Enthusiastic Fan or Dangerous Competitor?

I like Trader Joe’s.  I like the atmosphere – not unlike the small-town grocery stores I knew growing up.  I like the products – interesting choices and, at least, perceived quality.  But I’m not sure I like their legal position in a recent suit Trader Joe’s filed in the federal district court in the State of Washington against one Michael Hallatt of Vancouver, British Columbia.

Michael Hallatt is a self-proclaimed fan of Trader Joe’s.  There are no Trader Joe’s stores in Vancouver – or anywhere in Canada for that matter, so Mr. Hallatt would regularly drive to Bellingham, Washington, to shop at a Trader Joe’s.  When he realized that other Canadians also desired Trader Joe Products, he began buying in bulk for resale in Canada at a store called “Pirate Joe’s”.  

According to Mr. Hallatt, he did his shopping openly and without hiding his purpose.  He held the required Canadian licenses and permits that allowed him to cross the border with his purchased goods.  Sometime in 2012, Trader Joe’s advised its stores not to sell to Mr. Hallatt.  He nevertheless continued to purchase goods with the cooperation of friendly Trader Joe’s employees, by engaging purchasers that were not known to Trader Joe’s, and by spreading the purchases among multiple stores.  

Unable to stop Mr. Hallatt’s shopping sprees, Trader Joe’s sued Michael Hallatt.   The complaint alleges trademark infringement, unfair competition, false endorsement, false designation of origin, false advertising, trademark dilution, injury to business or reputation and deceptive business practices.  

Hallatt isn’t selling counterfeit goods.  He isn’t tampering with the packaging or relabeling the products.  Frankly, his only activity in the U.S. involves the purchase of sizeable quantities of Trader Joe’s products at full retail price from authorized Trader Joe’s stores.    Hallatt’s basic business scheme is legal under the “first sale doctrine” which permits the resale of trademarked products once the trademark owner puts the products in the market.  To support its various claims, Trader Joe’s will need to show something more than the mere resale of its goods.   Most, if not all, of the TJ’s  claims depend on whether Hallatt’s activities misrepresent his relationship with Trader Joe’s , or deceive or are likely to deceive consumers into believing he is an authorized dealer of Trader Joe’s products.  Trader Joe’s facts supporting these claims:

• Hallatt is reselling TJ’s products in their original packaging bearing TRADER JOE’S trademarks
• Hallatt is reselling TJ’s products at “significantly higher prices” than Trader Joe’s charges
• Hallatt prominently displays the message “We Sell Trader Joe’s!” on a sandwich board outside the retail store named Pirate Joe’s
• There is a sticker saying “I [heart] TJ” on the back of a cash register at Pirate Joe’s
• Pirate Joe’s uses Trader Joe shopping bags (presumably recycled from Hallatt’s Trader Joe’s shopping trips)
• Hallatt uses elements  of Trader Joe’s famous trade dress at Pirate Joe’s website; specific elements are not set forth in the complaint
• Design aspects in the Pirate Joe’s retail store are similar to Trader Joe’s “famous South Pacific” trade dress; no specifics given
• Hallatt is purchasing and selling goods outside the scope of Trader Joe’s stringent quality-control standards

This is it.  All of it.  (TJ’s complaint may suggest these are merely examples, but if they had other bad behavior, they would pile it on, or at least select better examples…).    

The first sale doctrine is what allows people to sell at garage sales and on eBay.  This allows an enterprising kid to buy cases of bottled water at Sam’s club and resell them out of a cooler at your kid’s little league game.  It allows a store to go out of business by selling its inventory to a discount house.  Hallatt is no different – unless he is fooling customers about his relationship with Trader Joe’s.  And there doesn’t seem to be any serious evidence of that – in fact quite the opposite.  In an interview on MPR, Mr. Hallatt even stated that he encourages customers to visit a Trader Joe’s to get the real experience.  

While I believe wholeheartedly in the protection of one’s trademark rights, I think Trader Joe’s should have thought about this before bringing a lawsuit.  The complaint looks petty.  The facts are weak.  Hallatt claims to be a fan; couldn’t they have worked out some kind of business deal?  Did they even try?  (Hallatt claims to have reached out to TJ’s but they refused to talk to him.)  Do they know it’s a bad claim and just want to bully Mr. Hallatt?  

If bullying was the intent, it hasn’t worked so far.  Hallatt has said he will fight this one, and has not only answered with a denial of all of the alleged violations, but has set forth several affirmative defenses (additional facts that constitute defenses to the claims) and counterclaimed for discrimination on the grounds that Trader Joe’s treatment of Hallatt is in violation of Washington law that prohibits discrimination by any business based on national origin (See RCW 49.60.030(1)(f)).   Hallatt has also dropped the “P” from his “Pirate Joe’s” sign. 

Minnesotax?

