Business Law Quarterly—Spring 2013

Editor's Column

This issue of Business Law Quarterly includes an article by Steve Mahieu, a recent contributor, about “Litigation Holds.” Those of you who have already received a litigation hold letter are aware that e-discovery has become a growth industry in the law. We will be returning to that topic in future issues. We also have articles from two new contributors, Jimmy Angelakos and Bob Murphy. We hope you find them interesting.

Recently, I read On the Origin of Tepees, by Jonnie Hughes. The title is a play on the title of Charles Darwin’s landmark volume, of course. Mr. Hughes is interested in the evolution of ideas and uses the idea of the tepee as a way of making his topic more accessible for the reader. The tepee as an idea evolved as Native American tribes began to live on the Great Plains permanently, something which mainly occurred only after they acquired horses. Prior to that, most tribes only ventured into the Great Plains in summer, to hunt buffalo. In the colder months, they returned to more permanent dwellings in more hospitable terrain, such as the Mandan settlement on the Missouri River encountered by Lewis and Clark, where they waited out the first winter of their trek.

Winter on the Great Plains was too difficult without horses, because the food supply, the buffalo, were nomadic and hunters had to move with them. Moving was hard work, even in good weather, when everything had to be carried or dragged by people with only dogs for assistance. Such a nomadic lifestyle was impossibly hard in the winters. So instead, the tribes lived in more robust structures, lodges of earth and wood, in places where the game mainly wintered over and was available as a supply of meat. But with the addition of horses, the lifestyle of following the buffalo became manageable and the tepee, originally a temporary structure, was adapted and transfigured into a permanent, if movable, dwelling. Mr. Hughes provides some interesting history on several other examples of ideas that evolved, such as the Stetson Hat and the gambrel barn. Both were adaptations that made the original items (a hat and a barn) much more suitable for particular situations. Both became part of the cultures that spawned them. He explores how it is that humans have the ability to create and share ideas, something that no other species does. Some groups of chimpanzees have learned to use tools (such as rocks for cracking nuts), but not how to communicate that skill to other groups other than through direct mimicry. But Mozart could imagine a melody and then write it down, so that someone who had never heard it could play it and make changes to it. As Hughes puts it, we are able to ‘borrow’ the lived experiences of others of our species and make use of those solutions to life’s problems in our own lives. We share thoughts and, in this way, ideas such as democracy spread and change the cultures they touch.

Andrew H. Connor, Editor

Litigation Holds and the Consequences of Failing to Preserve Evidence

Destroying potentially relevant documents or data, whether intentionally or carelessly, can lead to unnecessary headaches and even dire consequences in litigation. Courts have the power to sanction the offending party for such discovery violations, and in certain circumstances may even instruct the jury that it may infer that the destroyed evidence would have been harmful to the destroying party’s case. One step parties may take to avoid such an undesirable situation is to implement a litigation hold.

A litigation hold is a comprehensive undertaking by a party to identify and preserve documents and data, both in paper and electronic form, in that party’s possession, custody, or control. A typical litigation hold begins with a memorandum or other communication from the company’s management or attorneys instructing employees to preserve certain documents and information. Before implementing a litigation hold, a party must first consider the threshold question of whether its duty to preserve documents and information has been triggered. 

Courts hold that the duty to preserve arises whenever litigation is “reasonably anticipated.” Thus, “[t]he obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation.”1 When such a duty exists, a party is obligated to preserve what it knows (or reasonably should know) is relevant or may reasonably lead to the discovery of admissible evidence or is reasonably likely to be requested during discovery or is the subject of a pending discovery request. This applies with respect to any party’s claims or defenses in the lawsuit or potential litigation.

A party’s litigation-hold efforts will depend in part on the nature of the case, but in most circumstances will necessarily involve information-technology personnel. Indeed, the proper preservation of electronic documents and data, including emails, is particularly important in the age of electronic discovery. One aspect of electronic discovery is metadata, which is often defined as “data about data.” In the discovery context, metadata includes otherwise-hidden information about a file, such as the date and time the file was first created, last accessed, and last modified, who created the file, and other details that may prove useful in reconstructing a party’s activities. Discovery rules generally do not require parties to preserve electronic data using one single method, however, so parties are free to take different approaches in meeting their preservation obligations. For example, a party may create mirror images of pertinent hard drives or external storage devices, identify specific relevant data for preservation, or take other steps to satisfy its duty to preserve potential evidence.

