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Visual Dynamics, LLC v. Chaos Software Ltd.

United States District Court, W.D. Arkansas, Fayetteville Division

February 12, 2018




         Currently before the Court are:

• Defendants/Counter-Plaintiffs Chaos Software Ltd.'s and Chaos Group, LLC's (collectively, "Chaos") Motion for Summary Judgment against Plaintiff/Counter-Defendant Visual Dynamics, LLC's ("Visual Dynamics") Claims (Doc. 22), Brief in Support (Doc. 24), and Statement of Undisputed Material Facts in Support (Doc. 26); Visual Dynamics' Response in Opposition (Doc. 40-1), Brief in Support (Doc. 41-1), and Statement of Disputed Facts in Support (Doc. 42-1); and Chaos's Reply Brief in Support of its Motion (Doc. 43);
• Chaos's Motion for Summary Judgment on its Counterclaims (Doc. 23), Brief in Support (Doc. 25-1), and Statement of Undisputed Material Facts in Support (Doc. 26); Visual Dynamics' Response in Opposition (Doc. 37-1), and Statement of Disputed Facts in Support (Doc. 42-1); and Chaos's Reply Brief in Support of its Motion (Doc. 44); and
• Visual Dynamics' Motion for Summary Judgment as to Chaos's Counterclaims (Doc. 28), Statement of Undisputed Facts in Support (Doc. 30), and Brief in Opposition to Visual Dynamics' Statement of Undisputed Facts (Doc. 36); and Visual Dynamics' Reply Brief in Support of its Motion (Doc. 46-1).

         As further explained below, Chaos's Motion with respect to Visual Dynamics' aims is GRANTED, Chaos's Motion with respect to its own claims is GRANTED IN ART AND DENIED IN PART, and Visual Dynamics' Motion is GRANTED IN PART AND ENIED IN PART.

         I. BACKGROUND

         Chaos is a Bulgarian software developer that was founded in 1997. One of its products is a rendering software application that is sold under the "V-Ray" name and ark, which was first registered with the United States Patent and Trademark Office USPTO") on March 20, 2007. V-Ray is used to create realistic graphics and animation a variety of industries, including video games, film and television, and architecture 3sign. But Chaos does not sell V-Ray directly to the public; instead, it sells the product a network of "authorized resellers, " who in turn resell the product to the general public Dmetimes those resellers distribute the product to "sub-resellers, " who then sub-resell it the general public. Chaos contracts with its resellers, but it does not contract with sub-sellers. However, its contracts with its resellers require them to demand certain things their sub-resellers, such as pricing limits.

         Visual Dynamics is an Arkansas business that resells software from outside 3velopers. In September of 2008, Visual Dynamics' owner, Scott Slauson, purchased e internet domain name registration for from a man named Vance Ray r $4, 000, in anticipation of using to sell V-Ray products in the United States as one of Chaos's authorized resellers. After purchasing the domain, Mr. Slauson approached Chaos on behalf of Visual Dynamics, asking whether Chaos would make Visual Dynamics one of its authorized resellers. Chaos declined, explaining that it already had seven authorized resellers in the United States, and didn't want to oversaturate the American market or dilute its brand there. However, Chaos encouraged Visual Dynamics to go ahead and seek out one of its authorized resellers in order to become a sub-reseller of V-Ray products. Visual Dynamics did this, and sub-resold V-Ray products on, with Chaos's knowledge, from 2008 until May 26, 2011, when it finally became an authorized reseller of V-Ray products for Chaos.

         The relationship between Visual Dynamics and Chaos was a complicated and frustrating one for both parties. On the one hand, Visual Dynamics made money for Chaos, and of course, for itself. On the other hand, Chaos experienced frequent complaints from customers about Visual Dynamics' customer service, and about the website. Eventually, Chaos had enough, and on October 11, 2012, Chaos terminated the parties' authorized-reseller relationship, effective on November 9, 2012. However, Visual Dynamics continued sub-reselling V-Ray products on Then on June 3, 2013, Visual Dynamics was hit with a letter from Chaos's attorneys, demanding that it cease using the V-Ray mark and immediately turn over the registration of the domain to Chaos. Visual Dynamics declined, and instead continued sub-reselling V-Ray products on

         For the next three and a half years, an uneasy truce of sorts seems to have held between the parties. Chaos complained to consumers and to the public about Visual Dynamics and, and went out of its way to emphasize to anyone with questions about the matter that the two entities were not affiliated with each other. But Chaos took no legal action to follow up on its 2013 cease-and-desist letter. Mr. Slauson, however, fumed over the things Chaos was saying about Visual Dynamics to others, and on October 14, 2016, crossed the Rubicon by filing this lawsuit, claiming that Chaos was tortiously interfering with Visual Dynamics' business expectancy. In addition to that claim of tortious business interference, Visual Dynamics also asserted claims against Chaos for civil conspiracy and for a preliminary injunction, both of which were premised on the same conduct as the first claim. Chaos was apparently displeased with this turn of events, and responded by filing nine counterclaims against Visual Dynamics for trademark infringement, trademark dilution, false representation, false designation of origin, unfair competition, cyberpiracy, and deceptive trade practices, under various theories of federal and Arkansas law.

