Question 1 (40%)
Peterson Ranch Corporation (“Peterson”) owns and operates a walnut farm in the central valley area of California outside Modesto. Peterson’s average annual production is approximately $1.4 million in product, and each year since 2001 it has entered into an annual output contract pursuant to which it has sold all of its annual harvest to Dyamond Nut Brokers, Inc. (“Dyamond”), which is also headquartered outside Modesto. The 2010 walnut supply contract between Peterson and Dyamond provided that “Peterson shall sell all of its 2010 walnut harvest to Dyamond at a price equal to the Modesto spot market price for walnuts of similar grade in effect at the close of business on August 31, 2010.” Peterson’s 2010 harvest commenced on September 12, and produced an unprecedented volume of product. However, on August 20, 2010, a freak hail storm elsewhere in California destroyed nearly 10% of California’s walnut harvest, although Peterson was not affected. The spot market price, which had been at $1.07 on the contract price-setting date of August 31, rose dramatically after the storm to $1.46. Peterson sought to amend the price term, but Dyamond refused and demanded Peterson’s full harvest at the contract price. Peterson sold Dyamond only the smaller quantity it had provided the prior year under the 2009 contract, and sold the rest of its bounty crop to Calwalnuts, Inc. (“Calwalnuts”), another California corporation and Dyamond’s fiercest competitor. Dyamond had previously contracted to resell all of Peterson’s projected crop to a Plantings Nut Processing, Inc. (“Plantings”), a nut processor in Cleveland, Ohio, and was forced to breach that contract. As a consequence, Plantings sued Dyamond for breach of contract and informed it that Plantings would no longer do business with Dyamond in the future. Since Plantings is a monopoly in the market for nut processing in the United States, Dyamond’s future as a nut broker has been seriously jeopardized.
When one of Dyamond’s trucks was at the Peterson walnut farm on September 18, 2010, its driver accidentally drove into Peterson’s warehouse, causing nearly $80,000 in damage. The insurance on the truck had lapsed.
After Calwalnuts had taken possession of the produce it acquired from Peterson, it discovered that nearly 2% of it was rotten, apparently because of improper storage at the Peterson farm. Calwalnuts calculated the amount of the loss to be $78,000, and refused to pay Peterson that part of the agreed purchase price.
Dyamond brought suit in federal court in the United States District Court for the Northern District of California in San Francisco alleging federal antitrust law claims under the Sherman Act, 15 U.S.C. §§ 1 against Peterson and Calwalnuts, claiming they had conspired to deprive Dyamond of Peterson’s crop in order to drive Dyamond out of business and allow Calwalnuts to monopolize the nut brokerage business in northern California. Dyamond also asserted a claim in the same action against Peterson for breach of contract claiming $15 million in damages based on Peterson’s failure to supply Dyamond with Peterson’s entire 2010 production. Dyamond prevailed on its contract claim, but its antitrust claim was dismissed on Peterson’s joint motion with Calwalnuts under Rule 12(b)(6) of the Federal Rules of Civil Procedure. A final judgment was entered for Dyamond and no party appealed within the time limit for doing so.
Five months after the judgment in the first action, Peterson intitiated a second federal litigation in the United States District Court for the Eastern District of California in Sacramento in which he asserted a claim against Dyamond for the damage to Petereson’s warehouse, alleging $80,000 in damages. Peterson also joined in the same action a claim against Calwalnuts, alleging breach of contract relating to Calwalnuts’ refusal to pay $68,000 that Peterson alleged remained due under the contract. Dyamond then filed a cross-claim against Calwalnuts alleging the Calwalnuts had wrongfully interfered with Dyamond’s supply contract with Peterson.
Please explain whether any of the claims in the second action were improperly joined.
Issues: Specifically, the claims in the second action are:
- Peterson’s claim against Dyamond for warehouse damage;
- Peterson’s claim against Calwalnuts for alleged breach of contract for failure to pay the full purchase price; and
- Dyamond’s cross-claim against Calwalnuts for alleged interference with the Peterson-Dyamond 2010 supply contract.
One issue is whether any of the claims in the second action are compulsory counterclaims that were, for that reason, waived by the claimant’s failure to have asserted them in the first action. A second issue is whether two unrelated claims brought by Peterson against two different parties may be joined in a single litigation in the second action. Finally, there is an issue as to whether Dyamond’s cross-claim against Calwalnuts is barred by res judicata since he has already litigated a claim related to the same events in the first action he brought.
