REAVLEY, Circuit Judge:
Taco Cabana complained of the imitation of the appearance and motif of its Mexican restaurants by Two Pesos. Taco Cabana won a judgment for trade dress infringement under the Lanham Act and misappropriation of trade secrets under Texas law. Two Pesos appeals, claiming that Taco Cabana's trade dress is not protectable because the Mexican motif is not protectable, and that Taco Cabana surrendered any claim it had to Lanham Act protection by cross-licensing with another restaurant and retaining the same trade dress for two different restaurant names. Two Pesos also claims that it obtained the alleged trade secrets — architectural plans and kitchen equipment layout — in a lawful manner and cannot be guilty as a matter of law
Two brothers, Felix and Mike Stehling, opened the first Taco Cabana restaurant in San Antonio in September 1978, and opened five more restaurants in San Antonio by 1985. Taco Cabana describes its Mexican fast-food trade dress as:
In December 1985, Marno McDermott and Jim Blacketer opened Two Pesos in Houston. Two Pesos adopted a motif essentially consistent with the above description of Taco Cabana's trade dress,
Six days before filing suit against Two Pesos, the Stehling brothers entered into a series of agreements dividing the Taco Cabana restaurants between themselves and going their separate ways. Felix Stehling retained the "Taco Cabana" name, and Michael Stehling adopted the name "TaCasita." The agreements allowed the two groups to use the same trade dress, though one provision required "reasonable efforts to modify their trade dress for their respective future restaurants sufficiently to distinguish the restaurants of each Group from the restaurants of the other Group in the public's mind." The Stehlings have not altered their respective trade dresses. After filing suit, Taco Cabana expanded into several cities, including Houston and Dallas where Two Pesos was already doing business.
The jury found that: (1) Taco Cabana has a trade dress; (2) Taco Cabana's dress, taken as a whole, is non-functional; (3) the dress is inherently distinctive; (4) the dress has not acquired secondary meaning in the Texas market; (5) customers might likely associate or confuse a Taco Cabana restaurant with a Two Pesos restaurant; (6) Taco Cabana exercises adequate supervision and control over TaCasita to ensure that the quality of TaCasita's goods and services are not inferior to Taco Cabana's; and (7) Taco Cabana was damaged by the trade dress infringement. The jury awarded $306,000 for lost profits, $628,300 for lost income, and $0 for loss of good will. The district court doubled the damages for trade dress infringement (bringing the total to $1,868,600), awarded attorneys fees of $937,550, and ordered Two Pesos to make several changes in its restaurant design.
Taco Cabana also claimed misappropriation of the following trade secrets: (1) certain architectural drawings; (2) its kitchen equipment layout and design; and (3) its kitchen and restaurant operating procedures. The jury found that Two Pesos misappropriated the architectural drawings and the kitchen equipment layout and design, but not the operating procedures. The jury awarded $150,000 for the misappropriation. The district court entered judgment on the jury's verdict, and denied Two Pesos' motions for judgment n.o.v. and for a new trial. Two Pesos appeals.
I. Trade Dress Infringement
Trade dress infringement is established by showing that: (1) the dress
A. The Threshold "Concept" Dispute.
The district court instructed the jury that:
See Blue Bell Bio-Medical v. Cin-Bad, Inc., 864 F.2d 1253, 1256 (5th Cir.1989) ("The `trade dress' of a product is essentially its total image and overall appearance.").
Two Pesos argues that protectable trade dress is much narrower than "total image." The combined effect, Two Pesos argues, of Taco Cabana's consistent reference to "concept" and the district court's "total image" instruction was to mislead the jury into believing that Taco Cabana had a right to preclude competitors from using a Mexican theme for a Mexican restaurant.