         On October 30, 2017, the parties filed their summary judgment motions. Chaos filed two motions: one seeking summary judgment on its own claims against Visual Dynamics, and the other seeking dismissal of Visual Dynamics' claims against Chaos. Visual Dynamics filed one motion, seeking dismissal of Chaos's claims. All three of those motions are now ripe for adjudication. Trial of whatever claims survive these motions is set to begin on February 20, 2018. A final pretrial conference will be held tomorrow, February 13.


         "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). When, as here, cross-motions for summary judgment are filed, each motion should be reviewed in its own right, with each side "entitled to the benefit of all inferences favorable to them which might reasonably be drawn from the record." Wermager v. Cormorant Twp. Bd., 716 F.2d 1211, 1214 (8th Cir. 1983). The Court must view the facts in the light most favorable to the non-moving party, and give the non-moving party the benefit of any logical inferences that can be drawn from the facts. Canada v. Union Bee. Co., 135 F.3d 1211, 1212-13 (8th Cir. 1997). The moving party bears the burden of proving the absence of any material factual disputes. Fed.R.Civ.P. 56(a); Matsushita Bee. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986).

         If the moving party meets this burden, then the non-moving party must "come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita, 475 U.S. at 587 (quoting then-Fed. R. Civ. P. 56(e)). These facts must be "such that a reasonable jury could return a verdict for the nonmoving party." Allison v. Flexway Trucking, Inc., 28 F.3d 64, 66 (8th Cir. 1994) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). "The nonmoving party must do more than rely on allegations or denials in the pleadings, and the court should grant summary judgment if any essential element of the prima facie case is not supported by specific facts sufficient to raise a genuine issue for trial." Register v. Honeywell Fed. Mfg. & Techs., LLC, 397 F.3d 1130, 1136 (8th Cir. 2005) (citing Celotex Corp v. Catrett, 477 U.S. 317, 324 (1986)).


         The Court is of the opinion that there can be no reasonable dispute as to certain facts in this case, regardless of whether the record is viewed in the light most favorable to Chaos or to Visual Dynamics. So before diving into the specific elements of any particular claim or defense by either party, it is useful to make certain factual findings and legal rulings flowing therefrom, that will have the effect of dramatically streamlining the analysis that follows.

         Chaos does not claim that it is unlawful for Visual Dynamics to sub-resell V-Ray products. See, e.g., Doc. 35, p. 5. And there is no reasonable dispute that Chaos gave Visual Dynamics permission to use the V-Ray logo in connection with the sale of V-Ray products, long before Visual Dynamics became an authorized reseller. See Doc. 28, p. 27. There is also no reasonable dispute that, long before Visual Dynamics became an authorized reseller, Chaos not only permitted Visual Dynamics to use the domain, but even encouraged Visual Dynamics to sell V-Ray products on the domain. See Id. at 10-17, 27. True, Chaos conditioned this permission and encouragement on Visual Dynamics's compliance with requests, for example, that the domain explain that it was not Chaos's property, that it explain that it was not connected with Chaos, and that it not use any Chaos Software logos. See Id. at 27. But there is no evidence in the record that Visual Dynamics ever failed to comply with such requests at any point from when the two companies first communicated, all the way through the time when Chaos terminated its authorized-reseller contracts.

         Given all of this, the Court finds that long before Visual Dynamics became an authorized V-Ray reseller for Chaos, Chaos had already given Visual Dynamics a license to use the V-Ray mark in marketing and advertising materials for the sale of V-Ray products on the website. Although it would seem to be the better practice for a trademark license to take the form of a written contract, this is not the only means by which a license may arise. A trademark license can also arise through a course of conduct that clearly indicates to a reasonable observer in the implied licensee's position that the holder of the trademark has consented to a particular type of use of that mark by the licensee. See Restatement (Third) of Unfair Competition § 29 & comments a, c (1995). And that is what happened here, long before Visual Dynamics ever became an authorized V-Ray reseller for Chaos.