A couple of weeks ago, the Minnesota Legislature passed new tax legislation that, among other things, added a brand new Minnesota gift tax and expanded the applicability of the Minnesota estate tax. A summary of the entire new tax bill is here, but I wanted to highlight a few things that probably matter most to the entreVIEW audience:

Increased Income Tax Rates. In case you haven’t heard, the top rate for couples making more than $250,000 net income, or $150,000 for individuals, has increased from 7.85% to 9.85%. Since it applies retroactively to all of 2013, you can’t avoid paying that rate on the gazillions you’ve already earned this year…

Minnesota Gift Tax. Minnesota is only the second state in the entire country to implement a separate gift tax. This tax will apply to gifts made after June 30, 2013. Taxable gifts are those gifts to non-spouses over the annual exclusion amount as prescribed by the federal definition (generally), which is currently $14,000 per person. Each resident has an additional $1,000,000 lifetime exemption to use over and above the annual exclusion gifts. Gifts over the $1,000,000 exemption will be taxed at a flat 10% rate.  This is in addition to the 40% federal tax on gifts over a $5,250,000 lifetime exemption. As a result, if residents have made gifts over the $5,250,000 federal exemption, any further gifts will now be taxed at a combined 50% rate. Since, of course, the federal system and the Minnesota system differ, there are gifts that Minnesota residents make that will incur Minnesota gift tax but not federal gift tax. This new Minnesota gift tax also applies to residents of any state making gifts of Minnesota real estate or tangible property.

Estate Tax on Pass-Through Entities Owning Real and Tangible Property in Minnesota. Prior to this change in the tax law, non-Minnesota residents did not pay estate tax on assets that were held in business entities like LLCs or partnerships--even if those entities owned real estate. If the deceased was not a resident of Minnesota, it was not considered Minnesota located property. The new tax law looks through those entities to tax any real estate or tangible property (equipment, crops, etc.) held in a pass-through entity. Pass-through entities are LLCs, partnerships, some trusts and S-corporations. This change is effective for any decedents dying after December 31, 2012. This doesn’t change the application of the estate tax for Minnesota residents. Individuals owning any pass-through entity that owns any real estate or tangible property in Minnesota will now owe some estate tax to Minnesota.

Our Economy on the Rise (Knock on Wood): Should You Sell Your Home – OR Your Business?

Is it just me, or is everyone you know selling and buying homes right now? Five of my best friends have purchased new houses in the Twin Cities area and concurrently sold their previous dwellings just this spring. Two of them were forced into closings on their new purchases earlier than what they would have preferred, worrying that it might take some time for them to sell the condos they have lived in for the past few years. Both sold their condos in less than a week – for more than the asking price! During the process of viewing new homes with their realtors, all friends also experienced bidding wars and houses sold out from under their noses without getting a chance to bid or counter.

While I admit that my friends and I are in the typical age range for thinking about buying a new home (the “almost-30—but-definitely-not-yet-30” range), this housing market frenzy is not just a product of peer pressure in my close-knit circle of college pals. According to a recent Star Tribune article, real estate sellers are “leaping” back into the market, and this past April new listings in the Twin Cities metro area showed the biggest increase in two years. Real estate purchases also increased by over 5% from the same time last year, and the prices paid were over 12% higher overall. 

Reflecting on this recent trend, I was reminded of another article I read in the Star Tribune just a few months earlier related to the market for selling a business. As anyone in the M&A market (including we business lawyers!) has been made painfully aware over the past couple of years, companies have been reluctant to enter into the transaction conversation. However, according to this article, it is not only a “hot time” to sell your home, but also to think about selling your business. Investment banking firms have apparently been seeing valuations rising to pre-recession levels, with the typical six- or seven-times EBITDA commonly used as a valuation yardstick reportedly reaching closer to ten or even eleven times in certain industries. A representative from one of Minneapolis’s local investment banking firms is definitely not the only person who thinks these levels are “extraordinary.”

Even though I am still in a relatively nascent stage of my transactional legal career, I have also personally seen evidence of this trend. I have experienced an uptick in conversations regarding the buying and selling of our clients, and recently sat in on two different meetings with clients and investment bankers – the first two of my almost two-year-long career. The company my husband works for also just recently sold off one of its affiliates in a successful transaction. 

According to the Star Tribune article, there is an “unprecedented amount of capital that’s looking to be invested in business acquisitions,” including large capital pools of private equity investors. Additionally, the bank/lending markets are slowly becoming more amenable to transactions as well, while interest rates remain low. Ultimately, experts in the industry are advising entrepreneurs and other business owners that it’s a great time to think about going to market. While we M&A lawyers agree that these are “very unusual times” as compared to the past few years, we hope they stick around and provide us with some exciting opportunities to assist our clients with successful exits and/or acquisitions in the coming months and years!