While the failure to institute a formal litigation hold does not automatically constitute gross negligence for sanctions purposes,2 developing and implementing a litigation hold will aid parties in avoiding allegations of spoliation and related consequences. A party may draw spoliation sanctions, including an adverse-inference jury instruction, when it partly destroys relevant evidence with a “culpable state of mind.” The instruction informs the jury that it may infer that the offending party destroyed evidence that was harmful to that party’s case.3 Such an instruction often ends litigation because it is “too difficult a hurdle for the spoliator to overcome.” A party that negligently destroys evidence related to litigation pending in Illinois state court, for example, may also face a negligence claim based on the alleged spoliation.4

Two recent cases out of the U.S. District Court for the Northern District of Illinois illustrate the dangers of failing to safeguard evidence. In the first case, a business owner destroyed all but one box of cigarette-rolling papers after learning his company was being sued for trademark infringement.5 The owner claimed something was wrong with the other papers, and further stated he was “scared.” Notwithstanding the man’s supposed fright, the court imposed an adverse-inference jury instruction, attorneys’ fees, and other penalties.

In a second case, the defendant-company preserved some files from a hard drive, but then destroyed the drive itself.6 The company claimed the hard drive had crashed and was then disassembled. The company then used a computer program to copy some files from the drive before discarding it. The court discovered holes in the company’s argument, however, including the fact that certain files copied from the drive were created after the date when the drive purportedly crashed. The court, having concluded that the company destroyed relevant evidence and then lied to cover its tracks, imposed an adverse-inference jury instruction and barred the company from using any file from the hard drive as evidence at trial.

Although such adverse-inference instructions are an extreme sanction and not given lightly by the courts, the best course is to reduce the risk of spoliation by undertaking reasonable litigation-hold efforts. A party must keep in mind, however, that a litigation hold represents only one tool for facilitating compliance with evidence preservation obligations. Simply issuing a litigation hold memorandum does not automatically satisfy a party’s duty to preserve documents and data. The party must actually locate and preserve pertinent documents and data, and regularly follow up to ensure that any newly-created information is adequately safeguarded. Given the broad expanse of discoverable information in the possession of many companies and individuals today, involving attorneys and other experts in the litigation-hold process from the outset can help prevent costly missteps and otherwise ensure better compliance with discovery obligations.

Gatz Update

The more things change, the more they stay the same. In our last issue of Business Law Quarterly we reported about a recent Delaware case in which the Delaware Chancery Court held that managers of a Delaware limited liability company have fiduciary duties of loyalty and good faith, except to the extent that the limited liability company agreement specifically provides otherwise. Auriga Capital Corporation v. Gatz Properties, LLC. Since then, however, the Supreme Court of Delaware has heard and decided Gatz' appeal. The Supreme Court affirmed the trial court’s verdict against Gatz, based on the evidence.

But the Supreme Court went on to hold that the lower court did not need to decide the statutory construction issue of whether the Delaware Limited Liability Company Act imposes “default” fiduciary duties upon the managers of a Delaware limited liability company. In the circumstances, said the Supreme Court, the dispute over whether fiduciary standards apply could be decided solely by reference to the limited liability company agreement and it wasn’t necessary to decide whether “default” fiduciary duties exist as a matter of statutory construction. Therefore, said the Court, the lower court should have avoided the issue and its opinion on the point “must be regarded as dictum without any precedential value.” Ergo, it can be ignored, for now.

All the more reason, we think, for parties to a limited liability company agreement to exercise great care in preparing and reviewing it to understand what duties the managers will have to the company’s owners.

Andrew H. Connor, 312-627-2264

Trademarks as Search Terms

An interesting case discussing several aspects of trademark law is Rosetta Stone Ltd. v. Google, Inc., decided in April, 2012 by the United States Court of Appeals, Fourth Circuit. Rosetta Stone, the company, was started in 1992 and, by 2006, had become a leader in technology-based language learning products and online services. It owns and uses several registered trademarks employing the words Rosetta Stone or the term RosettaStone. In 2002, Rosetta Stone began online advertising on Google’s website. Eventually, this led to the lawsuit.

