News 7132,
7136. There is not the slightest indication that Congress in-
tended to discourage non-frivolous litigation. To the contrary,
“‘enforcement of trademark rights is left to the trademark
owners and they should, in the interest of preventing purchaser
confusion, be encouraged to enforce trademark rights.”’ Id.
(emphasis added).
It would seem essential, therefore, that any award of Section
35 fees to a prevailing defendant be preceded by a careful
determination that the losing party’s claim was ‘‘unfounded.”’
And, indeed, some of the Circuits have required just that.
Thus, a proper inquiry was made in Noxell Corp. v. Fire-
house No. | Bar-B-Que Restaurant, 771 F.2d 521 (D.C. Cir.)
(Scalia, Ginsburg and Wald, Circuit Judges), rehearing en
banc denied, 774 F.2d 1180 (1985). The D.C. Circuit there
sustained an award of Section 35 fees to a Lanham Act
defendant only after a painstaking analysis demonstrating that
the plaintiff had disregarded controlling precedent from this
Court in laying venue 3,000 miles away from the defendant’s
home district. Because the choice of venue was therefore
unfounded, the D.C. Circuit held that the case was appropriate
for an award of fees under Section 35."’
Likewise, the Federal Circuit in Stevenson v. Sears, Roebuck
& Co., 713 F.2d 705 (Fed. Cir. 1983), a case arising under the
identically-worded fee provision in the patent law (35 U.S.C.
§ 285), held that a fee award to a prevailing defendant was not
appropriate even where the plaintiff was relitigating issues
previously lost and reduced to judgment. The Coutt rejected a
claim for fees where there was an argument not “entirely
17 Judge Wald’s dissent took a narrower view of Section 35 than
Judges Ginsburg and Scalia. Judge Wald.believed that it was not enough that
choice of venue was groundless.
20
devoid of merit’’ that collateral estoppel should not apply, an
argument it analyzed with care. 713 F.2d at 713."°
The decision of the Second Circuit below stands in sharpest
contrast to the careful analyses in the opinions just described.
The Second Circuit made no determination that Universal’s
reading of the Cooper Judgment was ‘‘unfounded.’’ Its per-
functory resolutions of issues concerning the interrelationship
of copyright and trademark reflect profound confusion over
the differences between them, and are almost certainly wrong.
See pp. 5-9 & nn.3-6, supra. It decided issues contrary to the
District Court without recognizing that it was doing so—much
less confronting the fact that Universal’s positions could
hardly be actionably frivolous if the District Court had agreed
with them. It cited no authorities except § 45 of the Lanham
Act, which it apparently misread. It misread the California
Federal Court record. It disparaged the advice Universal re-
ceived from a lawyer fully familiar with that record, based on
its own misreading of that record."
Fundamentally, the Second Circuit was led into error be-
cause it did not feel obiiged to, and did not, specifically
18 Also under the patent statute, the Fifth Circuit has held that fees
should not be awarded to a prevailing defendant unless the invalidity of the
plaintiff’s claims ‘‘should have been obvious to all parties all along.”’
Arbrook, Inc. v. American Hospital Supply Corp., 645 F.2d 273, 279 (Sth
Cir. 1981). The Seventh Circuit, in Blau Plumbing, Inc. v. S.O.S. Fix-It,
Inc., 781 F.2d 604, 612 (7th Cir. 1986), states that frivolousness or ‘‘an even
more demanding standard’’ applies under Section 35. (The Seventh Circuit
case cited by the Second Circuit here, Scotch Whisky Ass’n v. Barton
Distilling Co., 489 F.2d 809 (7th Cir. 1973), cited at 797 F.2d 77, Al2, was
decided two years before Section 35 was even enacted by Congress, and
denied an award of fees under the ‘‘bad faith’’ exception to the American
Rule.)
19‘ The principal authority cited by the Second Circuit for its conclusion
that this was an appropriate case for sanctions, Mennen Co. v. Gillette Co.,
565 F. Supp. 648 (S.D.N.Y. 1983), aff’d mem., 742 F.2d 1437 (2d Cir. 1984),
cited at 797 F.2d 77, A12, involved a specific finding that the plaintiff’s case
had ‘‘no real substance,’’ where the plaintiff had actually eliminated the
claimed ‘‘trademavk’’ from its products. 565 F. Supp. at 653, 657.
