source: Caselaw Access Project

author: WILLIAM C. LEE, District Judge.

license: Public Domain

text:
    UNITED STATES of America, Plaintiff, v. James W. MURDOCK, Defendant.
    Civ. No. F 85-374.
    United States District Court, N.D. Indiana, Fort Wayne Division.
    Dec. 16, 1985.
    Supplemental Order Jan. 24, 1986.

      Charles J. Brunette, Atty. for Veterans Admin., Indianapolis, Ind., for plaintiff.
    James W. Murdock, pro se.
   ORDER

WILLIAM C. LEE, District Judge.

This matter is before the court on plaintiff’s (“government”) motion for summary judgment. The defendant (“Murdock”), who is proceeding pro se, filed a letter to the court as his response. For the following reasons, the ruling on plaintiff’s motion for summary judgment will be deferred pending further submissions by the parties.

This case involves an attempt to enforce a guaranty made by Murdock as part of a home loan he obtained from the Veteran’s Administration (“VA”) in 1968. Murdock sold the property, and the subsequent owners defaulted on the mortgage. The property was foreclosed, and now the government seeks to enforce Murdock’s promise to pay any amount paid out by the VA as a result of the foreclosure. The government seeks $990.76 principal and interest as of April 8, 1985, with interest at a rate of 4% per annum.

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment may only be granted if “the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). Thus, summary judgment serves as a vehicle with which the court “can determine whether further exploration of the facts is necessary.” Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir.1975).

In making this determination, the court must keep in mind that the entry of summary judgment terminates the litigation, or an aspect thereof, and must draw all inferences from the established or asserted facts in favor of the non-moving party. Munson v. Friske, 754 F.2d 683, 690 (7th Cir.1985). The non-moving party’s reasonable allegations are to be accepted as true for purposes of summary judgment. Yorger v. Pittsburgh Corning Corp., 733 F.2d 1215, 1218-19 (7th Cir.1984). A party may not rest on the mere allegations of the pleadings or the bare contention that an issue of fact exists. Posey v. Skyline Corp., 702 F.2d 102, 105 (7th Cir.), cert. denied, 464 U.S. 960, 104 S.Ct. 392, 78 L.Ed.2d 336 (1983). See Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). See also Atchison, Topeka & Santa Fe Railway Co. v. United Transportation Union, 734 F.2d 317 (7th Cir.1984); Korf v. Ball State University, 726 F.2d 1222 (7th Cir.1984). See generally C. Wright, Law of Federal Courts, § 99 (4th ed. 1983); 6 Moore’s Federal Practice, § 56.15 (2d ed. 1984).

Thus, the moving party must demonstrate the absence of a genuine issue of material fact. Even if there are some disputed facts, where the undisputed facts are the material facts involved and those facts show one party is entitled to judgment as a matter of law, summary judgment is appropriate. Egger v. Phillips, 710 F.2d 292, 296-97 (7th Cir.1983); Collins v. American Optometric Assn., 693 F.2d 636, 639 (7th Cir.1982). See also Bishop v. Wood, 426 U.S. 341, 348, 348 n. 11, 96 S.Ct. 2074, 2079, 2079 n. 11, 48 L.Ed.2d 684 (1976).

Based upon these principles, and given the deference due Murdock as a pro se litigant, see Haines v. Kerner, 404 U.S. 519, 92 S.Ct. 594, 30 L.Ed.2d 652 (1972), the facts of this case are as follows. In 1968, Murdock obtained a loan for $14,400.00 from the VA to purchase a house on Euclid Avenue in Fort Wayne, Indiana. The loan agreement contained the following language:

Some GI home buyers have the mistaken impression that if they sell their homes when they move to another locality, or dispose of it for any other reason, they are no longer liable for the mortgage payments and that liability for these payments is solely that of the new owners. Even though the new owner may agree in writing to assume liability for your mortgage payments, this assumption agreement will not relieve you from liability to the holder of the note which you signed when you obtained the loan to buy the property. Also, unless you are able to sell the property to a credit-worthy obligor who is acceptable to the VA and who will assume the payment of your obligation ... you will not be relieved from liability to repay any guaranty claim which the VA may be required to pay your lender on account of default in your loan payments.

Murdock signed this agreement, acknowledging that he read it and understood it.

In 1974, Murdock sold the property, and the new owners subsequently defaulted on their payments under the mortgage. Therefore, the holder of the note, the Federal National Mortgage Association (“FNMA”), filed a mortgage foreclosure action in the Allen County Circuit Court, naming Murdock and his wife among several defendants. Murdock was served by publication of a notice in the Fort Wayne Journal-Gazette. The property was foreclosed in October, 1982, and the VA paid $990.76 to FNMA under its guaranty. In September, 1984, the VA contacted Mur-dock, informing him that he owed the VA a debt under the guaranty provision quoted above. Murdock applied for a waiver of debt, which was denied. This action followed.

Murdock’s two letters to this court do not deny the existence of the loan or the provision of the loan which stated that Murdock could be liable under the loan even after selling the house. Rather, Mur-dock’s letters raise one issue concerning due process. According to Murdock, he never saw the notice of publication concerning the foreclosure action, and he never received notice of the foreclosure suit itself until two years after the property was sold. Had he known of the foreclosure proceeding, Murdock claims he would have purchased the property back. He believes that a greater effort to find him could have been made, and thus the debt created by the underlying foreclosure violates his right to due process. Murdock believes he should be relieved of a debt created by a proceeding of which he had no notice, and Murdock cites one case: United States v. Whitney, 602 F.Supp. 722, 723 (W.D.N.Y.1985).

In Whitney, a veteran obtained a loan which contained a similar promise to pay even after the property was sold to another party. The veteran sold the property, and the subsequent owner went into default. The bank holding the mortgage filed a foreclosure action in which the veteran was not named and of which the veteran had no notice. After paying on its guaranty, the VA sued the veteran for the deficiency on which the VA had paid. The court held that the veteran’s lack of notice violated both state law concerning service in foreclosure actions and the due process clause of the fifth and fourteenth amendments, and thus the veteran was not required to pay the VA under the terms of his guaranty. This holding agrees with the dictum of the Seventh Circuit in Mortgage Associates, Inc. v. Cleland, 651 F.2d 476, 479 (7th Cir.1981), which states that “failure to give [the veteran] notice raises serious due process questions in any attempt to saddle [him] with an increased deficiency.”

This case differs from Whitney in one important respect: Murdock was named a defendant in the underlying foreclosure action. Therefore, in order for the foreclosure to be valid, service on Murdock was necessary. FNMA obtained service by publishing notice in a local newspaper because it could not determine his whereabouts, which is a perfectly acceptable form of service of process under the Indiana statutes governing mortgage foreclosures. See I.C. 32-8-18-1. The real issue here is whether this notice is constitutionally sufficient.

In Mullane v. Central Hanover Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94 L.Ed. 865 (1950), the Supreme Court held that “an elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” The Mullane Court held that service by publication could be sufficient notice to defendants who were unknown or whose whereabouts “could not with due diligence be ascertained.” Id. at 317, 70 S.Ct. at 659. In a subsequent case, the Supreme Court held that a mortgagee is entitled to notice of a county tax sale that is more than simply notice by publication:

When the mortgagee is identified in a mortgage that is publicly recorded, constructive notice by publication must be supplemented by notice to the mortgagee’s last known available address, or by personal service. But unless the mortgagee is not reasonably identifiable, constructive notice alone does not satisfy the mandate of Mullane.... Notice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interest of any party ... if its name and address are reasonably ascertainable.

Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798-800, 103 S.Ct. 2706, 2711-12, 77 L.Ed.2d 180 (1983) (emphasis in original). Justice O’Connor’s dissent in Mennonite characterizes this holding as a “per se rule against constructive notice,” id. at 805, 103 S.Ct. at 2715, which holds that “constructive notice can never suffice whenever there is a legally protected property interest at sake.” Id. at 803, 103 S.Ct. at 2713 (emphasis in original).

Cases decided after Mennonite emphasize that due process requires notice by mailing, and not merely by publication, when the notifier knows or can obtain knowledge of the address of the person entitled to notice. See United States v. 125.2 Acres of Land, 732 F.2d 239, 241-42 (1st Cir.1984); Bender v. City of Rochester, N.Y., 588 F.Supp. 1405, 1407-08 (W.D.N.Y.1984); Zimmer Paper Products v. Berger & Montague, 586 F.Supp. 1555, 1557 (E.D.Pa.1984); F.D.I.C. v. Morrison, 568 F.Supp. 1240 (N.D.Ala.1983). Perhaps the best explanation of a court’s responsibilities in light of Mennonite is set out in Bender v. City of Rochester:

What the [Mennonite ] Court has done is shift the inquiry from whether under all the circumstances the notice was reasonably calculated to inform those with pro-tectable interests to a more focused examination of whether the names of such persons are “reasonably ascertainable,” in which event mail or equivalent notice is required.

765 F.2d 7 at 11 (2d Cir.1985). The court must therefore determine whether Mur-dock’s address was “reasonably ascertainable,” and whether, in light of Mullane and Mennonite, FNMA exercised “due diligence” in attempting to ascertain Mur-dock’s whereabouts before publishing notice of the foreclosure.

Such an inquiry is heavily dependent upon the facts of the case. Here, Murdock claims he moved to Auburn, Indiana after selling the Fort Wayne property. Whether FNMA knew of the move would affect the level of diligence it should have exercised before determining that Murdock’s whereabouts were “unknown” so as to justify service by publication. The essence of the inquiry is whether, given what FNMA knew about Murdock’s whereabouts or should have known through “reasonable” efforts to ascertain his whereabouts, the amount of effort expended by FNMA in attempting to serve Murdock was sufficient to conclude that his address was not “reasonably ascertainable.”

