Farouk Systems Inc v. FHI Heat, Inc., et al

Filing 51

MEMORANDUM AND ORDER (Signed by Judge Nancy F. Atlas) Parties notified.(sashabranner, 4)

United States District Court
Southern District of Texas

ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
§
§
§
v.
§
§
AG GLOBAL PRODUCTS, LLC d/b/a §
FHI HEAT LLC, et al.,
§
Defendants.
§

April 05, 2016
David J. Bradley, Clerk

FAROUK SYSTEMS, INC.,
Plaintiff,

CIVIL ACTION NO. H-15-0465

MEMORANDUM AND ORDER
This case is before the Court on the Motion for Summary Judgment [Doc. # 43]
filed by Defendants AG Global Products, LLC d/b/a FHI Heat LLC (“AG”) and
Shauky Gulamani, to which Plaintiff Farouk Systems Inc. (“Farouk”) filed a Response
[Doc. # 47], and Defendants filed a Reply [Doc. # 49]. Having carefully reviewed the
full record and applicable legal authorities, the Court grants the Motion for Summary
Judgment
I.

BACKGROUND
Farouk and AG both manufacture and sell hair care products. Farouk Shami is

the founder of Farouk. Gulamani was the President of Farouk until 2010, when he
resigned and became President and Chief Executive Officer of AG.
Farouk markets many of its hair care appliances under the trademark CHI.
Farouk uses various red and black color combinations on many of its CHI products.
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AG sells a heated hair brush under the name “Stylus” that is black with a red oval
along the edge of the handle. Farouk alleges that AG’s use of the red and black color
scheme constitutes trade dress infringement.
Farouk alleges also that AG has posted images on the Internet that are virtually
identical to images for which Farouk applied for copyright registration. Farouk
alleges also that Gulamani posted on the Internet a photograph of himself in which
Farouk has a copyright interest.
In July 2007, Farouk filed a trademark infringement lawsuit against FHI Heat,
Inc.1 (the “2007 Lawsuit”). That lawsuit was settled pursuant to a written Settlement
Agreement.2 Plaintiff alleges that AG, as a successor to FHI Heat, Inc., is bound by
and has breached the Settlement Agreement.
Plaintiff in its First Amended Complaint [Doc. # 12] asserts causes of action for
federal copyright infringement against AG and Gulamani, federal trade dress
infringement against AG and Gulamani, and breach of the Settlement Agreement
against AG only. Following the close of discovery, Defendants moved for summary
judgment on each of the claims in the First Amended Complaint. The Motion has
been fully briefed and is now ripe for decision.
1

Farouk Sys., Inc. v. FHI Heat, Inc., Civil Action No. H-07-2333 (S.D. Tex.).

2

The Settlement Agreement is filed under seal as Docket Entry # 26 in this current
lawsuit.

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II.

STANDARD FOR SUMMARY JUDGMENT
Rule 56 of the Federal Rules of Civil Procedure provides for the entry of

summary judgment against a plaintiff who fails to make a sufficient showing of the
existence of an element essential to her case and on which she will bear the burden at
trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Curtis v. Anthony, 710 F.3d
587, 594 (5th Cir. 2013); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.
1994) (en banc). Summary judgment “should be rendered if the pleadings, the
discovery and disclosure materials on file, and any affidavits show that there is no
genuine issue as to any material fact and that the movant is entitled to judgment as a
matter of law.” FED. R. CIV. P. 56(a); Celotex, 477 U.S. at 322-23; Curtis, 710 F.3d
at 594.
For summary judgment, the initial burden falls on the movant to identify areas
essential to the non-movant’s claim in which there is an “absence of a genuine issue
of material fact.” ACE Am. Ins. Co. v. Freeport Welding & Fabricating, Inc., 699
F.3d 832, 839 (5th Cir. 2012). The moving party, however, “need not negate the
elements of the nonmovant’s case.” Coastal Agric. Supply, Inc. v. JP Morgan Chase
Bank, N.A., 759 F.3d 498, 505 (5th Cir. 2014) (quoting Boudreaux v. Swift Transp.
Co., 402 F.3d 536, 540 (5th Cir. 2005)). The moving party may meet its burden by
pointing out “the absence of evidence supporting the nonmoving party’s case.”