A competitor can use elements of Taco Cabana's trade dress,
B. The Elements of Protectability.
The portions of the trial court's instructions disputed by Two Pesos appear in bold type:
Two Pesos' argument reduces to a fallacious syllogism: (1) functional elements do not enjoy protection; (2) Taco Cabana's trade dress includes functional elements; (3) therefore Taco Cabana's trade dress does not enjoy protection. Two Pesos correctly emphasizes that functional features cannot be protected, Sno-Wizard Mfg., Inc. v. Eisemann Products Co., 791 F.2d 423, 425 n. 2 (5th Cir.1986), but a particular arbitrary combination of functional features, the combination of which is not itself functional, properly enjoys protection. See Sicilia, 732 F.2d at 425 (design may be distinctive and identifying even though also related to performing a function); Chemlawn Services Corp. v. GNC Pumps, Inc., 690 F.Supp. 1560, 1571 (S.D.Tex.1988) (exterior configuration of functional parts arbitrarily selected; not necessary to copy configuration of each part to effectuate functions). Taco Cabana does not seek protection for individual elements, but for a particular combination of elements which constitute trade dress as a whole. See Sicilia, 732 F.2d at 429.
With the doctrine of functionality, the law secures for the marketplace a latitude of competitive alternatives. See Freddie Fuddruckers, Inc. v. Ridgeline, Inc., 589 F.Supp. 72, 77 (N.D.Tex.1984) (policy predicate for functionality doctrine is public interest in enhancing competition), aff'd without op., 783 F.2d 1062 (5th Cir.1986); Stormy Clime Ltd. v. ProGroup, Inc., 809 F.2d 971, 977-78 (2d Cir.1987) (functionality test critical to avoid upsetting patent law by indefinitely extending trade dress protection to an aggregation of elements that would otherwise enrich the public domain after expiration of design patent). "The need to avoid monopolization of a design lessens, however, in the area of distinctive trade dress. The wide range of available packaging and design options allows a producer to appropriate a distinctive identity without unduly hindering his competitors' ability to compete." Sicilia, 732 F.2d at 426 n. 7. Taco Cabana's particular integration of elements leaves a multitude of alternatives to the upscale Mexican fast-food industry that would not prove confusingly similar to Taco Cabana's trade dress.
Though the district court may have overstated the law to instruct the jury that protection is denied where the particular combination "must be used by others in order to compete,"
2. Inherent Distinctiveness & Secondary Meaning.
"If a mark or dress serves as a symbol of origin it is considered distinctive
The district court instructed the jury as follows:
While the district court might have achieved greater semantic clarity by separately addressing distinctiveness and inherent distinctiveness, the instruction as a whole properly guided the jury as to the elements of inherent distinctiveness. A distinctive trade dress that is neither descriptive nor functional is ipso facto inherently distinctive.
Two Pesos argues that Taco Cabana's trade dress embodies descriptive elements, which should disqualify the dress for inherent distinctiveness. "A descriptive term `identifies a characteristic or quality of an article or service' ... such as its color, odor, function, dimensions, or ingredients." Zatarains Inc. v. Oak Grove Smokehouse, Inc., 698 F.2d 786, 790 (5th Cir.1983) (finding "Fish-Fri" descriptive and not protectable), quoting Vision Center v. Opticks, Inc., 596 F.2d 111, 115 (5th Cir.1979), cert. denied, 444 U.S. 1016, 100 S.Ct. 668, 62 L.Ed.2d 646 (1980).
Taco Cabana's trade dress does not surrender the possibility of inherent distinctiveness merely by embodying certain descriptive elements. As with Two Pesos' flawed syllogism on functional elements, the existence of descriptive elements does not eliminate the possibility of inherent distinctiveness in the trade dress as a whole. "The whole, in trademark law, is often greater than the sum of its parts." Association of Co-operative Members, Inc. v. Farmland Indus., Inc., 684 F.2d 1134, 1140 (5th Cir.1982), cert. denied, 460 U.S. 1038, 103 S.Ct. 1428, 75 L.Ed.2d 788 (1983); see also 1 J. McCarthy, TRADEMARKS AND UNFAIR COMPETITION § 11:10 at 457 (2d ed. 1984) ("combination of two or more admittedly descriptive elements as a composite mark may result in a composite which is non-descriptive"; and quoting Farmland Industries, supra). Again, competitors may use individual elements in Taco Cabana's trade dress, but the law protects the distinctive totality. The jury visited both Taco Cabana and Two Pesos, and heard ample evidence of the distinctiveness of