Unfortunately, the government has presented no evidence on FNMA’s knowledge of Murdock's address or the attempts to serve him before the issuance of the notice of publication. Nor has the government addressed the legal sufficiency of the notice given Murdock in light of these facts and Mennonite. The court therefore cannot say as a matter of law that the government is entitled to judgment because the notice given Murdock may have been constitutionally insufficient, so that, like the defendant in Whitney, Murdock cannot be liable for the deficiency debt.

Because this inability to grant summary judgment arises from the presence of factual issues not addressed by the government, the court will defer ruling on the motion until both parties have had an opportunity to develop these facts and address the applicable law. After such further briefing and exploration of the facts, the court will be able to rule on the government’s motion.

Therefore, the court hereby GRANTS the plaintiff thirty (30) days to file such further briefs as it deems necessary on the issue of the constitutional sufficiency of the notice of the state foreclosure proceedings supplied the defendant in this case. The plaintiff may also submit affidavits in connection with its brief, including those of any persons involved in searching for the defendant for purposes of service of process in the foreclosure proceeding and in preparing the Notice by Publication which was ultimately issued in that case. The defendant is hereby GRANTED twenty (20) days after the filing of any such further brief to respond thereto, and the plaintiff shall then have ten (10) days in which to reply.

SUPPLEMENTAL ORDER

This matter is before the court on plaintiff’s motion for summary judgment. On December 16, 1985, this court entered an order deferring its ruling on the motion pending further submissions by the parties. The plaintiff (“government”) filed a reply brief on January 14, 1986, and the defendant (“Murdock”) submitted two letters to the court. For the following reasons, the plaintiffs motion for summary judgment will be denied.

As explained in the December 16, 1985 order, this cause involves the government’s attempt to enforce a guaranty made by Murdock as part of a home loan he obtained from the Veteran’s Administration (“VA”) in 1968. Murdock sold the property, and the subsequent owners defaulted on the mortgage. The property was foreclosed by the holder of the mortgage, the Federal National Mortgage Association (“FNMA”), and the VA was forced to pay a deficiency. The government now wants Murdock to pay this deficiency under the guaranty.

Murdock’s complaint about paying under the guaranty is that he had no notice of the underlying foreclosure action. He avers that had he known, he would have intervened in the foreclosure action and brought the loan current. The court’s December 16, 1985 order focused on the due process argument implicit in this claim. The court recognized that Murdock had been served by publication in the foreclosure action, but interpreted the Supreme Court’s holding in Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 103 S.Ct. 2706, 77 L.Ed.2d 180 (1983), and the cases following it, as requiring that the court inquire into whether Murdock’s whereabouts were “reasonably ascertainable” so as to require more notice than mere notice by publication. The court gave the government thirty days to submit whatever briefs and affidavits it wished on the issue of the “ascertainability” of Mur-dock’s whereabouts at the time of the underlying foreclosure action.

The government’s response has not been to file any affidavits suggesting what, if any, efforts were made to ascertain Mur-dock’s whereabouts. Instead, it has chosen to argue that the due process concerns raised in the December 16, 1985 order are irrelevant to this action, which the government views as a “suit on an indemnification agreement” and “nothing more.” It argues that if Murdock has a due process claim, it lies against FNMA, which is wholly distinct and separate from the government.

What the government’s argument fails to address, despite this court’s request that it do so, is the holding of United States v. Whitney, 602 F.Supp. 722, 723 (W.D.N.Y.1985). In Whitney, the VA attempted to enforce the same guaranty against a veteran as is involved here. The veteran involved in that case was not named in the underlying foreclosure action, and had no notice of it. Despite the fact that the suit in Whitney was “nothing more” than a “suit on the same indemnification agreement,” the court held that the veteran’s lack of notice violated the fifth and fourteenth amendments, and thus the veteran was not required to pay on the guaranty.

The lesson of the Mennonite case is that a person is entitled to notice as a “minimum constitutional precondition” to any proceeding “which will adversely affect the liberty or property interest” of that person. 462 U.S. at 800, 103 S.Ct. at 2712. The Whitney court held that a veteran who receives no meaningful notice of the underlying foreclosure proceeding “is denied the opportunity to exercise his equity of redemption or to bid in the proceeding disposing of the property,” which the court recognized as a “legally protected property interest.” 602 F.Supp. at 732. See also Federal Deposit Ins. Corp. v. Morrison, 747 F.2d 610 (11th Cir.1984) (mortgagor’s equity of redemption constitutes “property” protected by the Due Process Clause). Thus, what the underlying foreclosure sought to do was extinguish Murdock's equity of redemption, a property right protected by the fifth amendment. He was therefore entitled to proper notice.

Murdock was named in the underlying foreclosure, and was served by notice of publication. However, the holding of Mennonite makes clear that notice by publication is constitutionally insufficient if the party’s name and address are reasonably ascertainable. In such a case, due process requires “notice by mail or other means as certain to ensure actual notice.” 462 U.S. at 800, 103 S.Ct. at 2712. See also United States v. 125.2 Acres of Land, 732 F.2d 239, 241-42 (1st Cir.1984); Bender v. City of Rochester, 588 F.Supp. 1405, 1407-08 (W.D.N.Y.1984), aff'd, 765 F.2d 7 (2d Cir.1985); Zimmer Paper Products, Inc. v. Berger & Montague, 586 F.Supp. 1555, 1557 (E.D.Pa.1984), aff'd, 758 F.2d 86 (3d Cir.1985). Murdock has claimed that his new address could have easily been obtained, and the government has not offered any evidence about the efforts made to discover Murdock’s whereabouts prior to the issuance of the notice by publication. Therefore, there is a factual issue about whether Murdock’s address was reasonably ascertainable, and thus whether Murdock's due process rights were violated by the underlying foreclosure proceeding.

The government argues that these constitutional concerns are irrelevant because of the nature of the suit. It is certainly true that when the YA is required to make payments on a home loan in default, it may seek reimbursement from the veteran under the guaranty either on theory of subrogation or an independent right of indemnification. United States v. Shimer, 367 U.S. 374, 386, 81 S.Ct. 1554, 1562, 6 L.Ed.2d 908 (1961); Whitney, 602 F.Supp. at 733; 38 C.F.R. § 36.4323. Under a subrogation theory, the government would only acquire whatever rights FNMA had. If FNMA had violated Murdock’s due process rights, it would not be able to enforce the judgment against Murdock. Thus, the government would not be able to recover based on that judgment either. Whitney, 602 F.Supp. at 733-34.

Perhaps sensing the pitfalls of a subrogation theory, the government here argues that it seeks to enforce the guaranty under a theory of indemnification. The government’s right to indemnification is not extinguished by the fact that FNMA could not enforce the foreclosure judgment against Murdock. Shimer, 367 U.S. at 387, 81 S.Ct. at 1562. However, the Whitney court held in effect that the right to indemnification can be lost by the government through “intimate complicity” in the violation of the veteran’s constitutional rights. This complicity was described as follows: 602 F.Supp. at 734. Thus, “intimate complicity” sufficient to extinguish the government’s indemnification rights can be found in such simple acts as failing to recognize the veteran’s constitutional right to notice in the VA’s regulations, and in failing to inform the veteran once notice of the foreclosure is received. There is nothing to suggest that the government avoided either of these pitfalls in this case.

In bringing the foreclosure proceeding, the bank was only complying with the V.A.’s own regulations, which conspicuously fail to acknowledge or respect the veteran’s constitutionally guaranteed right to notice.
Since federal laws require the lender to deliver notice of the foreclosure proceedings, along with the name of the original veteran obligor, to the V.A. thirty (30) days in advance, the Government could have easily insured that the veteran had been sent “notice by mail or other means as certain to ensure actual service” ... Since the Government failed to do so, it cannot now hold the veteran liable to pay a deficiency arising out of the foreclosure proceeding without having any notice of that proceeding. Any contrary holding would permit the Government to circumvent and undermine the veteran’s statutory and constitutional rights to pri- or notice of the foreclosure proceeding.

The government points the finger at FNMA, in a sense arguing that giving notice to Murdock was FNMA’s responsibility so that the government cannot be bound by FNMA’s improprieties. However, there is some evidence of close involvement with FNMA in this case. The Decision on Waiver of Indebtedness, attached as an exhibit to the motion for summary judgment, indicates that the VA received the required Notice of Intention to Foreclose, and that a staff member of the Loan Service section had spoken several times with Mrs. Jacqueline Bowen, the then current resident of the house. (This largely undercuts the argument made in the reply brief that Mur-dock failed to tell the VA that he had sold the house, because the VA knew someone else was living there and attempting to make the payments on the mortgage.) The case history set out in the Decision on Waiver of Indebtedness suggests significant VA involvement with the property during the time of the foreclosure. Further, the VA paid the deficiency in March, 1984, and was able to locate Murdock to demand payment under the guaranty within six months. This suggests, at least superficially, that the VA knew where to find Murdock. Thus, far from being separate and apart from the foreclosure, the evidence currently available to the court suggests that the VA played a significant role in the foreclosure which might suggest “intimate complicity.”

The government’s attempt to make this into “nothing more” than a suit for indemnification also belies the' real stakes of the guaranty. In order to secure a VA loan, a veteran must agree to be liable on the loan even if he sells the property to someone else. The guaranty lasts for the life of the loan. Thus, veterans run the risk of being confronted, fifteen or twenty years down the road, with a sudden demand for indemnification because a second or third subsequent purchaser has defaulted on the loan. There is nothing intrinsically wrong with extracting such a promise as part of a loan transaction, but there is something fundamentally unfair about approaching a veteran and requiring payment on the guaranty when the veteran is completely unaware that the loan has gone into default. In such a situation, the veteran’s rights under the mortgage have already been extinguished without any chance to exercise them. He has only one choice: pay on the guaranty. Enforcement of a contractual obligation in light of such a violation of a constitutional right to due process should not be tolerated. In short, the government here cannot avoid the issue of the sufficiency of notice afforded Mur-dock in the underlying foreclosure proceeding.