As the court explained, Rosetta Stone’s suit resulted from changes in Google’s advertising policies. When an internet user enters a word or phrase into Google’s search engine, Google returns a results list of links to websites that it has determined to be relevant to the key words being searched. In addition to the natural list of results produced by the search, Google also displays paid advertisements known as “sponsored links.” Google’s AdWords advertising platform permits a sponsor to “purchase” keywords that trigger the appearance of the sponsor’s ad and link when one of the purchased keywords is a search term.

In other words, an advertiser purchases the right to have his ad and link displayed with the search results. According to the court, during the period of time in question, Google displayed up to three sponsored links in a highlighted box immediately above the natural search results, and also displayed sponsored links to the right of the search results, separated by a vertical line.7

Prior to 2004, Google’s policy did not allow the use of trademarks in the text of an advertisement (other than the advertiser’s own marks). In addition, Google allowed a trademark to be used as a keyword for searches only when the trademark’s owner did not object to that use. But in 2004 Google loosened this policy and began allowing the use of trademarks as keywords in searches, even over the objection of a trademark’s owner. According to the court, the reason for the change was largely financial as Google’s research showed that about 7% of its total revenue was driven by trademarked keywords. Subsequently, Google even introduced a trademark-specific keyword tool that suggested relevant trademarks for Google’s advertising clients to purchase as keywords. However, Google continued its policy of prohibiting the use of trademarks in actual advertising if the trademark owner requested blocking use of its trademark.

Then, in 2009, Google changed that policy and began allowing the use of trademarks in advertising in four situations: (1) when the sponsor was a reseller of the trademarked product; (2) when the sponsor made or sold component parts for a trademarked product; (3) when the sponsor offered compatible parts or goods for use with the trademarked product; and (4) when the sponsor provided information about a trademarked product. According to the court, this policy shift came after Google developed the technology to automatically check the linked websites to determine if the use of a trademark in an advertisement was “legitimate.”

The 2009 policy shift, however, created problems for Rosetta Stone, which claimed that since that change it had been plagued with counterfeiters selling fake Rosetta Stone products. According to Rosetta Stone, during the six months ending March 1, 2010, it reported to Google 190 separate instances in which one of Google’s sponsored links was marketing counterfeit Rosetta Stone products. Many of the purchasers of the phony products called Rosetta Stone and complained and were surprised to learn that the vendor they had found through Google was not authorized by or affiliated with the real Rosetta Stone. These calls led Rosetta Stone to contact Google and request that Google not allow sponsors to use Rosetta Stone’s trademarks. Google refused.

So Rosetta Stone sued, claiming direct trademark infringement, contributory infringement, vicarious infringement, trademark dilution and unjust enrichment. Google moved for summary judgment on all the claims except unjust enrichment. That count Google moved to dismiss for failure to state a claim.8 The trial court granted both of Google’s motions, in effect throwing out the case. Rosetta Stone appealed. The Fourth Circuit Court of Appeals reversed.

The Fourth Circuit noted that direct infringement of a trademark occurs when an unauthorized use of the mark confuses or is likely to confuse consumers about the origin of the goods or services in question. Federal courts have articulated at least nine factors that are relevant to the ‘likelihood of confusion’ inquiry:

  1. the strength or distinctiveness of the mark as actually used in the marketplace;
  2. the similarity of the two marks to consumers;
  3. the similarity of the goods or services that the marks identify;
  4. the similarity of the facilities used by the markholders;
  5. the similarity of advertising used by the markholders;
  6. the defendant’s intent;
  7. actual confusion;
  8. the quality of the defendant’s product; and
  9. the sophistication of the consuming public.

The presence of any of these factors may establish a likelihood of confusion, said the court. It is not necessary that they all be present, or even that a majority of them be present.

The Fourth Circuit then noted that Google’s use of the Rosetta Stone trademarks was “referential or nominative in nature.” It was not a situation in which Google was passing Rosetta Stone’s mark as Google’s own and confusing the public about who’s goods were being sold. It was, said the court, like an auto repair shop which specialized in fixing foreign cars and ran an ad using the trademarks of various foreign autos to highlight the kinds of cars they repair.