C. The Legal Effect of the Cross-License.
Prior to this litigation, the Stehling brothers divided the Taco Cabana restaurants. Felix Stehling retained the name "Taco Cabana," and Michael Stehling adopted the name "TaCasita." The agreement allowed the two groups to use the same trade dress, which Two Pesos calls a "naked license." But Two Pesos faces a stringent standard because finding a "naked license" signals involuntary trademark abandonment and forfeits protection. See American Foods, Inc. v. Golden Flake, Inc., 312 F.2d 619, 624-25 (5th Cir.1963). While this cross-license arrangement is not governed closely by any precedent, we find no basis for an involuntary abandonment.
An owner may license its trademark or trade dress and retain proprietary rights if the owner maintains adequate control over the quality of goods and services that the licensee sells with the mark or dress. See Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 387 (5th Cir.1977) (quality-control rationale is that public has right to expect consistent quality of goods or services associated with trademark or trade dress). Two Pesos argues that the cross-license creates two separate sources of good will and thus cannot indicate a single origin. This argument ignores the emergence of the "quality theory," which broadens the older source theory "to include not only manufacturing source but also the source of the standards of quality of goods bearing the mark" or dress. 1 J. McCarthy, supra, § 3:4 at 112. So long as customers entering a Taco Cabana or a TaCasita can expect a consistent level of quality, the trade dress retains its "utility as an informational device." Kentucky Fried, 549 F.2d at 387.
While the parties dispute the actual level of quality control, the jury's finding — that Taco Cabana exercises adequate supervision and control over TaCasita to ensure that the quality of TaCasita's goods and services are not inferior to Taco Cabana's — enjoys adequate record support. We also reject Two Pesos' argument that the district court erred in refusing to instruct the jury that TaCasita must also exercise quality control over Taco Cabana. Ignoring the record evidence of at least some bilateral quality monitoring, the law requires consistent quality, not equivalent policing. The jury found the requisite quality consistency; we need not demand rigorous bilateral regulation.
The purpose of the quality-control requirement is to prevent the public deception that would ensue from variant quality standards under the same mark or dress. Where the particular circumstances of the licensing arrangement persuade us that the public will not be deceived, we need not elevate form over substance and require the same policing rigor appropriate to more formal licensing and franchising transactions. Where the license parties have engaged in a close working relationship, and may justifiably rely on each parties' intimacy with standards and procedures to ensure consistent quality, and no actual decline in quality standards is demonstrated, we would depart from the purpose of the law to find an abandonment simply for want of all the inspection and control formalities. See Embedded Moments, Inc. v. International Silver Co., 648 F.Supp. 187, 194 (E.D.N.Y.1986) (license agreement without explicit provision for supervisory control and absence of actual inspection nevertheless no basis for abandonment where prior working relationship established basis for reliance on licensee's integrity and history of manufacture was "trouble-free").
The history of the Stehling brothers' relationship warrants this relaxation of formalities.
D. Likelihood of Confusion.
The district court properly instructed the jury on the likelihood of confusion,
Ignoring the indicia of confusion that yield unfavorable answers, Two Pesos expends considerable energy assaulting the Gelb Survey offered by Taco Cabana. That survey asked customers: (1) if they had ever been to a TaCasita or Taco Cabana or Two Pesos restaurant; (2) if yes, which ones; (3) "Do you think that any of these stores are owned or operated by the same company?" and (4) if so, "Why do you say that?" Questions 3 and 4 simply and objectively address the issue in this litigation. Subject to cross-examination and the other tools of the adversarial system, the jury could properly consider Mr. Gelb's conclusion that a substantial population of those who patronize quick-service Mexican restaurants, particularly those who have patronized Taco Cabana (where the survey was conducted), are likely to believe that Taco Cabana and Two Pesos are owned or operated by the same company.