Thus, the court is faced with the factual dispute as to whether or not Mur-dock’s address was “reasonably ascertainable” so that the notice by publication in the foreclosure was constitutionally insufficient. There is simply insufficient evidence on this point for the court to rule one way or the other. The government tries to argue that the notice was sufficient “on its face” because an attorney filed an affidavit in the foreclosure saying that FNMA was unable to locate Murdock. However, every case in which a collateral attack is made on the basis of insufficient service will contain some “prima facie” showing of proper service; that showing does not foreclose the collateral attack itself. The court must therefore hear evidence to decide this factual issue. Given that there is a genuine issue of material fact, summary judgment cannot be granted.

It is important to note what this order does not say. The court is not finding that the service on Murdock in the foreclosure proceeding was constitutionally insufficient; rather, the court is simply holding that it cannot now make a finding that it was sufficient. Perhaps the government will be able to show that reasonable efforts were made to ascertain Murdock’s whereabouts by FNMA, and thus notice by publication was proper. If so, the government is entitled to judgment on the complaint in this cause, because Murdock has admitted that the guaranty requires him to pay if it is enforceable under these facts. But it is important to note that the government will have to prove that the service in the underlying foreclosure was constitutionally proper in order to prevail in this cause. Murdock has raised sufficient doubts about that service to require such proof.

This will perhaps make the trial of this cause appear to be an examination into collateral matters. But the cogent analysis of Whitney requires this result in order to guarantee the constitutional rights of veterans. As that court forcefully put it:

[I]n cases ... where the veteran has long since transferred the property to a third party who has fallen behind in the payments, the veteran cannot be held liable under a perpetual guarantee agreement for the outcome of a foreclosure proceeding as to which he was provided no adequate notice ... the constitutional guarantee of due process of law forbids it, and justice cries out against it.

602 F.Supp. at 735.

Conclusion

For the reasons set forth above, the plaintiff’s motion for summary judgment is hereby DENIED.


author: ELMO B. HUNTER, Senior District Judge.

text:
    Jay Thomas GOLD, et al., Plaintiffs, v. HOLIDAY RENT-A-CAR INTERNATIONAL, INC., Defendant.
    No. 85-1382-CV-W-3.
    United States District Court, W.D. Missouri, W.D.
    Dec. 16, 1985.

      Mark Klein, Kansas City, Mo., for plaintiffs.
    Frederick H. Riesmeyer, II, Kansas City, Mo., for defendant.
   ORDER GRANTING DEFENDANT’S MOTION FOR A PRELIMINARY INJUNCTION

ELMO B. HUNTER, Senior District Judge.

Plaintiffs, Jay Gold and Gold & Son, Inc., (Gold), entered into a license agreement (agreement) with Holiday Rent-A-Car International, Inc., to purchase and operate its Kansas City, Missouri, franchise. Holiday/Payless Rent-A-Car International, Inc. (Holiday) has succeeded in interest to Holiday Rent-A-Car International, Inc. Gold filed suit in Jackson County Court on September 25, 1985, alleging breach of contract and fraud. Holiday filed a counterclaim, including a count for injunctive relief. Holiday seeks to enforce a covenant not to compete, the transfer of the phone numbers utilized by Gold while operating the Holiday franchise, and an assignment of the lease of the Holiday location at the Kansas City International Holiday Inn, 11832 Plaza Circle, all of which are provided for in the agreement. The agreement provides that Florida law will control any suit arising under the agreement. Holiday removed the case to this Court pursuant to 28 U.S.C. § Í441(a). A hearing was held on the preliminary injunction.

On January 6,1983, Gold entered into an option agreement with Holiday to purchase its Kansas City franchise for a sum of thirty thousand ($30,000.00) dollars. Gold signed a license agreement with Holiday to purchase the franchise on January 18, 1985. The agreement provided an exclusive license to operate the franchise in the counties of Jackson, Clay and Platte in Missouri, and Johnson and Wyandotte in Kansas. The franchise had been operated as a company franchise prior to the purchase for a period of one year. Thus, Gold purchased an ongoing business complete with location phone service, employees and customers. Gold assumed actual operation of the franchise in late January of 1985. Between the time Gold signed the agreement and the time he assumed actual operation of the franchise, he received a one week training course at the headquarters of Holiday in Florida.

As time went on Gold became disenchanted with the Holiday system and eventually in March of 1985, began talks with the officials of American International Rent-A-Car, Inc., (American), a competitor of Holiday. American did not have a franchise in the Kansas City area. On March 14, 1985, Gold sent a letter to American stating that he had developed a strategy regarding the noncompetition clause contained in the Holiday agreement. The strategy was to gain the attention of Holiday officials by withholding franchise fees owed and then suggest that each party go its own way.

On March 28, 1985, Gold was offered a franchise of American for twenty thousand ($20,000.00) dollars. The franchise area was the same as that covered by the Holiday agreement. Sometime between April and June of 1985, Gold began to accept American rentals at the Holiday franchise location. Statements of dues and rental data were prepared for the months of June and July for business between Gold and American. Also, in June Gold placed an order for American supplies.

Gold sent a letter to Holiday, on July 3, 1985, indicating that he no longer wished to operate the Holiday Kansas City franchise. Holiday responded on July 8, 1985, making reference to the noncompetition clause of the agreement. On July 30, 1985, Holiday notified Gold that his franchise would be terminated in ninety (90) days or on October 30, 1985, if he had not paid the franchise fees which were in arrears. The fees were not paid.

Gold continued to accept both Holiday and American rentals during the spring and summer of 1985. Holiday officials gained actual knowledge that Gold was accepting American rentals at the Holiday franchise locations on September 16, 1985.

Gold states that the license agreement with American was not formally entered into until August or September of 1985. The license agreement, however, is dated March 31,1985. The evidence shows at the very least that Gold was operating as a de facto licensee of American as early as April 1985.

The Holiday agreement and its terms are undisputed. It provides that Gold will not compete with Holiday for a period of two years commencing upon the effective termination of the agreement. The Court finds that the agreement was effectively terminated on October 30, 1985, as provided in the letter to Gold on July 30, 1985. The geographic scope of the covenant is limited to a seventy-five (75) mile radius of the license area. Both Missouri, see National Starch and Chemical Corp. v. Newman, 577 S.W.2d 99, 104 (Mo.App.1979), and Florida, see Fla.Stat. § 542.-33(2)(b), enforce covenants not to compete if reasonably limited as to time, area and scope. The covenant in the present case meets those requirements.

The agreement, also, provides that any remaining lease period will be assigned to Holiday upon termination of the agreement if Holiday so instructs Gold. Furthermore, it provides that all phone numbers used in connection with the Holiday franchise are assigned to Holiday upon termination of the agreement.

The Eighth Circuit Court of Appeals has developed a four part test to be utilized in determining whether a preliminary injunction should issue. These four parts are: (1) the threat of irreparable harm to the movant; (2) a balancing of the hardships between the respective parties; (3) the movant’s likelihood of success on the merits; and (4) the public interest. See, Data-phase Systems, Inc. v. C.L. Systems, Inc., 640 F.2d 109, 113 (8th Cir.1981).

There is a threat of irreparable harm to Holiday. Holiday turned over to Gold an ongoing franchise in January of 1983. Its fleet of vehicles was leased to Gold. It assigned its lease at the Kansas City International Holiday Inn to Gold. Gold has executed new leases on these premises. In April-June 1985, Gold began accepting rentals from American customers at the Holiday office. He continued to conduct a dual business out of the Holiday franchise at least until September of 1985. Because Gold had an exclusive license, Holiday does not have another franchise in Kansas City. Gold has diverted both potential and future customers from the Holiday system by use of the phone numbers listed in Holiday advertisements including the Yellow Pages, customers who use the rental system due to its location and past satisfied customers of the Holiday system. This loss of business continues today. Gold still uses one of the telephone numbers listed in the Yellow Pages as a Holiday number to conduct business for his American franchise and as late as November was using another phone number for the same purpose. There is a continuous harm being suffered by the goodwill of the Holiday system. It would be extremely difficult to calculate the amount of damages which Holiday has suffered and will continue to suffer because of the breach of the franchise agreement.

A balancing of the hardships between the respective parties reveal that the equities in the case are fairly balanced. If an injunction is issued Gold will not be able to compete for car rental business within the area designated in the agreement. He has a fleet of approximately 65 vehicles which he will not be allowed to operate. Plus, he will not be able to operate the American franchise which he purchased.

Holiday, on the other hand, continues to be harmed in that it no longer has a franchise operating in the Kansas City market. Allowing Gold to continue to operate the American franchise in the market not only presents competition for Holiday, but also, destroys Holiday’s only business in the market. Gold did not inform anyone with the Holiday system when he first began operating the American franchise. Instead he chose to operate the American franchise in a clandestine fashion out of his Holiday location. The businesses of the two competitors were operated side by side out of the same location without the knowledge of anyone at Holiday. Gold was aware of the covenant not to compete in early March, 1985, as he had written American that he had developed a plan to get around the covenant. Even before this plan could produce any results Gold began accepting American rental customers. Gold willfully and intentionally breached the covenant not to compete and for a period of several months attempted to conceal this breach from Holiday. Under these circumstances the equities simply do not favor Gold. See, Sigma Chemical Co. v. Harris, 586 F.Supp. 704, 711 (W.D.Mo.1984).

Holiday has shown that it has a high likelihood of success on the merits. The agreement and its terms are undisputed. For Holiday not to succeed on the merits, Gold must prove that the agreement was induced by fraud. See, Huttegger v. Davis, 599 S.W.2d 506, 511 (Mo.1980). Before addressing each allegation of fraud it is important to note several of the facts. One, Gold operated the Holiday franchise for over two years, accepting the benefits derived from the agreement. Two, Gold was aware of the restrictive covenant and its effects. Three, while operating under the'license agreement with Holiday, Gold began negotiations with American concerning the purchase of a franchise. Four, Gold wrote American that he had developed a plan to get around the covenant and its effects. Five, Gold accepted American rentals while still operating the Holiday franchise and did so for a period of at least five months without the knowledge of Holiday. Six, the first time Gold alleged that the agreement was induced by fraud was with the filing of the complaint in this case.