         However, whatever the precise scope of that prior license may have been, it merged into and was superseded by the written contracts that governed these parties' authorized-reseller relationship from May 26, 2011 to November 9, 2012. That is because these contracts were, among other things, written licensing agreements. They explicitly authorized Visual Dynamics to use the V-Ray logo and Chaos's marketing materials in advertising the product, see Doc. 1-1, ¶ 1.4; Doc. 1-2, ¶ 1.3, and they exerted quality control by requiring Visual Dynamics to immediately inform Chaos about trademark-related issues, see Doc. 1-1, ¶ 4.11; Doc. 1-2, ¶ 4.10, authorizing Visual Dynamics to take legal action to protect Chaos's intellectual property, see Doc. 1-1, ¶ 12, and by requiring Visual Dynamics to stop distributing and advertising V-Ray products when the agreements were terminated, see Doc. 1-1, ¶ 14; Doc. 1-2, ¶ 12; see also 3 McCarthy on Trademarks and Unfair Competition §§ 18:38, 18:42 (5th ed.) (discussing importance of quality control for trademark licensing). So under the so-called "merger rule, " any prior license that Visual Dynamics held with respect to the V-Ray trademark merged into the written authorized-reseller license and was terminated when the reseller contract was terminated. See Hot Stuff Foods, LLC v. Mean Gene's Enters., Inc., 468 F.Supp.2d 1078, 1095 (D.S.D. 2006); 4 McCarthy on Trademarks and Unfair Competition § 25:32 (5th ed.).[1] And there is no reasonable dispute that on October 11, 2012, Chaos terminated the reseller contract, effective on November 9, 2012. See Doc. 23-2, p. 4.

         Chaos indisputably took some steps to protect its intellectual property as soon as it terminated the reseller contract, by demanding that Visual Dynamics post new and more prominent disclaimers on, explaining the lack of affiliation between Visual Dynamics and Chaos. See Id. Visual Dynamics complied with these demands. See Doc. 28, p. 36.[2] However, Visual Dynamics continued selling V-Ray products on as a sub-reseller, just as it had done for many years before becoming an authorized reseller. See id.

         As previously mentioned in Section I, supra, on June 3, 2013, roughly seven months after Chaos's termination of its authorized-reseller contract with Visual Dynamics took effect, Chaos's attorneys sent Visual Dynamics a letter citing "potential consumer confusion, " demanding that Visual Dynamics immediately cease and desist from any further use whatsoever of the V-Ray mark, and further demanding that Visual Dynamics hand over the domain to Chaos within fourteen days-apparently in exchange for no compensation at all from Chaos. See Doc. 23-2, pp. 56-57. The Court would observe here that, at least as a general proposition, trademark law is quite clear that continued use of a mark by a former licensee after a license has been terminated constitutes trademark infringement. See 4 McCarthy on Trademarks and Unfair Competition § 25:31 (5th ed.) ("Once a . . . license contract is terminated, there is no doubt that the former... licensee has no authorization or consent to continue use of the mark.") (collecting cases). This is because the risk of customer confusion is especially high when the entity using the mark once did so with the explicit and widely-known authorization of the mark's owner but no longer has permission to do so. See Id. On the other hand, one who is looking past the letter of the law to the equities of the situation might justifiably raise an eyebrow over Chaos's decision to let seven months pass before making this demand. Cf. Citibank, N.A. v. Citytrust, 756 F.2d 273, 276 (2d Cir. 1985) (declining to enter preliminary injunction in favor of claimant who waited to file suit until nine months after receiving notice in the press and ten weeks after receiving actual notice of alleged wrong). But at any rate, Visual Dynamics felt this to be an unfair and unreasonable demand, and declined to accommodate it. See Doc. 37-1, pp. 13-14.

         Certainly, what transpired next is far more eyebrow-raising: as already noted, another three and a half years passed with Chaos taking no legal action to enforce or follow up on its demand. Visual Dynamics simply continued sub-reselling V-Ray products from In the meantime, Chaos contented itself to deal with confused or frustrated consumers on an ad hoc basis, by telling them that Visual Dynamics was not affiliated with Chaos, see Doc. 40-1, p. 45, that Visual Dynamics was not an official reseller of V-Ray products, see id., that Chaos does not trust Visual Dynamics and was unable to obtain the domain from them, see Id. at 48, that if a customer who purchased a V-Ray product from Visual Dynamics wants a refund, then he or she must seek the refund from Visual Dynamics, see Doc. 23-2, pp. 7-8, and that Chaos could not help customers with problems they might have using the website, see Doc. 45, pp. 3-4, 11-12. Visual Dynamics took umbrage at even this much interference by Chaos, see Doc. 41-1, pp. 2-5, and eventually decided that instead of letting sleeping dogs lie, it would poke the bear by filing this lawsuit. Only then did Chaos take legal action to enforce its demand of several years ago, by asserting its nine counterclaims in this case.

         Given all of the foregoing context, this is an appropriate place for the Court to make three especially important findings. First, it was not improper for Chaos to say these things about its relationship or lack thereof with Visual Dynamics. This is so for the rather obvious reason that all of these statements were true and in furtherance of Chaos's legitimate self-interest. See Restatement (Second) of Torts § 767. Visual Dynamics is not affiliated with Chaos. Visual Dynamics is not an authorized reseller of V-Ray products.[3] Chaos does not trust Visual Dynamics. Chaos is not able to "refund" a transaction to which it was not a party. Chaos does not own, and therefore Chaos is not able to help customers resolve any technical problems they might have using that website. And there is nothing improper about Chaos encouraging potential V-Ray customers to purchase V-Ray products only from authorized ...

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