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Malacara v. Garber, 353 F.3d 393, 404 (5th Cir. 2003) (citing Celotex, 477 U.S. at
323; Stults v. Conoco, Inc., 76 F.3d 651, 656 (5th Cir. 1996)).
If the moving party meets its initial burden, the non-movant must go beyond the
pleadings and designate specific facts showing that there is a genuine issue of material
fact for trial. Gen. Universal Sys., Inc. v. Lee, 379 F.3d 131, 141 (5th Cir. 2004);
Littlefield v. Forney Indep. Sch. Dist., 268 F.3d 275, 282 (5th Cir. 2001) (internal
citation omitted). “An issue is material if its resolution could affect the outcome of
the action.” Spring Street Partners-IV, L.P. v. Lam, 730 F.3d 427, 435 (5th Cir.
2013). “A dispute as to a material fact is genuine if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party.” DIRECT TV Inc. v.
Robson, 420 F.3d 532, 536 (5th Cir. 2006) (internal citations omitted).
In deciding whether a genuine and material fact issue has been created, the
court reviews the facts and inferences to be drawn from them in the light most
favorable to the nonmoving party. Reaves Brokerage Co. v. Sunbelt Fruit &
Vegetable Co., 336 F.3d 410, 412 (5th Cir. 2003). A genuine issue of material fact
exists when the evidence is such that a reasonable jury could return a verdict for the
non-movant. Tamez v. Manthey, 589 F.3d 764, 769 (5th Cir. 2009) (citing Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). “‘Conclusional allegations and
denials, speculation, improbable inferences, unsubstantiated assertions, and legalistic

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argumentation do not adequately substitute for specific facts showing a genuine issue
for trial.’” Pioneer Exploration, L.L.C. v. Steadfast Ins. Co., 767 F.3d 503, 511 (5th
Cir. 2014) (quoting Oliver v. Scott, 276 F.3d 736, 744 (5th Cir. 2002); accord Delta
& Pine Land Co. v. Nationwide Agribusiness Ins. Co., 530 F.3d 395, 399 (5th Cir.
2008). Instead, the nonmoving party must present specific facts which show “the
existence of a genuine issue concerning every essential component of its case.”
Firman v. Life Ins. Co. of N. Am., 684 F.3d 533, 538 (5th Cir. 2012) (citation and
internal quotation marks omitted). In the absence of any proof, the court will not
assume that the non-movant could or would prove the necessary facts. Little, 37 F.3d
at 1075 (citing Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 888 (1990)).
The Court may make no credibility determinations or weigh any evidence.
Chaney v. Dreyfus Serv. Corp., 595 F.3d 219, 229 (5th Cir. 2010) (citing Reaves
Brokerage Co., 336 F.3d at 412-13). The Court is not required to accept the
nonmovant’s conclusory allegations, speculation, and unsubstantiated assertions
which are either entirely unsupported, or supported by a mere scintilla of evidence.
Id. (citing Reaves Brokerage, 336 F.3d at 413); accord, Little, 37 F.3d at 1075.
Affidavits cannot preclude summary judgment unless they contain competent and
otherwise admissible evidence. See FED. R. CIV. P. 56(c)(4); Love v. Nat’l Med.
Enters., 230 F.3d 765, 776 (5th Cir. 2000).

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Finally, “[w]hen evidence exists in the summary judgment record but the
nonmovant fails even to refer to it in the response to the motion for summary
judgment, that evidence is not properly before the district court.” Malacara, 353 F.3d
at 405. “Rule 56 does not impose upon the district court a duty to sift through the
record in search of evidence to support a party’s opposition to summary judgment.”
Id. (internal citations and quotations omitted); Williams v. Valenti, 432 F. App’x 298,
302 (5th Cir. 2011).
III.

ANALYSIS
A.