The Peterson survey offered by Two Pesos is less helpful. That survey asked all respondents why they patronize Two Pesos. The survey then asked half of the respondents, "have you ever gone to another restaurant by mistake when you intended to go to a Two Pesos restaurant?" The other half were asked, "have you ever gone to a Two Pesos restaurant by mistake when you intended to go to another restaurant?" Predictably, a statistically insignificant number of people confessed to what would appear to be a rather silly mistake.
Surveys present evidence of actual confusion, which does not exhaust the confusion indicia. The other indicia considerably strengthen the basis for the jury finding: the similarity of the trade dress; the coincidence of products, markets, and advertising media; and Two Pesos' intent in adopting its trade dress.
Finally, Two Pesos again attacks the cross-license arrangement, arguing essentially that Two Pesos is not accountable for confusion in a market already subject to the confusion perpetuated by Taco Cabana and TaCasita. But a consumer who assumes some affiliation between Taco Cabana and TaCasita assumes correctly and therefore suffers no "confusion."
We therefore affirm the trial court's judgment that Two Pesos' appropriation of Taco Cabana's protectable trade dress creates a likelihood of confusion between unrelated entities, and thereby constitutes unfair competition.
II. Trade Secret Misappropriation
The jury found that Taco Cabana's architectural plans and kitchen equipment layout and design — but not its kitchen and restaurant operating procedures — constitute trade secrets, and that Two Pesos misappropriated these secrets. The jury awarded $150,000 for the misappropriation.
A trade secret misappropriation in Texas requires: (a) the existence of a trade secret; (b) a breach of a confidential relationship or improper discovery of the trade secret; (c) use of the trade secret; and (d) damages. Hurst v. Hughes Tool Co., 634 F.2d 895, 896 (5th Cir.), cert. denied, 454 U.S. 829, 102 S.Ct. 123, 70 L.Ed.2d 105 (1981). A trade secret is any formula, pattern, device or compilation of information used in one's business, and which gives an opportunity to obtain an advantage over competitors who do not know or use it. Hyde Corp. v. Huffines, 158 Tex. 566, 586, 314 S.W.2d 763, 776 (adopting RESTATEMENT OF TORTS § 757 (1939)), cert. denied, 358 U.S. 898, 79 S.Ct. 223, 3 L.Ed.2d 148 (1958).
Architectural plans and kitchen layout and design drawings may be trade secrets.
The issue thus becomes whether sufficient and continuous secrecy attached to these particular plans and drawings to preserve their status as trade secrets.
Furr's, Inc. v. United Specialty Advertising Co., 385 S.W.2d 456, 459 (Tex.Civ.App. — El Paso 1964, writ ref'd n.r.e.), cert. denied, 382 U.S. 824, 86 S.Ct. 59, 15 L.Ed.2d
The jury concluded that Two Pesos had misappropriated Taco Cabana's trade secrets, and we must review that conclusion constrained by our generous deference to jury findings. Under a less deferential standard of review, our decision might differ, but considering the evidence "in the light and with all reasonable inferences most favorable" to Taco Cabana, we cannot say that "the facts and inferences point so strongly and overwhelmingly in favor of [Two Pesos] that the Court believes that reasonable [persons] could not arrive at a contrary verdict." Boeing Co. v. Shipman, 411 F.2d 365, 374 (5th Cir.1969) (en banc), cited in Molex Inc. v. Nolen, 759 F.2d 474, 478-79 (5th Cir.1985) (trade-secret jury trial).
The jury could reasonably view the disclosures adduced by Two Pesos as limited and therefore insufficient to extinguish the secrecy of the materials. If a voluntary disclosure occurs in a context that would not ordinarily occasion public exposure, and in a manner that does not carelessly exceed the imperatives of a beneficial transaction, then the disclosure is properly limited and the requisite secrecy retained. Metallurgical Industries Inc. v. Fourtek, Inc., 790 F.2d 1195, 1200 (5th Cir.1986) (finding no surrender of secrecy where disclosures were not public announcements and secrets divulged only to businesses with whom plaintiff dealt with expectation of profit). Thus the disclosure of Taco Cabana plans to contractors did not extinguish their secrecy.
