MERC

1. In May 2018, ABC Corp. entered into a merchandising contract which terms and conditions
were totally lopsided in favor of the counterparty, XYZ, Inc. As a result, ABC Corp. suffered
tremendous financial losses. A year after, or in May 2019, Mr. X became a stockholder of
ABC Corp. Learning about the circumstances surrounding the merchandising contract, Mr.
X filed a derivative suit against ABC Corp. 's directors to claim damages on behalf of ABC
Corp. due to their mismanagement. (a) What is a derivative suit? (b) Was Mr. X's filing of
a derivative suit proper? Explain. (BAR 2019)

SUGGESTED ANSWER:
A. A derivative suit is an action filed by the stockholder in the name and on behalf of the
corporation to enforce a corporate right or cause of action to set aside wrongful acts
committed by its directors and/or officers [Ang, for and in behalf of Sunrise Marketing v.
Ang, G.R. No. 201675, June 19, 2013; Florete v. Florete, G.R. No. 174909, January 20,
2016].

B. The filing of derivative suit is not proper. One of the requisites of derivative suit is that
the person filing the suit must be a stockholder of the corporation at the time the acts or
transactions subject of the action occurred and the time the action was filed (Rule 8,
Section 1, Interim Rules of Procedure for Intramural-Corporate Controversies). In the
present case, the transaction subject of the derivative suit occurred when X was not yet
a stockholder. In fact, X only became a stockholder one year thereafter.

2. Cecilio is planning to put up a grocery store in the subdivision where he and his family
reside. To promote his proposed business venture, he told his wife and 3 children to send
out promotional text messages to all the residents in the subdivision. Cecilio’s family
members did as instructed, and succeeded in reaching, through text messages, more than
80% of the residents in the subdivision. Is Cecilio habitually engaged in commerce even if
the grocery store has yet to be established? (BAR 2009)

SUGGESTED ANSWER:
YES. Even if the grocery store has yet to be established, Cecilio already habitually engaged
in commerce, when, per his instruction, the members of the family contacted more than
80% of the residents of the subdivision where they reside. According to Article 3 of the Code
of
Commerce, “legal presumption of habitually engaging in commerce shall exist from the
moment the person who intends to engage therein announces through circulars,
newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever,
an establishment which has for its object some commercial operation.” Text messages may
qualify to be equivalent of commercial documents.

3. Virtucio was a composer of llocano songs who has been quite popular in the llocos Region.
Pascuala is a professor of music in a local university with special focus on indigenous music.
When
she heard the musical works of Virtucio, she purchased a CD of his works. She copied the
CD and sent the second copy to her Music instructions for the class to listen to the CD and
analyze the works of Virtucio. Did Pascuala thereby infringe Virtucio's copyright? Explain
your Answer (BAR 2017).

SUGGESTED ANSWER:
Pascuala did not infringe on the rights of Virtucio. The fair use of a copyrighted work for
criticism, comment, news reporting, teaching including limited number of copies for
classroom use, scholarship, research and similar purposes is not an infringement of
copyright (Section 185 of RA 8293, as amended). In this case, Virtucio’s reproduction of the
limited number of CD was for classroom use and educational purposes thus negating
copyright infringement.
4. Skechers Corporation sued Inter-Pacific for trademark infringement, claiming that Inter-
Pacificused Skechers’ registered "S" logo mark on Inter-Pacific’s shoe products without its
consent. Skechers has registered the trademark "SKECHERS" and the trademark "S" (with
 an oval design) with the Intellectual Property Office (IPO). In its complaint, Skechers points
out the following similarities: the color scheme of the blue, white and gray utilized by
Skechers. Even the design and "wave-like" pattern of the mid-sole and outer sole of Inter
Pacific’s shoes are very similar to Skechers’ shoes, if not exact patterns thereof. On the
side of Inter-Pacific’s shoes, near the upper part, appears the stylized "S" placed in the
exact location as that of the stylized "S" the Skechers shoes. On top of the "tongue" of both
shoes, appears the stylized "S" in practically the same location and size. In its defense,
Inter-Pacific claims that under the Holistic Test, the following dissimilarities are present: the
mark "S" found in Strong shoes is not enclosed in an "oval design"; the word "Strong" is
conspicuously placed at the backside and insoles; the hang tags labels attached to the
shoes bear the word "Strong" for Inter-Pacific and "Skechers U.S.A." for Skechers; and,
Strong shoes are modestly priced compared to the costs of Skechers shoes. Under the
foregoing circumstances, which is the proper test to be applied – Holistic or Dominancy
Test? Decide. (BAR 2014)