Copyright Infringement Claims

In the copyright infringement claims, Plaintiff alleges that AG copied two
images from Farouk’s Facebook page and Gulamani posted a photograph of himself
on his personal LinkedIn home page. The two essential elements of a copyright
infringement claim are (1) the plaintiff owns a valid copyright and (2) the defendant
copied constituent elements of the copyrighted material. See Guzman v. Hacienda
Records and Recording Studio, Inc., 808 F.3d 1031, 1037 (5th Cir. 2015); Bridgmon
v. Array Sys. Corp., 325 F.3d 572, 576 (5th Cir. 2003).
To qualify for a copyright, the work must be original. See Feist Publ’ns v.
Rural Tel. Serv. Co., 499 U.S. 340, 345 (1991). “Original, as the term is used in
copyright, means only that the work was independently created by the author (as

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opposed to copied from other works), and that it possesses at least some minimal
degree of creativity.” Id.
“A ‘compilation’ is a work formed by the collection and assembling of
preexisting materials . . . in such a way that the resulting work as a whole constitutes
an original work of authorship.”

17 U.S.C. § 101.

“The copyright in a

compilation . . . extends only to the material contributed by the author of such work,
as distinguished from the preexisting material employed in the work, and does not
imply any exclusive right in the preexisting material.” 17 U.S.C. § 103(b).
In this case, Farouk admits that the two images on its Facebook page were
created by copying a quotation and images from Shutterstock, a provider of royaltyfree images. In Image No. 1, the Farouk employee combined an unaccredited
quotation with images of a comb, scissors, and brush from Shutterstock. In Image No.
2, the Farouk employee combined a quote from Picasso with a banner reading “Snips
of Wisdom” and the image of a pair of scissors. Even though the images may be
copyrightable as compilations, the copyright extends only to the original material
contributed by the Farouk employee, not to the preexisting material borrowed from
other sources. See 17 U.S.C. § 103(b). Each of the elements of Image No. 1 was
copied from another source. Additionally, although Defendant’s version of Image No.
1 is extremely similar to Plaintiff’s, it is obvious that it is not a copy. In Image No.

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2, the original elements added by a Farouk employee are the “Snips of Wisdom” and
the image of the scissors. Neither of these elements is included in the allegedly
infringing image on AG’s Facebook page. As a result, AG is entitled to summary
judgment on the copyright infringement claims regarding Images No. 1 and No. 2.
Plaintiff alleges also that a photograph of Gulamani on his personal LinkedIn
profile page constitutes copyright infringement. There is no evidence that, at the time
the photograph was presented on Gulamani’s LinkedIn page, Farouk possessed a valid
copyright for the photograph. It is undisputed that the photograph was taken of
Gulamani by a third-party photographer. There is no evidence that the photographer
transferred the rights to the photograph to Farouk in a written assignment as required
by 17 U.S.C. § 204(a). Farouk argues that the photograph was taken while Gulamani
was employed by Farouk, but the “work for hire” provision of the Copyright Act
provides copyright protection under certain circumstances to an employer where the
person creating the work is an employee. See 17 U.S.C. § 201(b). There is no similar
provision where the subject of the work, not the creator of the work, is the employee.
Absent evidence that Farouk had a valid copyright in the photograph, Gulamani is
entitled to summary judgment on the copyright infringement claim.
As an additional, yet equal, basis for summary judgment in favor of Defendants
on the copyright infringement claims, Plaintiff has conceded that it is seeking only an

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award of statutory damages and injunctive relief on its copyright claims. It is
undisputed that Farouk did not attempt to register its copyrights in the two images and
the photograph until April 21, 2015, after the alleged infringement and, indeed, after
this lawsuit was filed in February 2015. The timing of the registration applications
renders any claim for statutory damages and attorneys’ fees unavailable. See
17 U.S.C. § 412. Defendants have represented that they are no longer displaying the
challenged images and photograph and, therefore, Farouk’s claim for injunctive relief
is moot. On this basis also, the Court grants summary judgment in favor of
Defendants on Plaintiff’s copyright claims.
B.