So several of the nine relevant factors were not applicable. But the evidence showed that Google had performed an internal study in connection with the 2004 policy change which “suggested that there was significant source confusion among Internet searchers when trademarks were included in the title or body of the advertisements”. The study recommended that the only effective policy to eliminate this risk of confusion would be to allow trademarks to be used as keyword search terms but not to allow them to be used in advertising text.

Google’s studies had found that 945 users were confused at least once. This, said the court, was sufficient evidence for a jury to find that Google intended to cause confusion in the marketplace because it acted with knowledge that confusion was very likely to result from allowing trademarks to be used in sponsors’ advertising.

In addition, Rosetta Stone offered evidence of actual confusion – the testimony of consumers who attempted to buy a Rosetta Stone software package via the Internet and wound up purchasing a bogus product from a sponsored link. Rosetta Stone also presented evidence of receiving a substantial number of complaints from individuals who had purchased counterfeit software which they thought was genuine.

Rosetta Stone also presented a report from an expert in market analysis and consumer behavior, which the trial court had elected to ignore as unreliable. The expert’s conclusion was that a significant portion of consumers were likely to be confused as to the origin, sponsorship or approval of the sponsored links. He commented that a survey he had conducted yielded a net confusion rate of over 17 percent. The Fourth Circuit held that for purposes of considering whether to grant summary judgment, the expert’s report was evidence of confusion that should have been considered.

The trial court had also concluded that consumer sophistication was a factor in Google’s favor. The trial judge said that because the product was expensive and was only likely to be purchased by someone willing to make the time commitment to learn a foreign language, this demonstrated that the consumers in question were well-educated and able to distinguish the sponsored links as ads. But the Fourth Circuit disagreed and said that such a determination about the kinds of consumers involved and whether they were likely to be confused should have been made by the jury.

In sum, the Fourth Circuit found that Rosetta Stone had pleaded and offered enough evidence in support of its claim of direct trademark infringement to be allowed a trial on the issue. So it reversed the dismissal of that count. In our next issue of Business Law Quarterly, we’ll review what the Fourth Circuit had to say about two other aspects of Rosetta Stone’s case: protected use of a trademark under the functionality doctrine, and the concept of trademark dilution.

Andrew H. Connor, 312-627-2264     

Equity Crowdfunding: Can It Come to Pass?

True crowdfunding has worked really well in numerous documented cases where ordinary people (and by ordinary I mean tech savvy people) looked to help other ordinary people complete a project. Sometimes it’s a personal project like raising money to pay medical bills (over $143,000 for a victim of the Aurora, Colorado shooting), while other times it’s a business project to raise money to build a better mouse trap (over $2,000 for a dry composting toilet). In the former case, the donor may get back a warm and fuzzy feeling; in the latter case a donor may get back a right to buy the better mousetrap (or dry composting toilet) at a discount (if it's ever produced), or some other tchotchke to thank the donors for their money. That all works really well thanks to the Internet and tech savvy ordinary people. Of course, we don’t know if there really is a sick person or better mousetrap involved at all, and there is no cop on the beat to check.

Before the JOBS (Jumpstart Our Business Startups) Act, one could not offer the crowdfunding donors an ownership or equity interest in a business project in exchange for their money because that “interest” is considered to be a “security,” the offer or sale of which is heavily regulated by federal and state law. With the JOBS Act, however, Congress sought to create a securities law crowdfunding exemption that permits the use of the Internet to raise a limited amount of capital from an unlimited number of ordinary people who then get back an equity ownership interest in the business project. But the devil is in the details and those details have doomed equity crowdfunding in our view. 

For example, the intermediary requirement to use a registered broker-dealer or “funding portal” is a kiss of death. It’s hard to imagine many registered broker-dealers becoming crowdfunding intermediaries in view of the small dollar amounts involved. Moreover, the restrictions, reporting requirements and affirmative duties imposed on funding portals are so onerous that it's unlikely many, if any, will emerge. In this regard, funding portals will be required to undertake a measure of due diligence to positively affirm that each and every of the ordinary people investors understands the risks of the investment, can bear the loss of the entire investment, and is otherwise educated in similar investment transactions. In addition, before a funding portal is permitted to sell securities under the crowdfunding exemption, the funding portal must first conduct a background and securities enforcement regulatory history check on each officer and director of the business project issuer, as well as each holder of more than 20 percent of the equity ownership of the business project issuer. The funding portal must also ensure that the proceeds from the crowdfunding are not sent to the business project issuer until the specified target offering amount has been reached.