21
determine that Universal’s legal position was frivolous or
groundless. It could not have done so. It could hardly have
condemned as actionably frivolous or groundless legal posi-
tions with which the District Court had expressly agreed. It
would have had to consider the industry-wide recognition of
Universal’s trademark rights. And, guided by the correct legal
standard, the Second Circuit would have had to confront the
ultimate irony of its position—that under its novel views of the
interrelationship of copyright and trademark law, the clear
language of the Cooper sai Stating that Cooper owned
“‘all rights in and to the use of the name, character, and the
story ‘King Kong’ ’’ reduced to the triviality that Cooper
owned nothing except ‘‘perhaps . . . some undefined ‘mer-
chandising rights.’ ’’ In other words, ‘‘a// rights’? meant ‘‘no
rights.’’ 3
The Second Circuit was gravely wrong in treating this
complex case as an appropriate one for the award of sanctions.
Its decision invites a wholesale increase in ‘‘sanctions’’ litiga-
tion for no conceivable meritorious reason. See pp. 2-4, supra.
B. The Second Circuit’s failure to require a specific
finding of reasonableness conflicts with prior rulings
of this and other courts.
In Hensley v. Eckerhart, 461 U.S. 424 (1983), this Court
held that a prevailing plaintiff seeking a fee award under 42
U.S.C. § 1988 has the affirmative burden of establishing that
the amount he seeks is reasonable. Jd. at 437. See also Blum v.
Stenson, 465 U.S. 886, 898-900 (1984).”°
Section 35 of the Lanham Act, like § 1988, expressly re-
quires that a fee award be ‘‘reasonable.’’ However, in this
20 This Court gave further consideration to the issue last Term in City
of Riverside v. Rivera, U.S. ___., 106 S. Ct. 2686 (1986); and in
Pennsylvania v. Delaware Valley Citizens’ Council for Clean Air, ___ U.S.
____, 106 S. Ct. 3088 (1986). The second of these cases has been restored to
the argument docket for this Term, 106 S. Ct. at 3100, 3331, for considera-
tion of whether a fee award to a prevailing plaintiff may be ‘‘multiplied’’ or
otherwise enhanced to reflect the risk of loss.
22
case, the lower courts made no determination that the
$1,142,545.70 in attorney’s fees awarded Nintendo under Sec-
tion 35 was reasonable. Indeed, although it was seeking what is
apparently the largest award of its kind ever made, Nintendo
offered no evidence beyond the gross amount of the claimed
fees. It did not even offer evidence of the hours spent or rates
charged, much less of the exercise of ‘‘billing judgment”’ called
for by Hensley.
There is no conceivable reason why fee-shifting in favor of a
prevailing defendant should be governed by any /esser standard
than fee-shifting in favor of a prevailing plaintiff. If anything,
fees to a prevailing defendant should be much more strictly
limited, since the plaintiff is ‘‘the chosen instrument of Con-
gress’’ to vindicate federal policy. Christiansburg Garment Co.
v. EEOC, 434 U.S. 412, 418 (1978)."
Courts other than the Second Circuit have subjected the
amounts of fee requests under Section 35 to exacting scrutiny.
See, e.g., International Olympic Committee v. San Francisco
Arts & Athletics, 781 F.2d 733, 739 (9th Cir.), amended on
other grounds, 789 F.2d 1319 (9th Cir. 1986); Sealy, Inc. v.
Easy Living, Inc., 743 F.2d 1378, 1385 (9th Cir. 1984). The
failure of the Second Circuit to require any scrutiny of the
amount of Nintendo’s request—apparently the largest of its
kind ever made—merits this Court’s review independently of
the Second Circuit’s errors in permitting any fee award at all.
21 Indeed, it is well-settled that the very nature of a trademark
necessitates vigilant enforcement. As was recognized in one of the cases
relied on by the Second Circuit, 797 F.2d at 77, Al2, a trademark owner
*‘must actively defend a mark or risk abandonment.”’ Steak & Brew, Inc. v.