Trade Dress Infringement Claim

Farouk alleges that AG’s Stylus heated hair brush infringes the trade dress of
CHI products. Defendants seek summary judgment on this claim, arguing that
Farouk’s claimed trade dress is generic and has been used too inconsistently to
constitute protectable trade dress. Defendants argue also that the alleged trade dress
is not protectable because it is a color combination that has not acquired secondary
meaning.3

3

Defendants argue also that Plaintiff has failed to demonstrate a likelihood of
confusion between the alleged trade dress and the Stylus brush. Because Defendants
are entitled to summary judgment on each of their first two arguments, the Court need
not address this third argument. Because the Court’s grant of summary judgment in
Defendants’ favor is not based on whether Farouk has presented evidence of a
(continued...)

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“Trade dress refers to the total image and overall appearance of a product and
may include features such as the size, shape, color, color combinations, textures,
graphics, and even sales techniques that characterize a particular product.” Amazing
Spaces, Inc. v. Metro Mini Storage, 608 F.3d 225, 251 (5th Cir. 2010) (citations
omitted). “The purpose of trade dress protection, like trademark protection, is to
secure the owner of the trade dress the goodwill of his business and to protect the
ability of consumers to distinguish among competing products.” Id. (citations
omitted).
Generic Trade Dress and Inconsistent Use.– Farouk alleges that its use of the
red and black color combination on its CHI line of hair styling appliances is
protectable trade dress. Where, as here, a plaintiff claims to have a protectable trade
dress “based on a combination of elements in a line of different products, courts have
required a threshold showing that the plaintiff identifies and consistently uses the
specific elements that make up the asserted trade dress.” Berg v. Symons, 393 F.
Supp. 2d 525, 551 (S.D. Tex. 2005) (Rosenthal, J.) (emphasis added). The alleged
trade dress must have a “recognizable and consistent overall look.” Id. (quoting Rose
Art Indus., Inc. v. Swanson, 235 F.3d 165, 172 (3d Cir. 2000)).
3

(...continued)
likelihood of confusion, Defendants’ Motion to Exclude [Doc. # 44], seeking to
exclude the report and testimony of Plaintiff’s expert on the likelihood of confusion,
is denied as moot.

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In this case, Farouk seeks trade dress protection for the red and black color
combination used in its CHI product line.4 The uncontested record establishes,
however, that Farouk does not use the red and black color combination consistently
in the CHI line. The CHI flat irons are primarily black with golden-colored heating
plates and the word CHI in red. See Photographs of CHI products, Exh. C to
Response. The CHI curling irons are different styles; one style is primarily red and
gold with the word CHI in black, and the cordless curling iron is primarily black and
gold with the word CHI in red. See id. One style of Farouk’s styling brushes is
primarily a golden color with red ends and a black and white handle, while others
have a red and black base with a black and white handle. See id. Other styling
brushes are black with a black and white handle.5 See id. Because Farouk does not
use the red and black color combination in any consistent manner within the CHI line
of hair care appliances, the red and black combination does not enjoy protection as
trade dress. Defendants are entitled to summary judgment on the trade dress
infringement claim.

4

The Court notes that other lines of CHI products do not include the red and black
color combination. For example, the CHI Miss Universe line is pink and Farouk’s
“Kardashian Beauty” appliances are black and bronze. See Photographs, Exh. C to
Response.

5

The allegedly infringing Stylus heated brush is almost exclusively black with a red
oval around the edge of the handle and the words “FHI Heat” in white. See
Declaration of Jason Dodo, Exh. A to Motion, ¶ 3.

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Secondary Meaning.– Color, even if protectable, can be protected only upon
a showing of secondary meaning. See Wal-Mart Stores, Inc. v. Samara Bros., Inc.,
529 U.S. 205, 206 (2000) (citing Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 152,
162-63 (1995)); see also Bd. of Supervisors for La. State Univ. Agric. and Mech. Coll.
v. Smack Apparel Co., 550 F.3d 465, 475 (5th Cir. 2008). “Secondary meaning occurs
when, in the minds of the public, the primary significance of [the trade dress] is to
identify the source of the product rather than the product itself.” Test Masters Educ.
Servs., Inc. v. Robin Singh Educ. Servs., Inc., 799 F.3d 437, 445 (5th Cir. 2015)
(quoting Bd. of Supervisors for La. State Univ., 550 F.3d at 475). “A mark has
acquired secondary meaning when it has come through use to be uniquely associated
with a specific source.” Id.
Courts in the Fifth Circuit use a seven-factor test to determine whether alleged
trade dress has acquired secondary meaning: (1) length and manner of use of the trade
dress, (2) volume of sales, (3) amount and manner of advertising, (4) nature of use of
the trade dress in newspapers and magazines, (5) consumer-survey evidence, (6) direct
consumer testimony, and (7) the defendant’s intent in copying the trade dress. Id.
Consideration of these factors, as discussed more fully below, establishes that Farouk
has failed to present evidence that raises a genuine issue of material fact regarding