Rules: Under rule 13(a), a party must state as a counterclaim any claim that the party has against an opposing party if the claim arises out of the same transaction or occurrence that is the subject of the opposing party’s claim and does not require adding a party whose joinder would be prevented because of the court’s lack of personal jurisdiction. Failure to assert a compulsory counterclaim waives the claim. Under rule 13(b), any counterclaim that is not compulsory is permitted to be joined, but need not be. Under Rule 18, a party asserting a claim (including counterclaims, cross-claims and third-party claims) may join as many claims as it has against an opposing party, regardless of whether the claims have any relationship to one another. Failure to bring a permissive counterclaim does not impair the right to assert that claim in another subsequent action. While Rule 18 permits a party to bring all of its claims against the opposing party, whether related or unrelated, it does not permit a party to join in a single action claims against two different parties where the claims are unrelated.
These rules are also subject to the doctrine of res judicata or claim preclusion. A party is barred under this doctrine from asserting in a subsequent action claims that arise out of the same events as those on which claims in an earlier case were based. A claim is precluded under this doctrine where the prior action resulted in a final judgment on the merits, the claim was or could have been brought in the first action, and the parties are the same as, or in privity with, the parties in the first action.
Analysis: Thus the first essential issue here is whether any of the claims in the second action arose out of the same transaction or occurrence as claims that were asserted in the first action. If so, they are barred and thus improperly joined in the second action. Any counterclaim that could have been brought in the first action and that arises out of the same transactions or events is barred as a waived compulsory counterclaim; and any claim that arises out of the same transactions or events that gave rise to a claim in the first litigation is also barred under the doctrine of claim preclusion.
Petersen’s claim for warehouse damage. The claims in the first action involved two related matters. The antitrust claim asserted that Calwalnuts and Peterson had conspired to drive Dyamond out of buisness, and thereby secure for Calwalnuts a monopoly in the market of nut brokerage in the region. This claim arose out of the failure of Peterson to honor its contractual obligations to Dyamond (which caused Plantings to cut Dyamond off), as well as the separate Petersen-Calwalnuts contract. The second claim likewise arose out of that same Petersen-Dyamond contract and its alleged breach by Peterson. Peterson’s claim against Dyamond in the second action for warehouse damage is entirely unrelated. It might have been brought in the first action as a permissive counterclaim, but it was not compulsory. It therefore is not precluded.
Peterson’s contract claim against Calwalnuts. This claim has no relationship to Peterson’s warehouse damage claim against Dyamond, and is therefore not a claim that may be joined under rule 18(a). Rule 18(a) allows unrelated claims to be brought against a single party, but does not permit unrelated claims to be joined against different defendants. Thus this claim against Calwalnuts was improperly joined.
Dyamond’s cross-claim against Calwalnuts for interference with the Petersen-Dyamond contract. This claim suffers from two defects. First, since Peterson’s contract claim against Calwalnuts was improperly joined, it should be dismissed. Calwalnuts is thus not even a party to a properly joined claim, and thus Dyamond’s claim is not a cross-claim against an existing party, but instead seeks to join a third party. (Note that there is no question posed about party joinder rules.) More importantly, even as an independent claim Dyamond is barred by claim preclusion from asserting in a second case a claim against the same party it previously had sued in an earlier action arising out of the same transactions or events. Dyamond and Calwalnuts were opposing parties in the first action, so the same parties element of claim preclusion applies. Further, the claim of interference with the Dyamond-Peterson contract arises out of the same transaction as Dyamond’s breach of antitrust claim in the first action, and the first action resulted in a final judgment on the merits.
Conclusion: Petersen may assert its warehouse damage claim in the second action; Dyamond’s contract claim against Calwalnuts is improperly joined and must be dismissed; Dyamond’s claim against Calwalnuts is barred under the doctrine of claim preclusion.
Question 2 (40%)
Sally Burke (“Burke”) was employed by the Berkeley Publishing Company (“Berkeley”) as a senior editor. On March 12, 2009, she was called into the office of her supervisor, Sammy Boye (“Boye”) for her routine annual performance review. In the course of the discussion Boye told Burke that there was a promotion that would go either to her or to another senior editor, Paul Smart (“Smart”), but that Boye thought it was likely that Smart would get the promotion. When Burke asked why, Boye told her: “I think the guys at the top just feel more comfortable with Smart. You women are more careful and that makes you great at some of the editing functions around here, but you don’t see women making creative decisions very much. The promotion is to fill a creative slot.” After the promotion indeed was given to Smart, Burke filed a gender discrimination case against Berkeley under federal law in federal court, alleging, among other things (in Paragraph 21 of her complaint): “On or around March 15, 2009, plaintiff’s supervisor Boye informed plaintiff that she would not be promoted because another male colleague was preferred by senior management on the basis of his gender.” Berkeley’s answer responded to the allegations of Paragraph 21 of Burke’s complaint with a general denial: “Defendant denies each and every allegation of Paragraph 21 of the Complaint.”