Beef & Brew Restaurant, Inc., 370 F. Supp. 1030, 1038 (S.D. Ill. 1974). The
court therefore denied any award of fees to the prevailing defendant.
23
C. The Second Circuit’s decision implicates other im-
portant federal questions.
Beyond the correct application of Section 35, itself an
important federal question, petitioner submits that this case
implicates other and larger federal questions as well. Section
35, which is expressly limited to “exceptional” cases, and
further expressly limited to “reasonable” fees, is one of the
most limited fee award statutes. If, as held below, it is
nonetheless triggered without a threshold determination of
groundlessness—even where the advice of expert counsel has
been sought and obtained—the proliferation of unjustified
“sanctions” claims under other, more /iberal fee statutes, is all
but a certainty. If, on top of this, a successful “sanctions”
motion has a $1.5 million pay-off—even under a statute
expressly limited to “reasonable” fees—the federal courts have
gone into the lottery business.
Assuming, arguendo, that Congress could expressly author-
ize unreasonable fee awards in non-frivolous cases, it ought
nonetheless to be a consistent canon of construction that such
an intention is not presumed; and that, absent express Con-
gressional authorization, prevailing defendants are not entitled
to.fees unless it is specifically found
a. that a claim or defense was without arguable legal
merit, /.e., frivolous, and
b. that the sanction imposed is reasonable.
By this standard, the decision below must be reversed, and
Nintendo’s claims for sanctions dismissed. The Second Cir
cuit’s conclusory assertion that Universal was in “bad faith” —
where that term does not embrace a threshold determination of
frivolousness or groundlessness—is not remotely an adequate
premise for the imposition of sanctions.
This is all the more true given that the Second Circuit based
its “bad faith” holding on Universal’s efforts to settle its
“Donkey Kong” claims. 797 F.2d at 75-76; A8-10. There is no
logic to the Second Circuit’s apparent preference for “defini-
24
tive adjudications” as against negotiated settlements. To the
precise contrary, the law prefers and encourages settlements.
The touchstone of liability for sanctions must be the absence
of an arguable legal basis for a claim or defense. Where, as
here, Universal brought suit on the advice of counsel, premised
on—at the very least—an arguably valid reading of a prior
federal court judgment, sanctions may not be imposed.
Il. As respects the award of state law damages (third ques-
tion presented):
The Second Circuit has deliberately refused to follow the
highest court of New York.
The Second Circuit accepted Nintendo’s contentions that,
beyond an award of fees under Section 35, it was entitled
under New York law to damages allegedly caused by Univer-
sal’s institution of suit and threats of similar action against
Nintendo’s licensees—including punitive damages more than
twice the amount of the actual! damages claimed. Accepting
Nintendo’s assertions that, under New York law, the institution
of a federal court Lanham Act suit, and attempts to settle
similar claims, could be the “wrongful means” required for the
common law tort of “tortious interference with contract,” the
Second Circuit affirmed an aggregate of $316,717.69 in puni-
tive and compensatory damages. 797 F.2d at 75, 77-78; A8,
12-13.
In so doing, the Second Circuit simply ignored a square 1984
holding by New York’s highest court which makes it unambi-
guously clear that liability under New York law could not arise
from Universal’s threat or commencement of civil litigation
under the Cooper Judgment, even assuming arguendo that
Universal was improperly motivated. Curiano v. Suozzi, 63
N.Y.2d 113, 480 N.Y.S.2d 466, 469 N.E.2d 1324 (1984). Cu-
riano had been prominently cited by Universal below.
Curiano, unmentioned by the Second Circuit, squarely holds
that improper litigation is actionable under New York law only
yon
if malicious prosecution or abuse of process occurs. 63 N.Y.2d
at 116-19, 480 N.Y.S.2d at 468-70, 469 N.E.2d at 1326-28.
These stringent limitations are, said the New York court,
“necessary to effectuate the strong public policy of open access
to the courts for all parties without fear of reprisal in the form
of a retaliatory lawsuit.” Jd. Neither of these torts was (or
could have been) even alleged against Universal. Thus the real
New York law—as distinct from the “New York law” applied
by the Second Circuit—absolutely precludes Nintendo’s “retal-
iatory lawsuit” against Universal and bars massive “reprisal”
such as the damage award involved here.