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whether its use of various red and black color combinations on its CHI products has
acquired secondary meaning.
With reference to the first factor, Farouk has presented evidence that it began
using the red and black color combination in 2000. FHI Heat, Inc. began using a red
and black color combination by 2005. As explained above, however, Farouk’s use of
the red and black color combination since 2000 has been inconsistent. In its
Response, Farouk states that an aspect of its alleged trade dress is the use of the word
“CHI” in a vibrant red on a black background.

See Response, p. 20.

The

uncontroverted record demonstrates, however, that some of the CHI hair care
appliances, specifically one version of the curling iron, has the word “CHI” in black
letters. See Photographs, Exh. C to Response.
Farouk has presented evidence that it had extensive sales of its products.
Farouk’s witness on the issue, however, has admitted that the sales volume includes
products that do not include the red and black color combination but are sold in
packages with red and black. See Deposition of Radhasaran Patel, Exh. A to
Declaration of Matthew L. Seror, pp. 69-70.
Farouk conceded that it has no evidence of its actual advertising expenses for
the products containing the alleged trade dress combination of red and black. Instead,
Farouk’s evidence regarding its advertising expenses for the products using the

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alleged trade dress was calculated as a percentage of total advertising expenses. The
percentage used, however, was based on the sales volume that Patel conceded
included products that were not red and black. Moreover, the relevant issue is not
simply the extent of advertising, but its “effectiveness in altering the meaning” of the
asserted trade dress to the consuming public. See Zatarains, Inc. v. Oak Grove
Smokehouse, 698 F.2d 786, 795 (5th Cir. 1983).
The fourth factor is the use of the trade dress in magazines and newspapers.
Plaintiff has presented no evidence that it advertises its products in newspapers or
non-trade magazines. In support of this factor, Farouk instead has presented evidence
that it and its founder have received significant press coverage, including Mr. Shami’s
appearance on “The Apprentice” and his association with the Miss Universe pageant.
There is no evidence, however, that any of this press coverage featured the asserted
trade dress. Indeed, the uncontested evidence in the record demonstrates that the
Farouk line of hair styling tools under the Miss Universe brand are pink and do not
include any red and black color combination. See Photographs, Exh. C to Response.
The fifth factor, often considered the most important factor, is consumer-survey
evidence. See Sunbeam Prods., Inc. v. The West Bend Co., 123 F.3d 246, 253 (5th
Cir. 1997). Plaintiff admits that it has not offered any consumer-survey evidence, and
provides no explanation for its failure to do so. Defendants, on the other hand, have

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presented the unchallenged results of a consumer survey conducted by Dr. Bruce
Isaacson.6 Dr. Isaacson has a Masters in Business Administration and a Doctor of
Business Administration in Marketing, both from Harvard Business School. See
Declaration of Bruce Isaacson, Exh. B to Motion for Summary Judgment.
Dr. Issacson’s Expert Report is attached as Exhibit 2 to his Declaration. Only 5.9%
of the 723 individuals interviewed in the survey associated a red and black color
combination with any one company. Of those who associated the red and black color
combination with a single company, most associated the color combination with
Revlon or some other company. Of the four options – CHI/Farouk, Conair, Revlon,
and “Other” – CHI/Farouk was the company identified as the source of products with
a red and black color combination by only 1.7% of respondents. See Isaacson Report,
p. 19. Generally, consumer-survey evidence of a percentage of association below
10% is insufficient to demonstrate secondary meaning. See, e.g., Straumann Co. v.
Lifecore Biomedical Inc., 278 F. Supp. 2d 130 (D. Mass. 2003) (2.7%); Citizens
Banking Corp. v. Citizens Fin. Group, Inc., 2008 WL 1995104 (E.D. Mich. 2008)
(8%).