Gold made approximately eight allegations of fraud. First, Gold alleges that he was to receive depreciation rebates on the fleet of vehicles at the Kansas City franchise when he purchased it. The option agreement provided that Gold would purchase the vehicles currently being used at the franchise. The purchase, however, was subject to Ford Credit Corp. (Ford), approving the assumption of Holiday’s loan on the vehicles by Gold. Gold was not able to meet the credit requirements of Ford. Because Gold was not able to assume the loan the agreement was modified. Holiday now would lease the vehicles to Gold at its cost from Ford. The modification agreement provided that the owner of the vehicles would receive the depreciation rebates. The owner was Holiday.

Second, Gold alleges that fleet insurance was to be provided at cost by Holiday. There is not persuasive evidence to support this allegation in the record. Furthermore the agreement allows Gold to secure his own fleet insurance if he can obtain a better rate. On one occasion Gold did so. Certain administrative expenses and a potential for a profit if losses for a given period are low are calculated into the rate Holiday is going to charge its franchisees that purchase fleet insurance from it. Gold includes these very same factors in the amount he charges car rental customers who purchase liability insurance on their rental car. Gold stated that he would not object to the inclusion of the administrative expenses into the calculation of his premium rate as long as he would have been informed of it. This statement indicates that even if the representation was made that fleet insurance would be sold at cost, it was not a substantial factor inducing Gold into the agreement.

Third, Gold alleges that Holiday stated that the Kansas City franchise had a substantial amount of government business. In 1982, Holiday had been awarded the GSA contract for Kansas City. The contract is bid out each year as provided in government regulations. Holiday bid on the 1983 contract. In late December, 1982, Holiday learned that the contract probably would be awarded to Thrifty Rent-A-Car, a competitor. The GSA bidding process favors small businesses. Holiday contacted the GSA, believing that in the preceding year Thrifty had conducted too much business to be classified as a small business. It was not until February, 1983, that Holiday learned that its attempt had been unsuccessful and that the GSA contract had been awarded to Thrifty. Holiday did not represent that it would or had secured the GSA contract for 1983 to Gold. Gold was informed of the correspondence with the GSA as early as January 20, 1983. Even after learning that the contract had been awarded to Thrifty, Gold did not make any allegations of fraud to Holiday concerning this subject matter.

Fourth, Gold alleges that Holiday made false representations about the accounting training which he would receive as a licensee of the system. Holiday instructed Gold on the proper method of keeping the day to day records of the franchise during his week training session in Florida. An official of Holiday later gave Gold some supplemental training at the Kansas City franchise. Gold testified that he believed that Holiday was going to give him an extensive training course in accounting which would enable him to perform all of the accounting work for the franchise. The Court finds that there is simply not persuasive evidence to establish this allegation.

Fifth, Gold alleges that Holiday misrepresented that it was the fifth largest car rental system in North America. Gold has no personal knowledge that this statement is false. His basis for the allegation is from magazine articles which he has read. Les Netterstrom, president and majority stockholder of Holiday, testified that the statement is based upon the number of locations being operated by Holiday. He further stated that he believes the statement to be true. Gold has not presented persuasive evidence to establish the allegation that Holiday was not the fifth largest car rental system in 1982.

Sixth, Gold alleges that Holiday misrepresented that it had numerous corporate accounts. Gold was shown a list of companies which had received a discount card from Holiday. A company’s name could appear on the list either by a local licensee requesting a discount card for the company or by a company employee simply applying for a card. The city and state of the company’s headquarters is listed alongside the company’s name on the corporate list. This should alert the reader that many of the businesses listed on the corporate account list were of a local nature. Gold stated that he believed that he would derive business from the accounts on the list. Gold testified that to the best of his knowledge only once in the two years that he operated the Holiday franchise was a discount card presented for use. Les Netter-strom testified that the employees of the companies receiving the discount cards were not required to use Holiday, rather it was a service provided by Holiday for the companies to utilize at their option. The Court does not find persuasive evidence to support Gold’s allegation that the corporate account list was materially misrepresented.

Seventh, Gold alleges that Holiday made financial misrepresentations as to the expenses incurred by the Kansas City franchise during the months of May through October 1982. Holiday provided Gold with a profit/loss statement for those months prior to his purchase of the franchise. The profit/loss statements were prepared on a cash flow basis rather than an accrual basis. Gold claims that the accounting method used by Holiday in preparing the statements should have been disclosed. He testified that the expenses incurred by the franchise were misstated because certain expenses which were paid at the first of the year should have been amortized over the entire year. Holiday did not make any representations as to the accounting method used to prepare the profit/loss statements. There is not any testimony in the record that the accounting method used by Holiday is not acceptable in the accounting community. The Court does not find persuasive evidence in the record to support an allegation of fraudulent misrepresentation.

Eighth, Gold alleges that Holiday stated that group insurance was available to the licensees and their employees. Holiday has no such program. Les Netterstrom testified that such a statement did appear in the Holiday Procedure Manual given to Gold. He characterized the statement as a mistake in the manual. Holiday did attempt to provide a group life and health plan for its licensees in 1984, however, there was not sufficient interest on the part of the licensees to make a group plan financially feasible. Gold learned in early 1983 that Holiday did not actually provide a group insurance plan for its licensees and took no action against Holiday at that time. The Court does not find persuasive evidence to establish that the group insurance was a material factor inducing Gold to enter the agreement.

The Court finds that there is not persuasive evidence to establish the allegations of fraud in the inducement attempted to be proven by Gold. The Court, thus, concludes that Holiday will likely succeed on the merits in its claim for permanent injunctive relief against Gold. '

There is a public interest in granting an injunction in this case. The public has an interest in enforcing covenants not to compete contained within valid contracts as long as the covenant is reasonably limited in scope, duration and geographic region. See Sigma Chemical Co., at 711.

The Court holds based upon its application of the Dataphase test, that a preliminary injunction should issue in this case. The Court hereby orders Jay Gold and Gold & Son, Inc., on or before December 30, 1985, to:

(1) execute all documents necessary to assign and transfer to Holiday the balance of the lease of the premises located at 11382 Plaza Circle, as set out in the license agreement;
(2) transfer each and every phone number used by Gold and Gold & Son, Inc., in connection with the advertisement of the Holiday franchise in Kansas City, as set out in license agreement; and
(3)refrain from violating the covenant not to compete contained within the license agreement with Holiday, for a period of two years commencing on October 30, 1985, for the geographic region of Clay, Jackson and Platte counties in Missouri, and Johnson and Wyandotte counties in Kansas and for a seventy-five (75) mile radius surrounding such region.

SO ORDERED.


author: DIMMICK, District Judge.

text:
    UNITAL, LIMITED, Plaintiff, v. SLEEPCO MFG., LTD., Sleepco Holdings, Ltd., Jack Chatvaire, Dennis Charles Daniels, and Marvin Dale Roberts, Defendants.
    No. C84-1196D.
    United States District Court, W.D. Washington.
    Dec. 17, 1985.

      William O. Ferron, Jr., Seed & Berry, Seattle, Wash., for plaintiff.
    C. Dean Little, LeSourd & Patten, Seattle, Wash., for defendants.
   MEMORANDUM AND ORDER

DIMMICK, District Judge.

The plaintiff, Unital Limited (“Unital”), is seeking the equivalent of a patent monopoly on an unpatented, unregistered roof design that did not originate solely with Unital. After hearing oral argument, the Court grants summary judgment to defendants, Sleepco Mfg., Ltd., et al. (“Sleep-co”).

I. JURISDICTION AND CHOICE OF LAW

Unital seeks injunctive and monetary relief from Sleepco for alleged copying of the roof contour of a sleeper cab on a long-haul truck. Sleepco moves for summary judgment.

Unital brings its action under 15 U.S.C. § 1125(a) (1982) of the Lanham Act for false designation of origin and under Washington law for unfair competition by means of common-law trademark infringement and passing off, for violation of consumer protection law, and for misappropriation of trade secrets. Subject matter jurisdiction is based on both the Lanham Act and diversity. Unital’s state claims are joined with its federal claim as provided by 28 U.S.C. § 1338(b).

The gravamen of Unital’s complaint is that Sleepco has unfairly competed with Unital by using Unital’s unregistered trademark. The Lanham Act provides a federal remedy for use of another’s unregistered trademark even though a remedy is also provided by the common law. New West Corp. v. Nym Co. of California, Inc., 595 F.2d 1194, 1198-99 (9th Cir.1979). The intent of Congress in passing the Lanham Act was to regulate commerce by making actionable the deceptive and misleading use of trademarks, whether registered or not, and to protect persons engaged in such commerce against unfair competition. Id. at 1199. As the New West court explained, both statutory and common-law (unregistered) trademark infringements are aspects of unfair competition under the federal statute. Id. at 1201. The present action is for common-law trademark infringement involving goods in both interstate and international commerce. Although the parties are diverse and state law claims are made, the primary source of the rights sued upon is federal law. Id.; accord International Order of Job’s Daughters v. Lindeburg & Co., 633 F.2d 912, 917 n. 8 (9th Cir.1980), cert. denied, 452 U.S. 941, 101 S.Ct. 3086, 69 L.Ed.2d 956 (1981). Uni-tal has, in any event, relied on federal, not state, substantive law. See 633 F.2d at 917 (where source of right is federal statute and plaintiff invokes federal substantive law, court applies federal law even where jurisdiction is based on diversity).