Similarly onerous are the pre-sale disclosure obligations imposed on the business project issuer that must be filed with the SEC, as well as annual SEC disclosure filing obligations. In addition to the names, addresses and ownership interests of the officers and directors of the business project issuer, descriptions of the business project and use of proceeds, and a description of the ownership and capital structure of the business project issuer, the business project issuer must also provide a description of its financial condition, including its tax returns for offerings under $100,000 and audited financial statements for offerings over $500,000. Again, it seems unlikely that many business project issuers will go to the trouble and expense to provide all of that information for a relatively small capital raise using the equity crowdfunding exemption.

Time will tell, but until the SEC and Financial Industry Regulatory Authority (“FINRA”) propose and adopt rules defining the crowdfunding exemption, there is nothing to tell – it’s still illegal to sell securities using a crowdfunding technique. 

Nevertheless, on January 10, 2013, FINRA invited prospective funding portals to voluntarily submit information to it, at no cost and on a confidential basis, about their proposed business models, activities and operations. The purpose of the information collection on FINRA’s “Interim Form for Funding Portals,” is to help FINRA become more familiar with the funding portal community and to assist it in developing rules specific to funding portals. But completion of the Interim Form will not result in FINRA membership or the ability to legally intermediate crowdfunding transactions. Voluntary filers of the Interim Form will still need to complete a new membership application form once the SEC and FINRA rules are proposed and become effective.

Robert B. Murphy, 202-906-8721   

Defendant Can’t Handle the Tooth!

In several recent editions of Business Law Quarterly, we have discussed various courts’ treatments of claims for breaches of implied warranties under the UCC. We revisit this topic here, in light of a well-reasoned Kansas Appellate Court decision that highlights the distinctions between two implied UCC warranties—the warranty of merchantability and the warranty of fitness for a particular purpose—in a rather unusual fact pattern.

Brenda Golden wanted a “super white” smile. In response to a magazine advertisement, Golden contacted Den-Mat, a manufacturer of porcelain veneers for teeth. Veneers are synthetic panels affixed over the front of a person’s teeth to cover discolorations or other imperfections in the teeth. Den-Mat sent Golden a brochure, in which it advertised the veneers would last up to 16 years with no discoloration and 100% retention. Den-Mat also recommended a dentist in Golden’s area to apply the veneers—one Dr. Carissa Gill.

At a consultation with Dr. Gill, Golden expressed her desire for “really white” teeth, and indicated that she wanted the whitest veneers that Den-Mat produced. Although Dr. Gill opined that the whitest veneers may appear artificial, Golden was not to be dissuaded. Dr. Gill ordered, took delivery, and received payment for Golden’s selected veneers. Two months later, Dr. Gill applied Golden’s chosen veneers to the top row of her teeth.

By three weeks later, one veneer had cracked and another had come loose. Dr. Gill replaced the veneers and reapplied them at no additional cost to Golden. Six months later, another veneer came off, and once again Dr. Gill replaced it at no additional cost. Less than a year later, yet another veneer came off, and although Dr. Gill replaced it, Golden complained that it appeared significantly whiter than the older veneers. A Den-Mat representative indicated that it was possible that the older veneers had become stained or darkened over time. When Golden subsequently complained that the veneers had developed a “grey cast” since they were first installed, Den-Mat refused to replace the veneers.

Golden filed suit in a Kansas trial court against Den-Mat and Dr. Gill, alleging (among other things) claims of breach of the implied warranties of merchantability and fitness for a particular purpose under Kansas’s statutory version of Article 2 of the UCC . The trial court granted summary judgment in favor of the defendants, albeit in what the appellate court described as a “short letter ruling . . . without citing supporting statutes or caselaw.” Golden appealed, and the Kansas Appellate Court overturned the lower court’s decision, finding that there were factual issues surrounding Golden’s implied warranty claims that should have been resolved by a jury.

