IP Law Daily Specific personal jurisdiction could not be based solely upon non-exclusive licensing of Disney IP to third parties
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Thursday, November 21, 2019

Specific personal jurisdiction could not be based solely upon non-exclusive licensing of Disney IP to third parties

By John W. Scanlan, J.D.

The Fifth Circuit found that no circuit had found specific personal jurisdiction based solely upon a licensor’s non-exclusive licenses to third parties selling products in the forum state and said that it was joining the Federal Circuit in rejecting this theory.

The non-exclusive licensing of Disney intellectual properties by two subsidiaries of the Walt Disney Company to third party licensees in Texas was insufficient by itself to find specific personal jurisdiction in Texas over the subsidiaries, the U.S. Court of Appeals for the Fifth Circuit ruled in affirming the dismissal of the claims against the IP subsidiaries. In addition, the fact that the court had personal jurisdiction over two other Disney subsidiaries that sold Disney merchandise in retail stores and online did not also give it personal jurisdiction over the intellectual property entities (Diece-Lisa Industries, Inc. v. Disney Enterprises, Inc., November 19, 2019, Dennis, J.).

Diece-Lisa Industries, Inc. (Diece-Lisa) was issued a trademark for "Lots of Hugs" as a word mark in 2008 for use with toys and sells stuffed toy bears using this mark. In 2010, Disney released the movie Toy Story 3, which featured a teddy bear character named "Lots-O’Huggin’ Bear" that also was referred to as "Lotso." Disney has sold Lotso as a stuffed toy bear and in other consumer products. In 2012, Diece-Lisa brought suit against Disney Store USA, LLC (DSU), which owns retail stores that sell Disney merchandise, and Disney Shopping, Inc. (DSI), which sells Disney merchandise online. It alleged federal trademark and unfair competition claims based on the sale of toy bears and other merchandise marked with the Lotso name. In 2014, Diece-Lisa brought another suit alleging trademark infringement claims against Disney Enterprises, Inc. (DEI) and Disney Consumer Products, Inc. (DCP), which own intellectual property rights in Disney characters and grant licenses to third parties, including DSU and DSI, to manufacture and sell Disney character merchandise. The two Disney IP entities moved to dismiss for lack of personal jurisdiction and improper venue. The Eastern District of Texas consolidated the cases and a magistrate judge granted Diece-Lisa leave to file a third amended complaint that added 10 additional Disney subsidiaries as defendants and also expanded the action from claims based on the sales of merchandise with the Lotso name to claims based upon the use of the Lotso character in various Disney productions.

About a year later, the magistrate judge sua sponte vacated that order without prior notice, which had the effect of removing the new parties from the suit and rendering moot their pending motions for lack of personal jurisdiction and improper venue. The magistrate judge said that the complaint changed the nature of the case by raising claims less connected to the original claims than the judge had originally perceived and that there were "serious" issues of personal jurisdiction and venue. While Diece-Lisa’s objections were pending before the district court, the parties agreed on, and the court entered, an order closing fact discovery and prohibiting assertions of additional claims, defenses, or theories of liability or damages. Diece-Lisa nonetheless filed a fourth amended complaint against additional defendants alleging new theories and reviving claims that had been part of the third amended complaint, issued deposition notices, and requested document production. The magistrate judge struck the complaint and quashed the notices. The district court upheld the vacatur of the third amended complaint, dismissed the IP entities for lack of personal jurisdiction, and deconsolidated the cases. Diece-Lisa appealed.

Reviewability. The Fifth Circuit had jurisdiction to review the two interlocutory orders vacating the order allowing the third amended complaint and striking the fourth amended complaint because they could be regarded as having merged into the final judgment terminating the case against the IP entities. The claims and parties involved with these two complaints were most similar to those in that case, and the complaints revived many previously-dismissed entities and claims that were directed against the IP entities. As a result, the court determined that these interlocutory orders were reviewable upon a final judgment in that case. The case involving the retail Disney parties did not involve these entities or their interests and there was no reason to inconvenience them by forcing them to wait until the other case was resolved.

Personal jurisdiction. The district court lacked both general and specific personal jurisdiction over the two Disney IP entities, the Fifth Circuit ruled in finding Diece-Lisa’s "novel" theories of specific jurisdiction to be without merit. Diece-Lisa argued two different theories: (1) that the entire Disney company should be treated as one "franchise" for purposes of personal jurisdiction because it presented itself as essentially one company, and because the court had personal jurisdiction over the two Disney retail subsidiaries it also had jurisdiction over the IP entities; and (2) because the court had personal jurisdiction over the third parties that had been granted licenses by the IP entities, it also had jurisdiction over the IP entities.

Regarding the "franchise" theory, the court found that Diece-Lisa had not alleged any facts that suggested an "alter ego" relationship between the retail entities and the IP entities. While all were subsidiaries of the Walt Disney Company, there was no allegation that the various subsidiaries did not observe corporate formalities or that the IP entities controlled the day-to-day activities of the retail entities. Merely alleging the existence of a corporate relationship was not sufficient to rebut the presumption of institutional independence. For the "licensor" theory, Diece-Lisa had argued that DEI was subject to personal jurisdiction in Texas because as the owner and licensor of Disney intellectual properties DEI had directed and authorized licensees to use these properties in Texas. The Fifth Circuit observed that no other circuit had found specific personal jurisdiction based solely upon a licensor’s non-exclusive licenses to third parties selling products in the forum state and stated that it was joining the Federal Circuit in rejecting this theory. Something more is required, the Fifth Circuit instructed, and because Diece-Lisa had alleged no additional contacts with Texas, the court declined to find that courts in Texas had personal jurisdiction over the IP entities.

Abuse of discretion. The Fifth Circuit found that the district court had abused its discretion by vacating its order granting Diece-Lisa leave to file the third amended complaint. It noted that it had "repeatedly" held that a sua sponte dismissal without prior notice and hearing is unfair and requires reversal because the adverse party must be given the opportunity to respond. The appellate court observed that the district court apparently tried to resolve its new uncertainty about its jurisdiction by vacating the interlocutory order as a shortcut that avoided addressing the pending motions to dismiss. The district court must determine on remand whether it had personal jurisdiction over the 10 new defendants added by the third amended complaint and then rule upon the other motions that had been rendered moot by its vacatur. However, the district court had not abused its discretion by striking the fourth amended complaint because Diece-Lisa violated the order agreed upon by the parties and entered by the district court.

This case is No. 17-41268.

Attorneys: Richard L. Schwartz (Whitaker Chalk Swindle & Schwartz, PLLC) for Diece-Lisa Industries, Inc. Robert N. Klieger (Hueston Hennigan, LLP) and Roy W. Hardin (Locke Lord, LLP) for Disney Enterprises, Inc. and Disney Consumer Products, Inc.

Companies: Diece-Lisa Industries, Inc.; Disney Enterprises, Inc.; Disney Consumer Products, Inc.

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