II. SUMMARY OF FACTS

The undisputed facts in this case are that Unital did not have a patent or registered trademark for the step-with-fin design at issue. (See Appendix A). Unital was asked by its customer Western Star Trucks to improve the roofline of the sleeper cab that Unital supplied to Western Star. Uni-tal’s president, in his deposition, admitted that Western Star requested some work on the appearance of the top of the sleeper cabs. He explained that he and Western Star explored numerous ideas and approaches to come up with something that was very attractive. He described this design effort as a process of going “back and forth.” Western Star approved the final step-with-fin design.

Unital’s evidence shows that the step-with-fin design was meant to serve two primary purposes. First, this design was necessary to fit two bunk beds in a sleeper cab. Second, the design was intended to appeal to customers of Western Star. The president of Unital clearly states these purposes in his deposition; his affidavit adds a tertiary purpose, which was to distinguish Unital cabs from other cabs.

Unital never manufactured the step-with-fin roof. The roof was manufactured by Kelowna Industrial Plastics, a Canadian company not a party to this suit. At first, Western Star ordered these roofs directly from Kelowna. Unital supplied Western Star with the unfinished boxes without roofs. Shortly after the step-with-fin sleeper was sold as part of Western Star trucks, Western Star asked Unital to deal directly with Kelowna to simplify Western Star’s paperwork. Unital then began ordering roofs from Kelowna and selling the assembled unfinished box-with-roof to Western Star.

In 1982, Western Star began buying its sleeper cab boxes (without roofs) from Sleepco. As before, Western Star had Ke-lowna make the fiberglass roofs from Western Star’s plugs and molds. Western Star modified its roof by adding a wedge to the step-with-fin design; this modified design was attached to the sleeper boxes produced by Sleepco. (See Appendix A.) Sleepco did not participate in the design of the modified roof cap. As before, Western Star eventually asked its cab maker, now Sleepco, to buy roofs directly from Kelow-na.

III. LAW GOVERNING TRADEMARK INFRINGEMENT

To determine whether an unregistered, or common-law, trademark exists, the Court must balance two opposing economic interests: the preservation of free competition and the promotion of invention. The Court works within constitutional limits set by Article 1 § 8, cl. 8, which empowers Congress “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Under subsequent federal patent and copyright law, the fundamental right to compete through imitation of a competitor’s product may be only temporarily denied by means of patents, copyrights, or trademark registration. Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 228-29, 84 S.Ct. 784, 786-87, 11 L.Ed.2d 661 reh. denied, 376 U.S. 973, 84 S.Ct. 1131, 12 L.Ed.2d 87 (1964); Re Morton-Norwich Products, Inc., 671 F.2d 1332, 1336-37 (C.C.P.A.1982). As a threshold requirement for legal protection, an inventiqn or discovery must be demonstrably genuine “lest in the constant demand for new appliances the heavy hand of tribute be laid on each slight technological advance in an art.” Cuno Engineering Corp. v. Automatic Devices Corp., 314 U.S. 84, 62 S.Ct. 37, 86 L.Ed. 58 (1941), quoted in 376 U.S. at 230, 84 S.Ct. at 788. In the present-day patent and copyright system, “uniform federal standards are carefully used to promote invention while at the same time preserving free competition.” Sears, 376 U.S. at 230-31, 84 S.Ct. at 788.

In a trademark infringement action under the Lanham Act, the plaintiff has the burden of establishing a right to exclusive use. Vuitton et Fils S.A. v. J. Young Enterprises, Inc., 644 F.2d 769, 774-75 (9th Cir.1981). A registered trademark raises a prima facie case of exclusive right to use, shifting the burden of proof to the defendant. Where there is no registration, the plaintiff has the burden of establishing his right.

A right to exclusive use of a design or configuration is established by proof that (1) the design is nonfunctional and (2) the design serves primarily to indicate its source in one of two ways: (a) by being inherently distinctive or (b) by acquiring secondary meaning. Vuitton, 644 F.2d at 772-73; Cable Electric Products, Inc. v. Genmark, Inc., 770 F.2d 1015, 1029-30 (Fed.Cir.1985); see also Re Morton-Norwich Products, Inc., 671 F.2d at 1343; Truck Equipment Service Co. v. Fruehauf Corp., 536 F.2d 1210, 1217 (8th Cir.1976), cert. denied, 429 U.S. 861, 97 S.Ct. 164, 50 L.Ed.2d 139 (1976). If the design is found to be functional, rather than “nonfunctional,” the plaintiff has no legal protection against copying or imitation. Consequently, the second requirement, as to source-indication, need not be addressed. Pagliero v. Wallace China Co., 198 F.2d 339, 344 (9th Cir.1952).

A. Common-law Doctrine of Functionality

Functionality is generally approached as a factual question, although it is ultimately a legal conclusion. If evidence is submitted showing that copying is essential to competition, then the legal conclusion of “functionality” for trademark purposes can be reached. Vuitton, 644 F.2d at 775. In short, functionality is properly viewed as a mixed question of fact and law.

Where, as in the present case, the factual premises for a finding of functionality have not been disputed either in oral argument or by documentary evidence, summary judgment should be granted.

In its landmark case on the question of what is “functional” in a common-law trademark infringement action, the Ninth Circuit explained that:

“Functional” ... connote[s] other than a trade-mark purpose. If the particular feature is an important ingredient in the commercial success of the product, the interest in free competition permits its imitation in the absence of a patent or copyright. On the other hand, where the feature or, more aptly, design, is a mere arbitrary embellishment, a form of dress for the goods primarily adopted for purposes of identification and individuality and, hence, unrelated to basic consumer demands in connection with the product, imitation may be forbidden where the requisite showing of secondary meaning is made. Under such circumstances, since effective competition may be undertaken without imitation, the law grants protection.

Pagliero v. Wallace China Co., 198 F.2d 339, 343 (9th Cir.1952) (footnotes omitted). This often-quoted language governs this case. See Fabrica, Inc. v. El Dorado Corp., 697 F.2d 890, 895 (9th Cir.1983) (Pagliero functionality test is applied to product features).

Although the Pagliero definition of functionality has been criticized as overinclu-sive, it still serves as the touchstone for the common-law doctrine of functionality. See Sicilia di R. Biebow & Co. v. Cox, 732 F.2d 417, 427-29 (5th Cir.1984). As the Ninth Circuit observed in a registered trademark infringement case, “[t]he policy expressed in Pagliero and the cases decided under it is aimed at avoiding the use of a trademark to monopolize a design feature which, in itself and apart from its identification of source, improves the usefulness or appeal of the object it adorns.” Vuitton, 644 F.2d at 774.

“Functionality,” as defined in Pag-liero, is a measure of the effect of a design or physical detail in the marketplace. The question, simply put, is what purpose does the design serve in the marketplace? If a design functions in the marketplace (1) by means of aesthetic appeal, (2) by increasing the utility or practicality of a product, or (3) by saving the consumer or producer time or money, then the design may be legally functional.

(1) Aesthetic Appeal

If the design functions primarily to beautify a product, and eye-appeal is an essential selling feature, then the design is “functional” and thus will not be protected. Famolare, Inc. v. Melville Corp., 472 F.Supp. 738, 744 (D.C.Hawaii 1979), aff'd without opinion, 652 F.2d 62 (9th Cir.1981); Pagliero, 198 F.2d at 343-44. Even with a registered trademark, the court will still permit competition through imitation if the design is purely aesthetic and not an arbitrary symbol of source, such as a logo. Vuitton, 644 F.2d at 774-75.

(2) Increase in Utility or Practicality

If the design improves the utility or practicality of a product, then it may be legally functional. At the center of the tangled web of “functionality” analysis in federal case law is the confusion of two words: “function” and “utility.” “Functionality” is a legal conclusion, not a factual description of usefulness. “Utility,” in contrast, is a purely factual description. Utility may or may not be legally protected. A patent, for example, may serve to protect the inventor of something useful. A useful shape may be registered as a trademark. In a situation such as the present case, where there is no patent or trademark, utility is simply one factor to be weighed by the court in its finding of “functionality” or “nonfunctionality.”

If a design has special utility, then the court considers the need of competitors and the public for free access to that design. The court considers, for example, whether the utility of the product as a whole depends on the design in question. Would protection of the design throttle trade? Are there numerous other designs that would be as practical, as useful? See, e.g., Sicilia di R. Biebow & Co. v. Cox, 732 F.2d 417, 429 (5th Cir.1984) (design is functional if it is one of a limited number of equally efficient options and free competition would be unduly hindered).

(3) Increase in Economy or Time Efficiency

If the design saves the consumer or producer time or expense, then the court considers the need of the public and of competitors for that design. Again, the central question is how protection will affect the marketplace.

B. Application of the Functionality Doctrine

The design feature at issue here, the step-with-fin roofline, improves both the usefulness and appeal of the sleeper cab. In deposition testimony, the president of Unital explained that the step was chosen to provide head room for an upper bunk. He further averred that the purpose of the overall design was consumer appeal. As the Vuitton court emphasized, a company may not have a monopoly in producing a consumer good that has an aesthetically pleasing design. Vuitton, 644 F.2d at 777. See also International Order of Job’s Daughters v. Lindeburg & Co., 633 F.2d 912, 917 (9th Cir.1980), cert. denied, 452 U.S. 941, 101 S.Ct. 3086, 69 L.Ed.2d 956 (1981) (ornamental features may fill a consumer need without serving as a trademark even though such features may be nonutilitarian). Although Unital submitted an affidavit indicating that Uni-tal intended the design to distinguish its sleeper cabs from those of other companies, Unital’s evidence, viewed as a whole, shows that the primary purposes of the design were to improve utility and consumer appeal.

Unital’s subjective intentions do not, in any event, determine the question of functionality. In Vuitton, the Ninth Circuit tested for “functionality” by asking whether consumers would tend to choose the plaintiff’s goods for utilitarian or aesthetic reasons or whether their choice would be based on quality or prestige associated with plaintiff’s goods. In the present case, no evidence has been submitted showing that truck buyers purchased trucks because of the brand of sleeper cab built into them. The undisputed fact is that consumers of long-haul trucks buy a particular manufacturer’s finished truck by its brand name, such as Kenmore or Peterbilt, not by the make of its sleeper cab.