Prior to examining the merits of Golden’s implied warranty claims, the court was tasked with determining, as a threshold matter, whether the UCC was even applicable to these claims. Article 2 of the UCC applies to the sale of goods, but Golden’s transaction with Dr. Gill involved both a purchase of goods (the veneers) and the purchase of a service (Dr. Gill’s application of the veneers). In determining whether such a “mixed transaction” is governed by the UCC or by general contract law, the majority of states (including Kansas) follow the “predominant purpose test.” This test holds that if the predominant purpose of the entire transaction is a sale of goods, then Article 2 of the UCC applies to the entire transaction. (A few states, when confronted with mixed transaction, will apply Article 2 only to the goods part of the transaction and general contract law to the service part.) The court noted that the outcome of the predominant purpose test depends heavily upon the particular facts and circumstance of each transaction. 

In examining the facts and circumstances surrounding Golden’s case, the court highlighted the fact that the veneers were goods and were integral to the transaction between Golden and Dr. Gill. Moreover, Den-Mat recommended Dr. Gill to install the veneers, and a jury could reasonably find that the predominant purpose of the transaction was the sale of the veneers, with Dr. Gill’s services merely ancillary to Golden’s purchase of the veneers. The court noted that this particular transaction involved cosmetic services, and therefore materially differed from a dentist providing medical treatment, such as the filling of a cavity. Although the filling itself is a good, such a transaction would not likely fall within the scope of Article 2 because the predominant purpose would involve a service—treatment for a malady. Here, on the other hand, Golden suffered from no such ailment and sought no professional diagnosis or treatment. Golden simply wanted whiter teeth and new veneers.

Having found that whether the UCC applied was a question for a jury, the court was still obligated to consider whether Golden could succeed on her claims for breach of implied warranties against Dr. Gill. Golden alleged that Dr. Gill breached both the implied warranty of merchantability and the implied warranty of fitness for a particular purpose.

An implied warranty of merchantability is an unwritten and unspoken guarantee that the goods sold by a merchant satisfy basic standards of quality, durability or acceptability. For example, a television retailer provides an implied guarantee that the television is able to convert an electronic signal into a picture and sound. An implied warranty of merchantability does not ensure that the goods be of the finest quality, but simply that they are fit for their ordinary purposes. The television in our example, therefore, need not provide the highest quality image resolution or the clearest sound available on the market. A court considers whether goods satisfy such basic standards of quality and durability from the perspective of an objective reasonable consumer.

In Golden’s case, the court held that whether Dr. Gill breached the implied warranty of merchantability was a question ripe for a jury. In other words, it was beyond the province of the lower court to determine whether the veneers failed to satisfy their fundamental purpose. First, the court observed that Dr. Gill could be considered a merchant because as a dentist, and more particularly as a dentist recommended by Den-Mat, she was likely knowledgeable about the characteristics of the veneers. Second, the court determined that the ordinary purposes of the veneers was for long-term cosmetic enhancement. Accordingly, the stains, discoloration, and cracks in the goods suggest that they may not have met their ordinary purpose. In so holding, the court emphasized that a jury must be instructed to make such a determination not from Golden’s subjective beliefs, but based on reasonable consumer expectations.

The court also overturned the lower court’s ruling in favor of the defendants with respect to Golden’s claim for breach of the implied warranty of fitness for a particular purpose. An implied warranty of fitness for a particular purpose exists when a seller has reason to know that a purchaser of goods intends to use the goods for a particular purpose. Additionally, for this warranty to attach to a transaction, the seller must have knowledge and expertise regarding the goods and the buyer must actually rely on this knowledge and expertise. Unlike the implied warranty of merchantability, the implied warranty of fitness for a particular purpose does not involve the general characteristics of the good at issue; rather, it involves the fitness of those goods for the buyer’s intended and expressed purpose. For example, assume that our hypothetical television purchaser above informs the seller that she is searching for a television capable of providing high-definition picture. If the seller recommends and sells a television that is only capable of providing standard definition video, the seller may be liable for a breach of the implied warranty of fitness for a particular purpose.