SUGGESTED ANSWER:
Considering the facts given and the arguments of the parties, the dominancy test is the
proper test to apply. Thus, the appropriation and the use of the letter “S” by Inter-Pacific on
its rubber shoes constitutes an infringement of the trademark of Skechers. The essential
element of infringement under the Intellectual Property Code is that the infringing mark is
likely to cause confusion. In determining similarity and likelihood of confusion, jurisprudence
has developed tests – Dominancy Test and the Holistic or Totality Test. The Dominancy
Test focuses on the similarity of the prevalent or dominant features of the competing
trademarks that might cause confusion, mistake, and deception in the mind of the
purchasing public. Duplication or imitation is not necessary; neither is it required that the
mark sought to be registered suggest an effort to imitate. Given more consideration, are the
aural and visual impressions created by the marks on the buyers of goods, giving little
weight to factors like prices, qualify, sales outlets, and market segments. In contrast, the
Holistic or Totality Test necessitates a consideration of the entirety of the marks as applied
to the products, including the labels and packaging, in determining confusing similarity. The
discerning eye of the observer must focus not only on the predominant words, but also on
the other features appearing on both labels so that the observer may draw conclusion or
whether one is confusingly similar to the other. Relative to the question on confusion of
marks and trade names, jurisprudence has noted two (2) types of confusion, viz.: (1)
confusion of goods (product confusion), where the ordinarily prudent purchaser would be
induced to purchase one product in the belief that he was purchasing the other; and (2)
confusion of business (source or origin confusion), where, although the goods of the parties
are different the product, the mark of which registration is applied for by one party, is such
as might reasonably be assumed to originate with the registrant of an earlier product, and
the public would then be deceived into that belief or into the belief that there is some
connection between the two parties, though inexistent. Applying the Dominancy Test to the
problem, we find that the use of the stylized “S”, by Inter-Pacific in its Strong rubber shoes
infringes on the mark already registered by Skechers with the IPO. While it is undisputed
that stylized “S” of Skechers is within an oval design, the dominant feature of the trademark
is the stylized “S”, as it precisely the stylized “S” which catches the eye of the purchaser.
Thus, even if Inter-Pacific did not use an oval design, the mere fact that it used the same
stylized “S”, the same being the dominant feature of the trademark of Skechers, already
constitutes infringement under the Dominancy Test (Skerchers, U.S.A., Inc., v. Inter Pacific
Industrial Tradiing Corp, G.R. No. 164321, November 30, 2006)

5. A standby letter of credit was issued by ABC Bank to secure the obligation of X Company
to Y Company. Under the standby letter of credit, if there is failure on the part of X Company
to perform its obligation, then Y Company will submit to ABC Bank a certificate of default
(in the form prescribed under the standby letter of credit) and ABC Bank will have to pay Y
Company the defaulted amount. Subsequently, Y Company submitted to ABC Bank a
certificate of default notwithstanding the fact that X Company was not in default. Can ABC
Bank refuse to honor the certificate of default? Explain. (BAR 2015).

SUGGESTED ANSWER:
No. Under the doctrine of independence in a letter of
credit, the obligation of the issuing bank to pay the beneficiary is
distinct and independent from the main and originating contract
underlying the letter of credit. Such obligation to pay does not
depend on the fulfillment or non-fulfillment of the originating contract.
It arises upon tender of the stipulated documents under the
letter of credit. In the present case, the tender of the certificate of
default entitles Y to payment under the standby letter of credit
notwithstanding the fact that X Company was not in default. This
is without prejudice to the right of X Company to proceed against
Y Company under the law on contracts and damages (Insular
Bank of Asia and America v. Intermediate Appellate Court 167
SCRA 450 [1988]).