6

The Court is not required to consider in a vacuum Farouk’s evidence on the issue of
secondary meaning. See Test Masters, 799 F.3d at 447. Instead, the Court may
consider all evidence presented by both parties when determining whether Farouk has
raised a genuine issue of material fact regarding whether the red and black color
combination has acquired secondary meaning, denoting to consumers that the
products come from Farouk. See id.

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Plaintiff’s evidence regarding the final factor – Defendants’ intent to copy
Farouk’s trade dress – is that Gulamani changed the color of the Stylus from black and
silver as suggested by the manufacturer to black and red. Defendants have presented
uncontested evidence, however, that FHI Heat, Inc. had been using the red and black
color combination since at least 2005, years before AG purchased FHI Heat, Inc.’s
assets and years before Gulamani became associated with AG. Gulamani testified
under oath in his deposition that he changed the color of the Stylus to continue the
same color combination used on other FHI products. Farouk has presented no
evidence to refute Gulamani’s sworn testimony, offering instead only suspicion and
conjecture.
The Court has carefully considered the evidence presented by Plaintiff and
Defendants on the secondary meaning factors. The Court concludes that Farouk has
failed to raise a genuine issue of material fact regarding whether its asserted trade
dress – some combination of the colors red and black – is recognized by the
consuming public as an indication that a hair stying tool using that color combination
is a Farouk product. On this basis also, Defendants are entitled to summary judgment
on the trade dress infringement claim.
C.

Breach of Contract Claim

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Plaintiff in the First Amended Complaint alleges that AG breached Sections 2.3
and 2.11 of the Settlement Agreement. AG, the only Defendant named in the breach
of contract claim, seeks summary judgment on the claim because it is not a party to
the Settlement Agreement between Farouk Systems, Inc. and FHI Heat, Inc.
The Settlement Agreement in the 2007 Lawsuit precludes FHI Heat, Inc. from
marketing its products by comparing them to Farouk’s products (Section 2.3). The
Settlement Agreement also requires FHI Heat, Inc. to educate its employees and
independent contractors that its products have no relationship or affiliation with
Farouk’s products (Section 2.11). AG argues that it is not bound by this Settlement
Agreement between Farouk and FHI Heat, Inc. Farouk argues that AG is a successor
to FHI Heat, Inc. and has successor liability under Texas law.
“Texas strongly embraces the general rule that a successor entity in an asset
transfer is not liable for the grantor’s liabilities.” In re 1701 Commerce, LLC, 511
B.R. 812, 823 (N.D. Tex. 2014) (citing E–Quest Mgmt. v. Shaw, 433 S.W.3d 18, 2224, (Tex. App. – Houston [1st Dist.] 2013, pet. denied); Lockheed Martin Corp. v.
Gordon, 16 S.W.3d 127, 139 (Tex. App. – Houston [1st Dist.] 2000, pet. denied)).
“The limited exceptions to the general rule are provided in section 10.254 of the Texas
Business Organizations Code, which states:
(a)

A disposition of all or part of the property of a domestic entity,
regardless of whether the disposition requires the approval of the

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entity’s owners or members, is not a merger or conversion for any
purpose.
(b)

Except as otherwise expressly provided by statute, a person
acquiring property described by this section may not be held
responsible or liable for a liability or obligation of the transferring
domestic entity that is not expressly assumed by the person.