The litigation of Burke’s claim proceeded to consider Berkeley’s motion to dismiss under Rule 12(b)(6), which the court denied, and then to pre-trial discovery. Ten months after Burke’s complaint was filed, Boye’s deposition was taken, at which he at first denied any meeting with Burke on March 15, and under extensive cross-examination finally admitted that he had met with her three days before, and that he had indeed told her that Smart was preferred due to his gender.
Burke promptly moved for Rule 11 sanctions against Berkeley, arguing that at trial Berkeley should be deemed to have admitted the allegations of Paragraph 21 of the complaint. Berkeley opposed the motion and brought its own motion for leave to amend its answer to respond to Paragraph 21 by denying that a meeting between Burke and Boye took place on March 13, admitting that Boye told plaintiff at a meeting with her on March 12 that a male employee was more likely to be promoted, and a general denial of the remaining allegations of Paragraph 21.
You are the presiding judge in the matter of Burke v. Berkeley Publishing Company. Please prepare your written opinion ruling on these two motions and explaining the bases for your rulings.
Issues: This question presents two issues. The central one is whether Berkeley should be permitted to amend its answer or instead should be forced to try the case having effectively admitted the central allegations of Paragraph 21 of the complaint due to its improper denial. The remaining issues involve whether there was a Rule 11 violation and if so whether Burke’s counsel failed to conform to the procedural requirements for challenging Berkeley’s conduct on that basis.
Rules: Rule 11 governs misrepresentations made to the court in filings made by a party. A motion under Rule 11 must be brought separtely from any other motion, and must be served at least 21 days in advance of filing so as to afford the anwering party an opportunity to cure. The sanction imposed must be limited to what is sufficient to deter further violations.
Since there is no suggestion that Burke afforded Berkeley any opportunity to cure the problem, clearly a Rule 11 motion was improperly brought and would not be granted.
Rule 8(b) requires a defendant’s answer to the complaint to fairly respond to the substance of each allegation. A defendant may admit or deny each allegation, but a denial must deny only that part of an allegation that the defendant in good faith intends to deny, and must admit as true the rest. The effect of a failure to deny, including a failure to deny effectively, is to admit the allegation.
Rule 15 (a) liberally permits a party to amend its pleadings once without consent of the opposing party or leave of court if done within 21 days of having served the pleading in question (unless a responsive pleading is required, in which case within 21 days of the service of the responsive pleading). Otherwise a pleading may only be amended with the other party’s consent or with court permission, which should be granted freely “when justice so requires.”
Here, Rules 8(b) and 15(a) are in tension. Rule 8(a)’s mandate is that a failure to make an effective, good faith and particularized denial should be treated as an admission of the entire paragraph that was ineffectively denied in Berkeley’s answer. Conversely, Rule 15(a) directs the trial court to give leave to amend “freely” in order to permit the dispute to be resolved on its merits rather than as a consequence of a misstep by one of the parties.
Resolving this tension, the court should focus on the element of “when justice requires” under Rule 15(a). While amendments are generally allowed, they should not be when an injustice would result. Paragraph 21 was not fairly responded to in Berkeley’s answer. The allegation was that “on or around” the specified date, the defendant admitted to the plaintiff that she would probably not be advanced on account of her gender. The answer utterly failed to repsond to this when it denied a meeting on (as opposed to “on or around”) the specified date. So there is no question that Berkeley failed effectively to deny Paragraph 21. The litigation has moved to an advanced stage under the shadow of this essentially fraudulent answer, compounded by attempts to perpetrate the same fraud in deposition testimony that was far from candid.
So the difficult issue iswhether justice requires the court to allow Berkeley to amend. There seems to be no just reason to permit that. First, an amendment would have to admit the very fact in issue. Second, it is likely that Burke has experienced some prejudice by virtue of Berkeley’s failure to honestly respond to the complaint. Depositions of other witnesses presumably were taken without Burke having a clear understanding of whether this issue was even in contention. Since Berkeley would suffer no obvious prejudice from a denial of its motion for leave to amend, and since Burke may have suffered at least some prejudice, leave to amend is denied. The court’s resolution also takes into account the evident bad faith on Berkeley’s part, which also influences the cout’s assessment of whether “justice requires” that leave to amend be granted.
Note: This question presents a very close call. Equally good answers argue that allowing Berkeley to amend would not prejudice Burke because the amendment woudl admit what Burke wants to prove. It was important to understand that the absence of a Rule 11 sanction did not mean Berkeely automatically got to amend its answer.
