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Hokto Kinoko Co. v. Concord Farms, Inc.

United States Court of Appeals, Ninth Circuit

December 24, 2013

HOKTO KINOKO COMPANY, a Japanese corporation, Plaintiff-counter-defendant-Appellee,
CONCORD FARMS, INC., a California corporation, Defendant-counter-claim-thirdparty-plaintiff-Appellant. and Hokuto Company, Ltd., a Japanese corporation, Third-party-defendant-Appellee,

Argued and Submitted May 8, 2013.

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Alan M. Kindred (argued) and Ivan Posey, Kindred ยง Posey, Hacienda Heights, CA, for Defendant-Counter-Claim-Third-Party-Plaintiff-Appellant.

David A. Dillard (argued), Christie, Parker & Hale, LLP, Glendale, CA, for Plaintiff-Counter-Defendant-Appellee and Third-Party-Defendant-Appellee.

Appeal from the United States District Court for the Central District of California, Ronald S.W. Lew, Senior District Judge, Presiding. D.C. No. 2:10-cv-01384-RSWL-PLA.



WARDLAW, Circuit Judge:

In this trademark infringement action, Hokto Kinoko Co. (Hokto USA), a wholly owned subsidiary of Hokuto Co., Ltd. (Hokuto Japan), sued Concord Farms, Inc. (Concord Farms) for violating its rights to marks under which it markets its Certified Organic Mushrooms, which are produced in the United States. Hokto USA claimed that Concord Farms wrongly imported and marketed mushrooms under its marks for Certified Organic Mushrooms, but which were cultivated in Japan by Hokuto Japan under nonorganic standards. Concord Farms counterclaimed against Hokto USA and Hokuto Japan, challenging the validity of the marks. The district court granted summary judgment in favor of Hokto USA and Hokuto Japan on all claims and entered a permanent injunction against Concord Farms. We must decide (1) whether the nonorganic mushrooms Concord Farms imported from Japan were " genuine" so as to preclude any liability for infringement; (2) whether Concord Farms's marketing in the United States of the foreign-produced nonorganic mushrooms under Hokto USA's marks created a likelihood of consumer confusion; and (3) whether Hokuto Japan's trademarks are subject to cancellation for fraud or were abandoned because it entered into a " naked licensing" agreement with Hokto USA for their use in connection with its organic mushrooms.

I. Background

A. Hokuto Japan and Hokto USA

Hokuto Japan is a Japanese corporation that produces mushrooms in Japan. These mushrooms include maitake, white beech (marketed as " Bunapi" ), and brown beech (marketed as " Bunashimeji" ) mushrooms, and are sold in 3.5 ounce packages. Hokuto Japan's mushrooms are grown in nonorganic conditions throughout Japan and sold in Japanese-language packaging.

In 2006, Hokuto Japan incorporated Hokto USA, also a Japanese corporation, to produce and market mushrooms in the United States. Hokto USA is a wholly owned subsidiary of Hokuto Japan. Like

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Hokuto Japan, Hokto USA produces white beech, brown beech, and maitake mushrooms. Unlike Hokuto Japan's mushrooms, however, Hokto USA's mushrooms are certified organic and produced in a state-of-the-art facility in San Marcos, California. Hokto USA's mushrooms are robotically transported within the facility in plastic bottles, and its entire process is computer controlled. While most mushroom-growing techniques involve manure and compost, Hokto USA uses a sterilized culture medium made of sawdust, corn cob pellets, vegetable protein, and other nutrients. Hokto USA also enforces strict temperature controls and other quality control standards, both in its San Marcos facility and during the transportation and storage of its mushrooms, to ensure that the mushrooms stay fresh for as long as possible.

The production of mushrooms in the United States did not start off quite as smoothly as planned. Although Hokto USA was incorporated in 2006, its San Marcos growing facility was not completed until 2009. While the facility was under construction, Hokto USA resorted to importing mushrooms from Hokuto Japan. Because U.S. consumers have different preferences than Japanese consumers, Hokuto Japan grew mushrooms for Hokto USA in special conditions. Most significantly, Hokuto Japan used a special growing medium that met U.S. Certified Organic standards. Hokuto Japan also worked with Hokto USA to develop English-language packaging for the U.S. market. The packaging identified the mushrooms as " Certified Organic" and provided nutritional information geared toward U.S. consumers.

When the San Marcos facility finally opened in 2009, Hokto USA began producing its own mushrooms and stopped importing Hokuto Japan's mushrooms. But in 2010, there was a shortfall of white beech mushrooms. To meet its customers' demand, Hokto USA imported two shipments of Hokuto Japan's inferior white beech mushrooms, which were produced in Japan and sold in Hokuto Japan's usual Japanese-language packaging. Before selling these mushrooms to U.S. consumers, Hokto USA affixed a white sticker to every package, which clearly identified the mushrooms as a product of Japan and identified the product as " white beech mushrooms." The white stickers also identified the " distributor" as Hokto USA and provided U.S. customer service information.

B. The Trademarks

In 2003, Hokuto Japan acquired Japanese trademark registrations for a series of marks (" Hokto marks" ), including variations on its logo and several mushroom-shaped cartoon characters with faces, arms, and legs. These registrations protected Hokuto Japan's rights to use the marks to market a wide variety of goods, ranging from mushrooms to live fish to bonsai trees.

Hokuto Japan also sought U.S. trademark registrations on the same marks and hired a U.S. trademark attorney, Donald Hanson, to apply for them. Believing that Hokuto Japan intended to use the marks for the same wide range of nonmushroom products listed in the Japanese registrations, Hanson applied for U.S. registrations covering those same goods and signed a form for each mark affirming that Hokuto Japan had " a bona fide intention to use the mark in commerce on or in connection with the identified goods and/or ...

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