Golden alleged that she informed Dr. Gill that she wanted exceptionally white teeth. As such, the court determined that a jury could reasonably find that Dr. Gill was aware that Golden had a particular purpose beyond a mere cosmetic enhancement to her teeth—she wanted “strikingly white teeth.” Golden made clear a specific need that she sought to fill with the veneers, and Dr. Gill’s acknowledgement that the porcelain veneers would not discolor or stain could therefore give rise to a claim for breach of the implied warranty of fitness for a particular purpose. Golden’s claim was therefore improperly withheld from a jury. In so holding, the court underscored that a buyer need not emphasize the particular purpose for which she is purchasing the goods, but rather that it is enough that the seller should “reasonably understand” the buyer’s intended purpose.

Although claims asserting violations of either implied warranty may involve some overlapping facts, the warranties materially differ in certain ways. First, the implied warranty of merchantability requires that the seller be a merchant, i.e., someone who regularly deals in goods of the kind at issue or otherwise holds herself out by occupation as having particular knowledge or skill of the goods. The implied warranty of fitness for a particular purpose may be imputed to a transaction between any seller and purchaser. Second, in claims for a breach of the implied warranty of merchantability, a seller’s reliance on a merchant’s expertise or judgment is presumed, whereas in claims for a breach of the implied warranty of fitness for a particular purpose, the plaintiff must demonstrate actual reliance on the seller’s judgment to furnish suitable goods. Finally, a key distinction lies in the buyer’s intended use of the goods. The implied warranty of merchantability only provides a guaranty that the buyer may use the goods as they are fundamentally and objectively intended to be used. The implied warranty of fitness for a particular purpose, on the other hand, warrants that the goods will be satisfactory for the buyer’s expressed, particular intended use.

As a final note, the court observed that claims for breaches of these implied warranties are not mutually exclusive—a seller may be liable for breaches of both warranties for a single transaction, although the buyer may not recover duplicative damages. Golden’s implied warranty claims were both allowed to proceed to a jury, as the warranty of merchantability related to the durability and color constancy characteristics of the veneers, whereas the warranty of fitness for a particular purpose related only to the ability of the veneers to retain their brilliant white luster. 

As of the date of publication, Golden’s claims remain pending in the Sedgwick County District Court.

For more information about any of the material contained in the Business Law Quarterly, please contact the author or the editor or one of the Dykema attorneys with whom you work.

1 Zubalake v. UBS Warburg LLC (Zubalake IV), 220 F.R.D. 212, 216 (S.D.N.Y. 2003).

2 Chin v. Port Authority of N.Y. & N.J., 685 F.3d 135, 162 (2d Dist. 2012) (“We reject the notion that a failure to institute a ‘litigation hold’ constitutes gross negligence per se.  Rather, we agree that ‘the better approach is to consider [the failure to adopt good preservation practices] as one factor’ in the determination of whether discovery sanctions should issue.”).

3 Zubalake, 220 F.R.D. at 219-20.

4 Boyd v. Travelers Ins. Co., 166 Ill. 2d 188, 652 N.E.2d 267 (1995).

5 Top Tobacco, L.P. v. Midwestern Cash and Carry, LLC, No. 11 C 4460, 2012 WL 4490412, at *1 (N.D. Ill. Sept. 27, 2012).

6 Domanus v. Lewicki, No. 08 C 4922, 2012 WL 3307364, at *1 (N.D. Ill. Aug. 13, 2012).

7 Readers may note that Google has recently changed the way it displays search results.  The sponsored links now appear at the bottom of the first page of results, still in a highlighted box.

8 Summary judgment is proper when, construing the complaint most favorably to the plaintiff, it nevertheless fails to state facts sufficient to justify the legal injury claimed.  So Google’s motion to dismiss the trademark infringement claim acknowledged that trademark infringement is a valid basis for a claim but denied that the facts pleaded showed any infringement.  A motion to dismiss a claim will be granted when the claim itself is not recognized by the law.  The motion to dismiss the unjust enrichment claim in effect conceded that Google had profited from the actions in question, but denied that such profit was unjust.

As part of our service to you, we regularly compile short reports on new and interesting developments in our business services program. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation.Your comments on this newsletter, or any Dykema publication, are always welcome. © 2011 Dykema Gossett PLLC. 


As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2021 Dykema Gossett PLLC.