C. Requirement of Notice to Competitors

The judicial requirements for establishing a right to exclusive use serve primarily to protect the freedom to compete effectively. These requirements serve another purpose, but one seldom addressed. This ancillary purpose is to ensure that competitors have notice of the protected nature of a design. Where a design is registered as a trademark, copyrighted, or patented, constructive notice is thereby given to potential competitors. Where no claim is recorded, however, a producer would compete at his peril if every useful, attractive, or practical innovation could be legally protected as a common-law trademark.

Notice to potential competitors is indirectly ensured by the source-indication requirement of the plaintiff’s prima facie case. A prima facie case consists of both a showing of nonfunctionality and a showing of either inherent distinctiveness or secondary meaning. A design that is inherently distinctive will presumably carry its own message as to its source. A design with secondary meaning may not. Secondary meaning may be geographically confined, leaving out-of-state or international competitors, such as Sleepco', without notice that a design functions as a common-law trademark. See Truck Equipment Service Co. v. Fruehauf Corp., 536 F.2d 1210 (8th Cir.), cert. denied, 429 U.S. 861, 97 S.Ct. 164, 50 L.Ed.2d 139 (1976). In the absence of such notice, the court must carefully scrutinize a commonlaw infringement case to ensure that the alleged in-fringer had fair warning of the protected status of the product or design at issue. Although we do not reach the question of such notice here, having found the roof design to be functional, the record before us reveals no evidence showing that Unital communicated an intent — by advertising, by means of its product, or otherwise — to use the roof design as its trademark until it filed this suit.

C. Unital’s Remaining Claims.

Because Unital’s own evidence shows that the step-with-fin design was an attractive, practical, and in part a necessary innovation, there is no premise for Unital’s claims of unfair competition under state law. Where federal law provides no legal protection for an unpatented, uncopyrighted, or unregistered article, a state may not prohibit copying of it or award damages for such copying. Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 232-33, 84 S.Ct. 784, 789, 11 L.Ed.2d 661 reh. denied, 376 U.S. 973, 84 S.Ct. 1131, 12 L.Ed.2d 87 (1964). Unital’s pendent claim for consumer protection violations is accordingly dismissed. Unital’s state claim of misappropriation of a trade secret (concerning another roof design) also fails because Unital has not submitted evidence rebutting Sleepco’s evidence of an independent development of the design allegedly misappropriated.

CONCLUSION

Unital has shown no basis, in its oral argument or written evidence, on which this Court can abridge Sleepco’s fundamental right to compete through imitation of a competitor’s product. As the United States Supreme Court observed in Sears, 376 U.S. at 232-33, 84 S.Ct. at 789, copying an un-patented design is " 'the exercise of a right possessed by all — and in the free exercise of which the consuming public is deeply interested.’ ” Id. at 231, 84 S.Ct. at 789, quoting Kellogg Co. v. National Biscuit Co., 305 U.S. 111, 122, 59 S.Ct. 109, 115, 83 L.Ed. 73 (1938). Even where the copying is identical, the inability of the public to tell two identical articles apart is not enough to support an injunction against copying or an award of damages for copying. Id.

Sleepco’s motion for summary judgment is GRANTED. All requests for attorney’s fees are DENIED. This case is therefore DISMISSED.

Unital’s step-with-fin roof design.

Western Star truck with Sleepco sleepercab, step-with-fin and wedge roof design (side view).

Western Star truck with Sleepco sleepercab (front view).

Alternative to #2 picture.

      . In his deposition, Unital's president explained how the step design was selected from among several designs proposed to Western Star: "It was done primarily from a mechanical application. ... The front part of that sleeper is the walk-in section. The latter part is raised so a double bunk can be added. In other words, an upper and a lower bunk. We did not have enough head room for the upper bunk.”

      . Whether the Unital sleeper cabs were labeled or not is disputed but not material. Unital has submitted no admissible evidence of consistent labeling of its sleeper cabs by Western Star or Volvo White, who sold well over 90 percent of all Unital sleepers before the suit began. Affidavits based on personal knowledge from Western Star and Volvo White verify Sleepco’s assertion that Unital’s sleeper cabs were unlabeled when sold to consumers.


author: JOINER, District Judge.

text:
    Laura J. CONLEY, Plaintiff, v. GREAT LAKES PLASTICS, INC., Bradley Killop, Evans Industries, d/b/a Great Lakes Plastics, Inc., and Service Employees International Union, Local 79, Jointly and Severally, Defendants.
    Civ. A. No. 85CV-60279-AA.
    United States District Court, E.D. Michigan, S.D.
    Dec. 17, 1985.

      Gary A. Colbert, Southfield, Mich., for plaintiff.
    Lee R. Franklin, Haggerty & Franklin, and Dennis M. Rauss, Donovan Hammond Ziegelman Roach & Sotiroff, P.C., Detroit, Mich., for defendants.
   MEMORANDUM OPINION AND ORDER

JOINER, District Judge.

This is a hybrid § 301/duty of fair representation case. The primary issue presented for decision at this time concerns the six month statute of limitations that governs these actions. See DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983). Specifically, this court must decide when the six month period applicable to plaintiff’s claim against her employer begins to run. The employer argues that the period runs from the date that its alleged breach of § 301 occurred. Plaintiff maintains that the period runs from the date she knew or should have known of the union’s breach of the duty of fair representation.

BACKGROUND

Plaintiff Laura Conley was employed as a press operator by defendant Great Lakes Plastics, Inc., a division of defendant Evans Industries, from May 6,1974 to October 17, 1984. In addition to Great Lakes Plastics and Evans Industries, the named defendants are Bradley Killop, a plant manager at Great Lakes, and Service Employees International Union, Local 79 (“the Union”), which represented Conley.

The complaint reveals that plaintiff began a medical leave of absence from Great Lakes Plastics on July 24, 1984. She was hospitalized to receive treatment for stress and depression. Plaintiff claims that her problems were caused at least in part by harassment she received from Killop. On October 1, 1984, plaintiff returned to work. She alleges that Killop and perhaps other people at work continued to harass her. This mistreatment caused plaintiff to suffer a relapse on October 17, 1984, and she began to cry at work. Plaintiff informed her supervisor that she was going home, and she did. Later that day, plaintiff received a mailgram from Great Lakes informing her that it regarded her absence as a voluntary quit. Plaintiff sent the Company a return mailgram that same day, informing it that she had not quit her job.

The next day, October 18, 1984, plaintiff filed a grievance. She alleged that Great Lakes had terminated her arbitrarily and without just cause, in violation of the collective bargaining agreement. This activated the grievance procedure set forth in Article IV, § 3 of the collective bargaining agreement between Great Lakes and the Union. The procedure requires a meeting between representatives of the Union Shop Committee and the Company to discuss the grievance. The meeting is to be held within two days of the filing of the grievance, but the parties may extend this time limit by mutual agreement. Within seven days of the meeting, the Company must submit a written response to the grievance to the Shop Committee. The Committee may then request a second meeting, and the Company must submit another written response within seven days of that meeting. The next step is arbitration, which must be requested by the party desiring arbitration within seven days of the submission of the Company’s written response. This time limit may be extended by mutual agreement.

On November 29, 1984, Bradley Killop of Great Lakes wrote to a Union representative, stating that the Company “will be happy to meet” regarding Conley’s grievance. The letter said that the Union’s business agent had scheduled a meeting without consulting or informing the Shop Committee, and that the Company therefore would not attend. Killop then suggested that the meeting be held in Salem, Michigan, sometime during the workweek. It appears that the Union neither responded to Killop’s letter nor scheduled a meeting to discuss Conley’s grievance.

Plaintiff retained an attorney named George Wirth, who repeatedly contacted Union representatives during late 1984 and early 1985. Mr. Wirth’s affidavit details these attempts to ascertain the status of Conley’s grievance. On February 27, 1985, Union business agent Jim Watters informed Wirth that another Union representative was working on Conley’s case and would have an arbitration date by the end of the week. No arbitration date was ever scheduled, however, and Union representatives stopped returning Wirth’s calls.

On April 11, 1985, Conley filed an unfair labor practice charge against the Union with the NLRB. The Regional Director of the NLRB refused to issue a complaint on Conley’s behalf, and his decision was affirmed by the General Counsel of the NLRB on July 25, 1985. Conley filed the present case on July 8, 1985.

Count I of Conley’s complaint charges that Great Lakes, Evans, and Killop violated § 301 of the Labor Management Relations Act, 29 U.S.C. § 185. Plaintiff claims that these defendants breached the collective bargaining agreement by discharging her without just cause. Count I also claims that defendants’ conduct violates the Fourteenth Amendment to the United States Constitution. Count II alleges that the defendant union breached its duty of fair representation. Plaintiff claims that the union acted arbitrarily and in bad faith when it refused to process her grievance.

All of the defendants now move for summary judgment. For the reasons discussed below, the court grants defendants' motions as to the Fourteenth Amendment claim, but otherwise denies the motions.

I. Statute of Limitations on Claim Against Employer

The parties in this case agree that it is a hybrid § 301/fair representation case.. In such actions, plaintiff combines two interdependent claims. To prevail against either the company or the Union, plaintiff must show both that her discharge violates the contract and that the Union breached its duty. DelCostello, 462 U.S. at 164-65, 103 S.Ct. at 2290; Hines v. Anchor Motor Freight, Inc., 424 U.S. 554, 570-71, 96 S.Ct. 1048, 1059, 47 L.Ed.2d 231 (1976). Plaintiff “may, if [s]he chooses, sue one defendant and not the other; but the case [s]he must prove is the same whether [s]he sues one, the other, or both.” DelCostello, 462 U.S. at 165, 103 S.Ct. at 2291.