A Post by Karen Wenzel, Guest Blogger

The Book: Ian Frazier, Great Plains (Farrar/Straus/Giroux, 1989)

Why: The story of a vast area shaped by the dreams of those who have inhabited it.

A few days ago, one of my partners sent me the menu for a client dinner we are attending at a resort somewhere in the Appalachian wilderness area of a Mid-Atlantic state. The food descriptions looked great, but what immediately captured my attention was the name in which our reservations had been made: “Great Plains Moody.” Had the person attending to the details simply misheard the constituent elements of our firm’s name? Or was this some East Coast wit’s ironic commentary on some regionally shared character flaw, say the dark Scandinavian underside of Minnesota Nice?

Thinking about that was putting me in a dark mood, but luckily the reference to the Great Plains reminded me of a wonderful book I had read many years ago by that title. The author, Ian Frazier, is one of my favorites, specializing in travelogues in which he encounters all manner of quirky people and situations. And I vaguely recall some sort of Kevin Bacon-like connection with him as well, something along the lines of his being married to the sister of the wife of the brother of a friend. Putting aside my friendship with a fellow blogger here who is just about to hit the big time with a children’s musical, that’s just about as close as I’ve ever gotten to knowing a literary figure personally.

Anyway, what makes this book great is the lure of the Great Plains themselves. Frazier graphically describes this area as being something akin to a vast blank canvas waiting to be painted by generations of adventurers pursuing their personal ambitions. This is not to say the area was at any time empty, and Frazier is particularly sympathetic to those who inhabited the plains for generations before Europeans arrived on this continent. No, instead, think of this as the story of a place that is somehow mystically attractive, a place where for ages people have gone to pursue their dreams.

One particular story that will resonate, on a deep level, with any entrepreneur is the story of Korczak Ziolkowski, the sculptor whose dream of creating a memorial to the renowned Crazy Horse out of a mountain in South Dakota is even now slowly coming to fruition. Ziolkowski, like many a great entrepreneur, was a man of vision who could look at something that to others looks unremarkable and see something wonderful.

Frazier’s description of the monument-in-process is especially evocative. The site, he says, “…is a ruin, only in reverse. Instead of looking at it and imagining what it used to be, people stand at the observation deck and say, ‘Boy, that’s really going to be great someday.’”  That sounds a lot like what we hear at Gray Plant Mooty on a daily basis from our entrepreneurial clients.

Mr. Spock Battles the Trolls

“The needs of the many outweigh the needs of the few.”
—Spock, Star Trek II: The Wrath of Khan (1982).

These are the opening words in United States District Judge Otis D. Wright’s May 6, 2013, order issuing sanctions against two recent graduates of the University of Minnesota Law School for filing hundreds of cases alleging copyright infringement involving pornographic videos.

Judge Wright went boldly where no man had gone before in taking on these alleged copyright trolls. 

According to Judge Wright, these entrepreneurial lawyers “…have outmaneuvered the legal system. They’ve discovered the nexus of antiquated copyright laws, paralyzing social stigma, and unaffordable defense costs. And they exploit this anomaly by accusing individuals of illegally downloading a single pornographic video. Then they offer to settle—for a sum calculated to be just below the cost of a bare-bones defense. For these individuals, resistance is futile; most reluctantly pay rather than have their names associated with illegally downloading porn. So now, copyright laws originally designed to compensate starving artists, allow starving attorneys in this electronic-media era to plunder the citizenry.”

So how did these hungry young lawyers come to incite the wrath of Wright? They monitored downloads of copyrighted porn movies using a software program called BitTorrent. They would then record the IP addresses of the computers downloading the movies, file suit in federal court to subpoena Internet Service Providers for the identity of the subscribers to these IP addresses, send cease and desist letters to the subscribers, and offer to settle each copyright infringement claim for about $4000.

Individuals targeted gladly paid a few thousand dollars to save embarrassment and avoid a potential $150,000 statutory damage award for copyright infringement.

Their business model was successful as they obtained millions of dollars in settlements. And then the Starship Enterprise and Dr. Spock appeared in in the form of Judge Wright and put an end to these enterprising young trolls.

Is copyright trolling now dead? Not really. These guys got caught because they created fictitious companies to initiate the claims, failed to conduct sufficient investigations of the alleged infringement, exercised deception and fraud on the court, engaged in forgery, and, in the words of Judge Wright, conducted “vexatious litigation to coerce settlement.” The use of BitTorrent and the practice of enforcing copyrights without producing or licensing the works, for the sole purpose of making money, will likely continue. 

It will however be interesting to see how Judge Wright’s order affects lawyers who pursue similar copyright infringement claims, especially those who do not employ abusive litigation practices.  According to Mark Stoltz of the Electronic Frontier Foundation, “Other lawyers have been doing it without forging signatures and using shell companies. But they're no less harmful.” See here or interesting additional perspectives on copyright trolls.