Question 3 (20%)
For twenty-four years, plaintiff Wally Woo (“Woo”) has owned and operated a sports fisherman supply shop in Lake Wobegone, Minnesota, under the trade name “Holy Mackerel.” Defendant Peter Hook (“Hook”) also operates a chain of sports fisherman supply shops under the name “Holy Mackerel” on a national scale, including several shops in Minnesota. It is unddisputed that Woo opened his “Holy Mackerel” store in May, 1995, and that Hook did not go into business until four years later when he opened his first store in upstate New York. Woo brought suit in federal court asserting trademark claims against Hook seeking an injunction barring Hook from using the “Holy Mackerel” trademark anywhere in the United States.
It is well-settled trademark law that ownership of a mark is established by first use. The first in time to use a trademark is generally held to be the “senior” user and is entitled to enjoin other “junior” users from using the mark. However, this senior right remains subject to limits imposed by the senior user’s “existing market area and natural area of expansion.” A trademark owner’s existing market and natural area of expansion are determined on a case-by-case basis depending on the nature and quality of the business already operating under the mark, the geographic area from which the business derives substantial business revenues from customers, and the economic feasibility of expanding into additional geographic areas. In his deposition, Woo was asked what he thought his current market area was, to which he responded: “Just Lake Wobegone.” When asked what he thought his natural area of expansion was, Woo testified that “I have always thought I should expand my business into a national one. Lake Wobegone is just barely enough of a market to support my family, and I would expect that a national enterprise would make me a very wealthy man indeed. Also, mackerel aren’t even caught in Lake Wobegone – they are ocean fish. So I need to expand this business of mine at least to the coastal areas.” The other evidence relating to Woo’s market area and natural area of expansion consists of zip code data from credit card customers at Woo’s store, and shows that approximately 98% of all customers reside within 20 miles of lake Wobegone.
Hook has brought a motion for partial summary judgment under Rule 56 of the Federal Rules of Civil Procedure, seeking a ruling that Woo’s remedies are limited to the Lake Wobegone region. Hook argues that Woo can point to no evidence to support his contention that his “existing market and natural area of expansion” includes any other region. Please explain Hook’s best argument, then Woo’s best argument, and finally your conclusion as to which argument will prevail and why.
The issue is whether the evidence supports Hook’s motion for summary judgment.
Rule 56 provides for summary judgment as well as “partial” summary judgment on any claim or defense or any part thereof. Summary judgment is granted under Rule 56 where there is no genuine issue of a material fact for the jury to decide. All reasonable inferences are drawn in favor of the non-moving party, since a jury could reasonably draw those same inferences. Furthermore, inferences that can rationally be drawn from ambiguous evidence must be drawn in favor of the non-movant. Conversely, Matsushita established that a non-moving party may not defeat summary judgment relying on inferences that the court determines to be irrational. Although summary judgment was at one time somewhat disfavored because it denied a party its day in court, the Supreme Court more recently has clarified that summary judgment is not a disfavored procedural shortcut. In assessing whether there is a genuine dispute as to a material issue of fact, the trial court considers which party bears the burden of proof at trial, and a moving party may point to the absence of evidence to meet that burden if it falls to the non-moving party.
Here, Hook is seeking to limit the trial to a trademark dispute confined to the Lake Wobegone area. Hook’s best argument is that there is no evidence on which a jury could find that Woo either participates in any other market, or that the “natural area of expansion” for Woo’s business extends any further. The only evidence Woo has on these points are the zip code data, which limit his business consistently with Hook’s position, and woo’s conclusory testimony that merely establishes that Woo would like to be a bigger business. Conversely, Woo may argue that the fact determination concerning his “natural area of expansion” requires the jury to draw inferences from available facts since the legal rule essentially requires some degree of prediction. He can thus argue that the jury could consider his stated desire to expand into a national business, the feasibility of expanding such a buisness inot a national one in light of Hook’s having done just that, and the nature and quality of the business, which suggests relatively easy replication in stores Woo could open near any fishery.
Hook’s partial summary judgment motion should be granted. There is no evidence to show that Woo’s existing market exceeds the lake Wobegone area. Nor is there evidence from which a reasonable jury could find that Woo’s natural area of expansion exceeds its existing business area. Woo has offered no evidence to explain why, having limited his business to one single area in spite of years of hoping for more, he has nevertheless remained a purely local buisness. (A presentable argument the other way: Woo should prevail because the issues are too factually dense to take from the jruy, and there are matters on which a jury must weigh such things as Woo’s credibility in his testimony about expanding his buisness.)