Id. (quoting TEX. BUS. ORG. CODE § 10.254). As a result, the only means by which
successor liability may be imposed under Texas law against a transferee of assets are
“(1) express assumption or (2) liability conferred by another statute.” Id. at 824
(citing Koll Real Estate Grp., Inc. v. Howard, 130 S.W.3d 308, 315 n.11 (Tex. App. –
Houston [14th Dist.] 2004, no pet.).
In this case, it is undisputed that Key Bank National Association (“Key Bank”)
was a secured creditor of FHI Heat, Inc. In April 2010, FHI Heat, Inc. surrendered
certain collateral to Key Bank. Also in April 2010, AG purchased those assets,
including the FHI Heat name and the goodwill associated with it. See Declaration of
Jason Dodo, Exh. A to Defendants’ Motion for Summary Judgment [Doc. # 43-1], ¶ 5.
AG’s purchase of the assets from Key Bank expressly excluded any liabilities. See
Purchase Agreement, Exh. L. to Plaintiff’s Response, ¶ 1.6.
The uncontroverted evidence in the record establishes that AG did not expressly
assume FHI Heat, Inc.’s liabilities and neither party has identified another statute that
confers successor liability on a company that purchases assets from a secured creditor

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to whom the assets have been surrendered. AG, therefore, is not subject to successor
liability under the Settlement Agreement and is entitled to summary judgment on the
breach of contract claim.
The Court notes that some judges in the Southern District of Texas have
assumed that successor liability can be imposed under Texas law when the acquisition
of the predecessor’s assets was fraudulent and intended to avoid the predecessor’s
debts or liabilities. See, e.g., Allied Home Mortg. Corp. v. Donovan, 830 F. Supp. 2d
223 (S.D. Tex. 2011) (Harmon, J.); U.S. v. Americus Mortg. Corp., 2013 WL 4829284
(S.D. Tex. Sept. 10, 2013) (Hanks, M.J.); Ford, Bacon & Davis, LLC v. Travelers Ins.
Co., 2010 WL 1417900 (S.D. Tex. Apr. 7, 2010) (Werlein, J.). The decision in each
of these cases is based on Lockheed Martin Corp. v. Gordon, 16 S.W.3d 127 (Tex.
App. – Houston [1st Dist. 2000). In Lockheed Martin, the Texas court discussed the
majority rule under the Third Restatement of Torts for Products Liability, which
allows for successor liability in any of four specific situations: (1) there is express
assumption of liability; (2) the acquisition results from a fraudulent conveyance to
avoid liability; (3) the acquisition constitutes a consolidation or merger with the
predecessor; and (4) the acquisition results in the successor becoming a “continuation”
of the predecessor. See id. at 134. The Texas Court of Appeals then noted that the
rule in Texas, unlike the majority Restatement rule, allows successor liability only

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when expressly assumed or another statute provides to the contrary. See id. at 134-35.
In a footnote to that sentence, the Texas Court of Appeals notes that the Texas statute
eliminated the “de facto merger” exception, the third Restatement exception; and that
Texas case law had rejected the “mere continuation” theory, the fourth Restatement
exception. See id. at 135, n.6. Because there was no mention of the “fraudulent
conveyance” exception in footnote 6, some judges appear to have assumed that Texas
had not rejected that exception from the Restatement. That assumption is not,
however, supported by the actual holding in Lockheed Martin or by the language of
the Texas statute.
Even were this Court to conclude that the “fraudulent conveyance” is a valid
basis for imposing successor liability under Texas law, there is no evidence in the
record that the purchase by AG of FHI Heat, Inc.’s assets from Key Bank (the secured
creditor entitled to the assets) was a fraudulent conveyance intended to avoid FHI
Heat, Inc.’s debts and liabilities. Indeed, there is no evidence that even suggests that
Key Bank’s conveyance of FHI Heat, Inc.’s assets to AG was fraudulent in any way.
For this reason also, AG is entitled to summary judgment on the breach of contract
claim.
IV.

CONCLUSION AND ORDER

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Plaintiff has failed to present evidence that raises a genuine issue of material
fact regarding at least one essential element of each of its claims. As a result, it is
hereby
ORDERED that Defendants’ Motion for Summary Judgment [Doc. # 43] is
GRANTED. It is further
ORDERED that Defendants’ Motion to Exclude Expert Report and Testimony
of Michael J. Barone, Plaintiff’s expert on likelihood of confusion [Doc. # 44] is
DENIED AS MOOT.
The Court will issue a separate final judgment.
SIGNED at Houston, Texas, this 5th day of April, 2016.

NAN Y F. ATLAS
SENIOR UNI
STATES DISTRICT JUDGE

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