This Court’s review is necessary quite apart from the attor-
ney’s fee issue discussed above. The Second Circuit has disre-
garded the settled rule that, in applying state law, a federal
court is not free to pick and choose among state law prece-
dents. It must follow a) the most recent ruling b) of the highest
court of the state. See, e.g., Vandenbark v. Owens-Illinois
Glass Co., 311 U.S. 538, 541-43 (1941); Broussard v. Southern
Pacific Transp. Co., 625 F.2d 1242, 1245-46 & n.3 (5th Cir.
1980). Pronouncements of a state’s highest court are the law of
the state. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78, 79
(1938).
22 Accordingly, the law of New York is no less protective of the right to
seek judicial relief than analogous federal case law. If, however, New York
law were to be read as penalizing the assertion of federal claims where federal
law did not permit, or in an amount much larger than federal law would
permit, a substantial issue of federal supremacy would arise. This Court has
held that state courts cannot enjoin access to federal courts. Donovan v. City
of Dallas, 377 U.S. 408 (1964). Nor can state law penalize the assertion of
Federal claims. Nash v. Florida Industrial Comm’n, 389 U.S. 235 (1967).
Moreover, for state law to impose financial sanctions not subject to the
“exceptional case” and “reasonableness” standards laid down by Congress in
Section 35 would frustrate Congress’ purpose to encourage trademark
proprietors to enforce their rights. See, e.g., Arkansas Louisiana Gas Co. v.
Hall, 453 U.S. 571, 584 (1981); see also Sears, Roebuck & Co. v. Stiffel Co.,
376 U.S. 225, 231 (1964). Particularly is this so if state law authorizes
punitive damages for asserting Lanham Act claims, since Section 35 expressly
provides that a prevailing Lanham Act plaintiff is entitled only to compensa-
tion, “not a penalty.”
26
Hence a federal court cannot, as the Second Circuit did, fail
even to consider such a ruling and prefer one of its own
interpretations of state law. And it cannot prefer a dictum in
its own earlier case—or, for that matter, in an earlier state
court case—to a later square holding by the highest state court.
See, e.g., Broussard v. Southern Pacific Transp. Co., supra,
625 F.2d at 1245-46 & n.3. But that is just what the Second
Circuit did here. 797 F.2d at 75, A8, citing Zi/g v. Prentice-
Hall, Inc., 717 F.2d 671, 677-78 (2d Cir. 1983), cert. denied,
466 U.S. 938 (1984), and Guard-Life Corp. v. S. Parker
Hardware Mfg. Corp., 50 N.Y.2d 183, 191, 428 N.Y.S.2d 628,
632, 406 N.E.2d 445, 448 (1980).”°
The Second Circuit’s complete disregard of Curiano v.
Suozzi, which was prominently cited by Universal, appears to
be a deliberate refusal to consider an authoritative statement of
applicable state law. This Court can, and should, prevent that
from occurring.
23 Even the dicta in Zi/g and Guard-Life do not state that a complaint
which is not found to be frivolous could be the premise for a “retaliatory
lawsuit” such as Curiano condemned. Only the decisions in this case so hold.
27
CONCLUSION
For the foregoing reasons, it is respectfully submitted that a
writ of certiorari should issue to review the judgment of the
United States Court of Appeals for the Second Circuit.
Dated: October 10, 1986
Respectfully submitted,
MICHAEL W. SCHWARTZ*
WACHTELL, LIPTON, ROSEN & KATZ
299 Park Avenue
New York, New York 10171
(212) 371-9200
Counsel for Petitioner
Universal City Studios, Inc.
Of Counsel:
LAURENCE H. TRIBE
1525 Massachusetts Avenue
Griswold Hall, 307
Cambridge, Massachusetts 02138
(617) 495-1767
J. THOMAS MCCARTHY
University of San Francisco
Law School
2130 Fulton Street
San Francisco, California 94117
(415) 666-6517
*Counsel of Record
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.