In DelCostello, the Supreme Court applied a six month period of limitations to hybrid actions. The question presented by this case is when the six month period begins to run. Numerous courts of appeals have found that “[f]or purposes of a hybrid § 301/fair representation action, the time the statute of limitations begins to run is when the claimant knows or should have known of the union’s alleged breach of its duty of fair representation.” See, e.g., Dowty v. Pioneer Rural Elec. Coop. 770 F.2d 52, 56 (6th Cir.1985); Howard v. Lockheed-Georgia Co., 742 F.2d 612, 614 (11th Cir.1984); Metz v. Tootsie Roll Indus., Inc., 715 F.2d 299, 304 (7th Cir.1983), cert. denied, 464 U.S. 1070, 104 S.Ct. 976, 79 L.Ed.2d 214 (1984). Great Lakes, Evans and Killop, the employer defendants, argue that the above statement applies only to plaintiffs fair representation claim against the Union. They contend that plaintiff’s § 301 claim against them accrued on October 17, 1984, the date of her discharge or quit. The employer defendants argue that their alleged wrongdoing began and ended on the day that plaintiff’s employment was terminated. Therefore, the six month statute applicable to plaintiff’s claim against the employer defendants began to run on October 17, 1984.

The court disagrees. The six month period of limitations does not begin to run until both of plaintiff’s “inextricably interdependent” claims exist. DelCostello, 462 U.S. at 164-65, 103 S.Ct. at 2290. As previously indicated, plaintiff must - prove the Union’s breach of its duty of fair representation to prevail on her § 301 claim against the company. That breach is one element of the claim against the employer. Plaintiff cannot bring a hybrid action until the Union has breached its duty. Therefore, the limitations period begins when the hybrid cause of action, consisting of both the § 301 and fair representation claims, accrues. This occurs when “the claimant knows or should have known of the union’s alleged breach of its duty of fair representation.” Dowty, 770 F.2d at 56; Howard, 742 F.2d at 614; Metz, 715 F.2d at 304.

The necessity of holding that plaintiffs § 301 claim and fair representation claim accrue simultaneously is revealed by examining the consequences of the opposite result. Holding that the § 301 limitations period begins to run before the fair representation period would completely eliminate many hybrid actions against employers. Any time more than six months elapsed between a plaintiff’s discharge date and the date she should have known of the union's breach, the plaintiff would be barred from suing her employer and could use only the union. The employer thus would be able to escape liability by “hid[ing] behind the union’s wrongful failure to act.” Vaca v. Sipes, 386 U.S. 171, 197, 87 S.Ct. 903, 920, 17 L.Ed.2d 842 (1967). This would contravene the intent of Congress by “shield[ing] employers from the natural consequences of their breaches of bargaining agreements by wrongful union conduct in the enforcement of such agreements.” Vaca, 386 U.S. at 186, 87 S.Ct. at 914. Moreover, holding that the limitations period on the § 301 claim begins to run on the date of discharge would encourage employers to bargain for and obtain contractual grievance procedures extending beyond six months. Such procedures would ensure that the cause of action against the employer would always expire before the claim against the union accrued, thus eliminating employers from hybrid lawsuits.

In addition to allowing employers to escape liability for their wrongful conduct, accruing the § 301 claim before the fair representation claim would often leave injured employees without a complete remedy. If the employee cannot sue her employer, but can only sue the union, then a court cannot impose equitable remedies such as an order to arbitrate. DelCostello, 462 U.S. at 168 n. 17, 103 S.Ct. at 2292 n. 17; Vaca, 386 U.S. at 196, 87 S.Ct. at 920. The Supreme Court has indicated that “an order compelling arbitration should be viewed as one of the available remedies” for hybrid § 301/fair representation plaintiffs. Vaca, 386 U.S. at 196, 87 S.Ct. at 920.

There is an even more important reason that a hybrid § 301/fair representation plaintiff should not be limited to a suit against her union. Plaintiff may not recover from the union her damages caused by the employer’s breach of § 301. Instead, the union may be held liable only for the increase, if any, in plaintiffs damages caused by the union’s refusal to process the grievance. DelCostello, 462 U.S. at 168, 103 S.Ct. at 2292; Bowen v. United States Postal Serv., 459 U.S. 212, 222-24, 103 S.Ct. 588, 594-96, 74 L.Ed.2d 402 (1983); Vaca, 386 U.S. at 197-98, 87 S.Ct. at 920-21. Thus, “a large part of the damages will remain uncollectible in almost every case unless the employee sues within the time allotted for his suit against the employer.” DelCostello, 462 U.S. at 168, 103 S.Ct. at 2292 (footnote omitted).

“Of paramount importance is the right of the employee,’ who has been injured by both the employer’s and the union’s breach, to be made whole.” Bowen, 459 U.S. at 222, 103 S.Ct. at 595. Early accrual of the § 301 claim would restrict many such employees to a suit against the union only. This would unacceptably limit both the available damages and the available remedies.

The employer defendants argue that the result this court reaches conflicts with Del-Costello. Specifically, they claim that the Supreme Court adopted the short DelCos-tello limitations period to protect employers from stale § 301 claims. Therefore, the employer defendants conclude, the cause of action against them must accrue on the date of discharge. However, defendants misconstrue the purpose of the six month limitations period, which is not primarily intended to shield employers. Instead, DelCostello adopted a brief limitations period to protect the finality and integrity of the internally-selected dispute resolution process. DelCostello, 462 U.S. at 163-71, 103 S.Ct. at 2289-94. In cases such as this, where the internal grievance procedure has broken down, judicial review of plaintiff’s claims against both the employer and the union is essential.

Not only is the holding of this court consistent with Supreme Court precedent, but it comports with prior decisions of the Court of Appeals for the Sixth Circuit as well. That court has routinely concluded that hybrid § 301/fair representation claims against both employers and unions accrue when a plaintiff exhausted his intra-union remedies, or when such exhaustion proved futile. The Sixth Circuit thus accrues the claims against the employer and the union defendants simultaneously. See, e.g., Miller v. Jeep Corp., 774 F.2d 111, 114 (6th Cir.1985); Dowty, 770 F.2d at 56-57; Shapiro v. Cook United, Inc., 762 F.2d 49, 51 (6th Cir.1985).

For the reasons just discussed, this court holds that plaintiff’s claims against all of the named defendants accrued when she knew or should have known of the Union’s breach of its duty of fair representation.

II. Accrual Date of Claims Against All Defendants

The next issue that must be resolved is the question of when Conley knew or should have known of the Union’s breach. The employer defendants argue that Conley should have known that the Union was not going to process her griev-anee by December, 1984. They reason that the collective bargaining agreement “contains a five-step grievance procedure which culminates in binding arbitration within a few weeks. ” Thus, the Union should have demanded arbitration of Conley’s grievance “by no later than mid-December.” The Union’s failure to do so should have alerted Conley to the fact that it was not going to process her grievance.

An examination of the grievance procedure of Article IV, § 3 of the collective bargaining agreement refutes defendants’ argument. The procedure calls for a series of meetings that culminate in arbitration, but the timetable provided for these steps is flexible and can be modified by the employer and Union. Therefore, the grievance procedure does not establish fixed deadlines by which plaintiff could have monitored the progress reports that she and her attorney, George Wirth, received from Union representatives.

The affidavit of George Wirth establishes that the Union informed him on February 27,1985 that it would obtain an arbitration date for Conley’s grievance by the end of the week. At this point, plaintiff had no reason to know that the Union would ultimately refuse to pursue the matter. Plaintiff filed her complaint in this case on July 8, 1985, less than six months after February 27, 1985. Her hybrid § 301/fair representation claim is therefore timely under DelCostello. Defendants’ motion for summary judgment based on the DelCostello statute of limitations must be denied.

III. Fourteenth Amendment

Plaintiff’s complaint alleges that the employer defendants’ breach of contract somehow violates the Fourteenth Amendment to the United States Constitution. Plaintiff fails to allege that defendants’ conduct constitutes state action, and it certainly appears that all of the alleged wrongs are completely private in nature. It has been firmly established, at least since the Civil Rights Cases, 109 U.S. 3, 3 S.Ct. 18, 27 L.Ed. 835 (1883), that the Fourteenth Amendment reaches only state action. Therefore, plaintiff’s Fourteenth Amendment claim must be dismissed.

CONCLUSION

Defendants’ motions are granted as to plaintiff’s Fourteenth Amendment claim, but are otherwise denied.

SO ORDERED.

      . Defendants Great Lakes, Evans, and Killop label their motion as one for dismissal, rather than for summary judgment. However, as both sides have presented materials outside of the pleadings, the court will treat this motion as one for summary judgment. See Fed.R.Civ.P. 12(b)(6).

      . The employer defendants’ position is supported by a recent decision from the Court of Appeals for the Eleventh Circuit, Proudfoot v. Seafarer’s Int'l Union, 767 F.2d 1538, 1541 n. 3 (11th Cir.1985). For the reasons discussed infra, this court declines to follow Proudfoot.


author: McMILLAN, District Judge.

text:
    Ora E. CAROTHERS, S.S. #[ XXX-XX-XXXX ], Plaintiff, v. Margaret M. HECKLER, Secretary, United States Department of Health and Human Services, Defendant.
    No. C-C-85-088-M.
    United States District Court, W.D. North Carolina, Charlotte Division.
    Dec. 19, 1985.

      George L. Fitzgerald, Charlotte, N.C., for plaintiff.
    Richard S. Poe, Asst. U.S. Atty., Charlotte, N.C., for defendant.
   ORDER

McMILLAN, District Judge.

Ora E. Carothers, plaintiff, was born on July 9, 1947, and has a tenth grade education. In the past she was employed as a spinner in a textile plant.

