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Seventh Circuit: Operating agreement permitted license of marks, so no trademark infringement
February 25, 2008

In its second trademark decision Friday, the Seventh Circuit clarified what is required for a party to be authorized to use another entity's trademarks. In this case, the plaintiff—one of four founders of two LLC's designed to manage and control a restaurant in Chicago—alleged trademark infringement against the three other co-founders based on the co-founders' use of the trademarks and trade dress of the two LLC's in similar restaurants in New York and Las Vegas. The district court dismissed the case because it found that such use of the trademarks and trade dress was authorized according to the operating agreement of the LLC's.The Seventh Circuit affirmed. The court emphasized the operating agreement of one of the LLC's specifically contemplated and permitted expansion of the "Concept" of the Chicago restaurant (including the use of the trademarks and trade dress) in other locations if two of the co-founders desired to expand. Because three of the co-founders desired the expansions to New York and Las Vegas, the expansion and corresponding use of the trademarks and trade dress was authorized. Being authorized, the three co-founders' use of LLC's trademarks could not, as a matter of law, infringe the LLC's trademark and trade dress rights, and the district court therefore properly dismissed the claim.More detail of Segal v. Geisha NYC LLC after the jump.

This case concerns the national expansion of Japonais, a popular Chicago restaurant located in the River North restaurant district. In 2003, founder Jonathan Segal and his three other co-founders (Rick Wahlstedt, Jeffrey Beers and Miae Lim) created two LLC's to operate and manage Japonais Chicago. One of these LLCs, Geisha Chicago, owns the Japonais Chicago restaurant, as well as all intellectual property related to the Japonais name and design. According to Geisha Chicago's operating agreement, the other LLC, Hospitality Chicago, is Geisha Chicago's sole and exclusive "Managing Member." The operating agreement vests Hospitality Chicago with complete plenary authority over Geisha Chicago—among other things, Hospitality Chicago has the exclusive power to utilize the assets of the company. Notably, the four founders were the only members of Hospitality Chicago. Hospitality Chicago's operating agreement included provisions that anticipated the national expansion of Japonais. According to the operating agreement, "if at least two" of the four founders "desire to open a restaurant in a location outside the greater Chicagoland area based upon the Restaurant's Concept (an Expansion)," such "expanding founders" could do so by delivering written notice to the others "setting forth the material terms of the Expansion as well as the terms and conditions pursuant to which the Non-Expanding Founders may invest in the Expansion." The operating agreement defines the term "Concept," as a restaurant that is "substantially similar" that incorporates "the intellectual property of the Restaurant." Japonais Chicago received immediate national acclaim and financial success, and in 2006, the three other co-founders opened additional Japonais restaurants in New York City and Las Vegas. The new restaurants in New York and Las Vegas utilized the trade dress and design of Japonais Chicago without offering compensation to Geisha Chicago or Hospitality Chicago. Segal objected and through Geisha Chicago and Hospitality Chicago brought suit in Northern District of Illinois, such suit included a count for trademark infringement based on the other co-founders' use of Geisha Chicago's intellectual property in the expansions to New York and Las Vegas.The district court found the "clear and unambiguous" language of Hospitality Chicago's operating agreement expressly authorizes "any two Founders to expand the restaurant concept and to do so using the intellectual property of the Chicago restaurant." As such, it held there could be no likelihood of confusion as to source or affiliation as a matter of law, and dismissed Segal's Lanham Act count under Rule 12(b)(6).On appeal, Segal argued Hospitality Chicago's operating agreement was merely a contract intended to govern relations between the founders, and thus was not relevant to whether Geisha Chicago authorized the defendants' use of Japonais Chicago's intellectual property. Segal claimed only Geisha Chicago, "acting through its duly authorized members," can direct use of its intellectual property, and that the district court erred because Hospitality Chicago's operating agreement did not, and could not, authorize the New York entities' trademark use.The Seventh Circuit disagreed with Segal's arguments and found both operating agreements were wholly relevant to the question of whether Geisha NYC and Hospitality NYC were authorized to use Japonais Chicago's trademarks. It then noted Geisha Chicago's operating agreement delegates all of its corporate powers to Hospitality Chicago, such that Hospitality Chicago could authorize use of Geisha Chicago's intellectual property. The court further found the expansion of the restaurant to new locations and the use of Geisha Chicago's intellectual property was authorized pursuant to Hospitality Chicago's operating agreement, which allows two founders to utilize the Japonais "Concept" to expand the restaurant nationally. The court's reasoning paralleled that of the district court. Because three of the four co-founders was enough to control the decisions of Hospitality Chicago and thus Geisha Chicago. As a result, when the three co-founders made the decision to expand and use Geisha Chicago's intellectual property, that was enough to authorize them to do so. Because the use was authorized, the use of the trademarks and trade dress did not infringe Geisha Chicago's rights. Ultimately, the court analogized:

The use of similar names to denote the identical product of a single seller is no more confusing than the fact that two bottles of Coca-Cola carry the same name. Likewise, here it is not confusing to restaurant patrons that Japonais New York and Japonais Las Vegas carry the same name as Japonais Chicago—by definition they are expanded locations of the same restaurant and share three of the same founders and a "Concept."

As a result, the plaintiff could prove no set of facts that would entitle it to relief, and the court affirmed the dismissal.

To read the full opinion in Segal v. Geisha NYC LLC, click here.

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