Similarly, only a limited disclosure was shown by the fact that a paralegal for Two Pesos' trial counsel obtained the architectural plans from a municipality under the Texas Open Records Act, TEX.REV.CIV.STAT.ANN. art. 6252-17a (Vernon Supp.1991).
The jury heard further that upon failing the Friesenhahn ploy, McDermott and Blacketer obtained a set of the plans from Joe Kaplan, a lighting designer. Kaplan testified in his deposition that he had borrowed a set of plans from Rene DeBacker, an electrical estimator for Vollmer Electrical Company. Kaplan said he wanted to study the plans and recommend better lighting arrangements, though he later admitted that he never looked at the plans. He copied the plans without telling anyone, and the next day "brought the [original] plans back and put them back on the table where [he] found them."
DeBacker testified that he considers such plans confidential, that he would always consult Vollmer before considering a request for copies of plans, and that neither Kaplan nor anyone else ever asked him for a set of the plans. Ferdinand Vollmer likewise testified that his company treats all architectural plans as proprietary and confidential, that Kaplan never asked him for a set of Taco Cabana plans, that he would not have given him a set even had Kaplan asked, and that he thinks Kaplan stole the plans.
We need not detail the various reasonable inferences — some subtle and some unsavory — to acknowledge that one view of the evidence would not inculpate Two Pesos; another view would. The jury properly assumed its function of assigning weight and credibility to the various accusations and denials, of which the foregoing is a representative glimpse. The jury's conclusion rests on adequate evidence, and we decline to disturb the verdict.
Finally, Two Pesos does not seriously dispute that it used the plans, and ample evidence supports this conclusion.
The jury awarded $306,000 for lost profits, $628,300 for lost income, and nothing for loss of good will. For the trade secret misappropriation, the jury awarded $150,000.
Taco Cabana claims injury, under the so-called "headstart" theory, from Two Pesos' preemption of the Houston market and other areas. According to Two Pesos, the
A. Trade-Dress Infringement Remedies.
Circuits that have addressed the issue uniformly apply the Lanham Act remedies of section 35 to violations of section 43(a). See NuPulse, Inc. v. Schlueter Co., 853 F.2d 545, 548, 550 (7th Cir.1988) (citing cases).
15 U.S.C.A. § 1117(a) (West Supp.1991). Taco Cabana's recovery may include "the economic benefits they normally would have received by licensing." Boston Professional Hockey Ass'n v. Dallas Cap & Emblem Mfg., Inc., 597 F.2d 71, 75 (5th Cir.1979).
B. Injunctive Relief.
Two Pesos weakly contests the requirements of structural changes and corrective advertising, calling them punitive instead of compensatory. "In fashioning relief against a party who has transgressed the governing legal standards, a court of equity is free to proscribe activities that, standing alone, would have been unassailable." Kentucky Fried, 549 F.2d at 390; see also Chevron, 659 F.2d at 705 (defendant required to distance itself from plaintiff's trade dress, even if requirement involves a competitive handicap not suffered by others); Frisch's Restaurants, Inc. v. Elby's Big Boy, Inc., 670 F.2d 642, 650-51 (6th Cir.) (affirming district court's requirement of corrective advertising), cert. denied, 459 U.S. 916, 103 S.Ct. 231, 74 L.Ed.2d 182 (1982).
C. Profits and Damages.
Two Pesos argues that a monetary award requires evidence of actual confusion, and that only diverted sales provide a proper measure of damages. We disagree, as we did in Boston Professional Hockey, 597 F.2d at 75-76 (plaintiff's failure to quantify any damages from diverted sales did not preclude recovery for deprivation of economic benefits that would have accrued from licensing); see also Shen Mfg. Co. v. Suncrest Mills, Inc., 673 F.Supp. 1199, 1206 (S.D.N.Y.1987) (defendant's intentional copying entitles plaintiff to profits based on unjust enrichment theory despite failure to prove any instance of actual confusion). Because we embrace the "headstart" theory as the apt framework for monetary recovery, we need not pursue the issue of actual diverted sales.