On March 20, 1984, plaintiff filed for disability and supplemental security income alleging that she became disabled on August 17, 1981. In June, 1984, she amended the application to state that she became disabled in October of 1980. After an initial denial of benefits and a hearing, an administrative law judge (AU) denied the plaintiffs claim on September 26, 1984. On January 14, 1985, the Appeals Council declined to review the AU’s decision. The plaintiff filed this complaint on February 5, 1985, seeking judicial review of the Secretary’s final decision.

This court has jurisdiction to review the final decision of the Secretary to determine whether it is supported by substantial evidence. 42 U.S.C. § 405(g) and § 1383(c)(3). The definition of disability — the inability to engage in substantial gainful employment — is the same for both Social Security disability insurance benefits and SSL 42 U.S.C. § 423 and § 1382(c).

TESTIMONY AT THE HEARING

At the hearing, plaintiff testified that she had last worked in December 1982. She was a spinner in a textile plant but had quit because she could no longer do the work; she'd “just choke up and cough” (Tr. 23). She stated that her breathing problems have been with her for the last ten years and cause “the wheezing, the shortness of breath, the choking, the coughing, the throwing up, strangling” (Tr. 25). In addition, those problems prevent her from resting well at night; she must frequently get up and sit in a chair. She testified that in fact she can hardly do anything, that her husband and daughter do all the housework (id.).

Plaintiff stated that she always has a phlegm and congestion problem (Tr. 25). Aside from that, however, she has attacks of asthma. The attacks are set off by fumes, textile products, and chemicals (Tr. 26). They are worst in the fall and spring because she has allergies then also (id.). The cool weather is best.

Plaintiff testified that she cannot afford to see a doctor regularly and therefore goes to the emergency room when she has an attack (Tr. 27). She admitted that she is in good health otherwise and that the doctors have suggested therapy for her. She claimed that she cannot afford the therapy (Tr. 27-28).

Plaintiff said she cannot lift things because when she does “it feels like my lungs is going to pull in and it hurts me up in my chest” (Tr. 29). She said she can only take a few steps at a time but that she occasionally walks down the street (Tr. 29-30). She can dress and bathe herself (Tr. 31), and goes to church regularly (Tr. 30). She cannot sleep well at night since she “chokes up so bad” when she lies down (Tr. 32). Sometimes she tries to sleep in a chair. In the daytime she catches up with a nap (id.).

Plaintiffs mother and husband affirmed her story. The husband stated that plaintiff has many attacks at night and that sometimes they have to carry her to the hospital for oxygen and a shot (Tr. 35). The last attack, he said, was about one month before the hearing (Tr. 36). He said the attacks seem to come more often as plaintiff gets older (id.) and that she has a bad coughing spell every day (Tr. 39).

The vocational expert testified that plaintiff had done semi-skilled work in a polluted environment, and could not return to that (Tr. 40-41). He testified that, considering plaintiffs age, education, and experience, and assuming the AU would find her able to do sedentary or light work on a sustained basis, there were jobs available that plaintiff could do (id.) Plaintiff could do benchwork — “assembly or disassembly, packing, unpacking, sorting” (Tr. 41).

REVIEW OF THE MEDICAL EVIDENCE

Dr. Fred Owens saw the plaintiff on January 28, 1983, for the North Carolina Industrial Commission (Tr. 119). He found that plaintiff has had to go to the emergency room for treatment about every two months (Tr. 120). He found the plaintiff was easily fatigued and had trouble sleeping. He wrote:

Respiratory rate, 16; bilateral rales, rhonehi and wheezing heard. She has both inspiratory and expiratory wheeze. Her chest sounds terrible with secretions. Her wheezing is loose. Her breath sounds are normal in intensity. Percussion is normal.

(Tr. 121). Dr. Owens measured plaintiffs “1 second Forced Expiratory Volume” (FEV1) and her “Maximum Voluntary Ventilation” (MW). He found a FEV1 of 1.26 (44% of predicted) and a MW of 29 (26% of predicted) (Tr. 122). He found that after application of a bronehodilator, all parameters, except for MW, worsened (Tr. 122). The MW improved to 36 (32% of predicted) (id.). Overall, Dr. Owens judged plaintiff to be 40% impaired.

Dr. Richard Roberts examined the plaintiff on October 26, 1983. He noted that plaintiff had had an attack just two weeks earlier requiring injections at the emergency room (Tr. 137). He also found that she had shortness of breath and coughing after climbing one flight of stairs. He found her chest moderately hyperinflated with both inspiratory and expiratory wheezes throughout (Tr. 138). He got a FEV1 value of 1.35 (Tr. 138). He felt his findings compatible with chronic asthma with persistent airway obstruction. He recommended medication therapy (Tr. 138).

On April 9, 1984, the plaintiff was examined by Dr. T. Reginald Harris as a consultant (Tr. 145). He found that plaintiff went to the emergency room frequently for acute asthma attacks (Tr. 147). His pulmonary function studies produced a FEV1 of 1.03 and a MW of 27.9. After application of a bronehodilator, those values increased to 1.57 and 33.7 (Tr. 150). He found this classic asthma and recommended vigorous treatment and avoidance of respiratory irritants and cessation of smoking (Tr. 151).

The record contains copies of several emergency room records. These show that the plaintiff was treated for asthma attacks on April 21, 1983 (Tr. 126); May 24, 1983 (Tr. 127-28); June 16, 1983 (Tr. 129); October 9, 1983 (Tr. 131); October 10, 1983 (Tr. 130); and October 13, 1983 (Tr. 132-34).

SUMMARY OF THE AU’S DECISION

The AU found that the plaintiff’s impairments were “severe” within the regulatory definition — an impairment or combination of impairments that “significantly limits your physical or mental ability to do basic work activities_” 20 C.F.R. § 404.1520(c) (1985). The impairments included bronchial asthma which the AU found “controllable by the general avoidance of respiratory irritants, the cessation of smoking, and the embarkation upon a vigorous program of treatment” (Tr. 10). These “severe” impairments nonetheless did not meet the conditions for disability contained in the listings of Appendix 1 of subpart P because the FEV1 and MW tests improved on application of a broncho-dilator enough to exceed the values in the regulations. In addition, the AU seemed to lay some stress on the fact that the plaintiff’s condition would improve considerably if she were to quit smoking.

The AU further found that the plaintiff was not working and could not return to her old job but, based on her age, education, and experience, she could do other work.

DISCUSSION

The case should be remanded.

The AU committed error when he failed to consider whether plaintiff is disabled under the second part of the asthma listing. That part reads:

Episodes of severe attacks (see 3.00C), in spite of prescribed treatment, occurring at least once every 2 months, or on average of at least 6 times a year and prolonged expiration with sneezing or rhon-chi between attacks.

20 C.F.R. 404, Subpart P, App. 1, § 3.03B (1985).

Plaintiffs evidence shows that in 1983 she had been to the emergency room for severe asthma attacks 6 times in 6 months. Her husband stated that at the emergency room she would receive oxygen and shots to remedy her condition. There was also evidence of sneezing and rhonchi between attacks. Therefore, plaintiff is disabled under this section unless these attacks did not occur in spite of treatment.

On remand, the AU must consider Section 3.03B and determine whether the attacks occurred in spite of prescribed treatment. To do this, he must first determine what the prescribed treatment was and second determine whether the plaintiff followed it. The plaintiffs failure to follow prescribed treatment, however, is justified and cannot be used against her under Section 3.03B, if she either cannot afford the treatment or does not have the ability to carry it out. Gordon v. Schweiker, 725 F.2d 231, 236 (4th Cir.1984). Consequently, as to bronchodilators, the AU must determine whether they were prescribed and whether the plaintiff could afford them. As to smoking, the AU must determine whether plaintiff was ordered to stop and whether she had the ability to do so voluntarily. Id. If the AU finds that plaintiff cannot afford bronchodilators and cannot voluntarily stop smoking, her failure to take bronchodilators and to stop smoking is not a failure to follow prescribed treatment and cannot be held against her under Section 3.03B.

The AU’s second error was his failure, in his analysis of whether plaintiff met the disability requirements of Section 3.03A, to consider the FEV1 and MW measurements that were taken by Dr. Harris before application of a bronchodilator. Under Section 3.03A plaintiff would be disabled if her FEV1 and MW measurements were less than or equal to 1.1 and 38 respectively. 20 C.F.R. 404, Subpart P, App. 1, §§ 3.03A & 3.02 (1985). The pre-bron-chodilator measurements taken by Dr. Harris were 1.03 and 27.9 (Tr. 150); had these been used, the plaintiff would have been found disabled. The AU, however, used the post-bronchodilator measurements of Dr. Harris, which were FEV1 of 1.57 and MW of 33.7, and, based on those post-bronchodilator measurements, found plaintiff not disabled under Section 3.03A.

The regulations indicate the measurements should be taken after application of a bronchodilator. 20 C.F.R. Part 404, Sub-part P, App. 1, § 3.00D (1985). They apparently contemplate, however, that in some instances pre-bronchodilation measurements are more appropriate and should be used under Section 3.03A. One obvious situation where pre-bronchodilation measurements are more appropriate is where the applicant cannot afford to use broncho-dilators regularly.

In this case, there was evidence that plaintiff could not afford therapies or a private doctor for her condition (Tr. 27-28, 145). If that is so, she may not be able to afford bronchodilators. If she cannot, a measurement of her breathing capacity after application of bronchodilators is not a fair appraisal of her breathing capacity generally. Therefore, on remand, the AU must determine whether the plaintiff can afford such drugs. If she can afford them, the post-bronchodilation measurements are a fair appraisal of her normal breathing capacity and may be used in the Section 3.03A determination. If she cannot, however, the pre-bronchodilation measurements should be used, and the plaintiff should be found disabled under Section 3.03A.

ORDER

IT IS THEREFORE ORDERED that the action is REMANDED to the Secretary for further proceedings consistent with this order.

This 17 day of December 1985.