Especially given the volatility of the restaurant industry, and the significant value of securing the image of "market leader," we believe the "headstart" theory provides an apt framework for Taco Cabana's monetary recovery. Two Pesos' infringement foreclosed the Houston market, which Gabriel Gelb characterized as "one of the most affluent Mexican food markets in the country." Based on the Houston market alone, Gelb estimated lost profits of $4.4 million. Other damage models produced even higher figures. The jury award easily
D. Enhanced Damages.
Finding that Two Pesos' conduct was willful and deliberate, the district court doubled the jury award for infringement. Judge Singleton asserted that "[u]nder the facts of this case and listening to the witnesses and judging the credibility myself, I can come to no other conclusion than to find that Two Pesos' actions were willful in the sense that it was deliberate.... The evidence was overwhelming." Intentional imitation alone — as opposed to intentional infringement — would not suffice for the requisite bad faith, but as his Order recites, Judge Singleton found "that Two Pesos intentionally and deliberately infringed Taco Cabana's trade dress."
We must respect the fact that section 35 endows the district court with considerable discretion in fashioning an appropriate remedy for infringement. An enhancement of damages may be based on a finding of willful infringement, but cannot be punitive. Playboy Enterprises, Inc. v. P.K. Sorren Export Co., 546 F.Supp. 987, 998 (S.D.Fla.1982); see 15 U.S.C.A. § 1117(a) (West Supp.1991) (any sum in excess of actual damages must "constitute compensation and not a penalty").
It is anomalous to say that an enhancement of damages, which implies an award exceeding the amount found "compensatory," must be "compensatory" and not "punitive." Responding to that anomaly, we have suggested that enhancement could, consistent with the "principles of equity" promoted in section 35, provide proper redress to an otherwise undercompensated plaintiff where imprecise damage calculations fail to do justice, particularly where the imprecision results from defendant's conduct. Boston Professional Hockey, 597 F.2d at 77 (increased damages justified when defendant withholds or misrepresents available sales records or otherwise obstructs ascertainment of damages); accord P.K. Sorren, 546 F.Supp. at 998-99 (award of excess damages appropriate where "record strongly indicates that plaintiff's damages and defendants' profits were both greater than the amounts conclusively proven"). We find no evidence of information obstruction by Two Pesos, but we acknowledge the trial court's superior capacity to discern the elements of equitable compensation. Given the substantial evidence of willful infringement,
E. Attorney Fees.
Section 35 of the Lanham Act permits an award of attorneys' fees in "exceptional cases." The judicial definition of an exceptional case often appears indistinguishable from the standard for enhancement of damages: some form of willful, deliberate, or fraudulent conduct. Indeed, Taco Cabana invites us to apply the same standard, employ the same evidence, and affirm on that basis. We decline to conflate the standards because some cases may well warrant one form of recovery and not the other,
We review for abuse of discretion, mindful that "the district court heard the evidence, saw the witnesses, and appraised their motives. Based on its personal observations, the court found that [defendant's] conduct was `certainly intentional' and designed
F. Trade-Secret Damages.
Trade-secret misappropriation damages typically embrace some form of royalty. Metallurgical, 790 F.2d at 1208 ("reasonable royalty" aptly defines measure of damages in trade secret misappropriation case); Sikes v. McGraw-Edison Co., 665 F.2d 731, 737 (5th Cir.) (affirming award of damages that represented reasonable per unit royalty), cert. denied, 458 U.S. 1108, 102 S.Ct. 3488, 73 L.Ed.2d 1369 (1982). With the evidence of sales in the scores of millions and impressive profits, the jury's single award of $150,000 is not unreasonable.
The judgment of the district court is AFFIRMED.