Next term, the Supreme Court will weigh in on two trademark cases that will address the parameters of federal preclusion principles and the criteria for awarding infringers’ profits.
On June 28, the U.S. Supreme Court granted certiorari to take up a pair of cases that could affect how trademark cases are argued in federal courts. In Lucky Brands Dungarees, Inc. v. Marcel Fashion Group, Inc., the Court will determine whether federal preclusion principles bar defendants from raising defenses that could have been raised in previous cases between the same parties, even when the plaintiff asserts new claims. In Romag Fasteners, Inc. v. Fossil, Inc., SCOTUS will decide whether a finding of willful infringement is required to award an infringer’s profits in cases involving false designation of origin or false description.
Lucky Brands: Second Circuit Splits from Ninth, Eleventh and Federal Circuits
The federal preclusion issue at play in Lucky Brands stems from a 2011 infringement suit between Lucky Brands and Marcel, the third such suit between those two parties going back to 2001. The first suit between the two resulted in a 2003 settlement agreement in which Marcel released all claims related to Lucky Brands’ use of the LUCKY BRAND trademark. In the 2011 suit, the district court twice handed wins to Lucky Brands which were vacated and remanded on appeal to the Court of Appeals for the Second Circuit. In the second appeal, the Second Circuit determined that Lucky Brands was precluded from using the 2003 settlement agreement as a defense against infringement because that agreement could have been raised in the second case between the parties filed back in 2005.
In its petition to the Supreme Court, Lucky Brands argued that the Second Circuit’s defense preclusion principle creates a split with the Federal Circuit, the Eleventh Circuit and the Ninth Circuit. Lucky Brands called the Federal Circuit’s decision in Ecolab v. Paraclipse (2002), a patent case, “particularly instructive” because it involved a case in which the defendant agreed that the asserted patent was valid in the first case but then challenged validity in the second case. While the district court found that Paraclipse was barred from challenging validity, the Federal Circuit reversed, holding that claim preclusion didn’t apply in the case because the devices forming the basis of infringement in the second case differed from those in the first case. The Eleventh Circuit’s decision in McKinnon v. Blue Cross and Blue Shield of Alabama (1991), an Employee Retirement Income Security Act case, and the Ninth Circuit’s decision in Orff v. United States (2004), a breach of contract suit involving sovereign immunity under the Reclamation Reform Act of 1982, both reached similar decisions regarding defenses not previously raised which weren’t barred by either issue preclusion or claim preclusion.
Further, Lucky Brands argued that, under Supreme Court precedent, neither issue preclusion or claim preclusion bars defenses that weren’t resolved in a previous case from being raised in a later case between the same parties, especially when the second case involves a different cause of action. This precedent extends back more than 200 years to cases such as Clark v. Robert Young & Co. (1803), where SCOTUS held that a verdict in a prior case may only be given as evidence in a later case to bar a suit that alleges the same cause of action. This principle is further supported by a pair of 1876 Supreme Court cases: Davis v. Brown and Cromwell v. County of Sac. Thus, the fact that the Second Circuit found no justification for Lucky Brands’ refusal to raise the 2003 settlement as a defense prior to the 2011 case is irrelevant, according to the petition.
Finally, Lucky Brands said that the Second Circuit’s decision is both inconsistent with the Federal Rules of Civil Procedure and is fundamentally unfair to defendants. Federal Rule of Civil Procedure 13(a) indicates that a counterclaim is compulsory if it “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim” but Marcel’s claims in the 2011 case didn’t arise from the occurrences leading to the 2003 settlement agreement, making the agreement a permissive counterclaim if a counterclaim at all. Further, the Second Circuit’s approach would require defendants to assert all possible defenses, contrary to notions of fairness. Lucky Brands had raised a motion to dismiss the earlier 2005 case based on the 2003 settlement, but that motion was denied and “a reasonable litigant may have chosen not to expend resources on a defense that would not have resolved every claim.”
Romag Fasteners: Circuit Courts Split 6-6 on Willfulness Requirement
In April 2014, a jury verdict entered in the District of Connecticut found that Fossil had infringed Romag Fastener’s trademark and patent and falsely represented the source of its products as coming from Romag. While none of Fossil’s violations were found to be willful, the jury found that Fossil acted in “callous disregard” with respect to Romag’s trademark rights, leading to a damages award of $6.7 million in profits. However, a bench trial following the verdict led the district court to rescind the profits award as Romag didn’t show that Fossil’s infringement was willful. On appeal, the Federal Circuit affirmed based on the Second Circuit’s requirement of a showing of willfulness for awarding profits although the case was remanded for a damages amount consistent with the Supreme Court’s holding in SCA Hygiene Products Aktiebolag v. First Quality Baby Products (2017). Romag again appealed to the Federal Circuit after an amended final judgment was entered by the district court in October 2018. The Federal Circuit found “no reason to relitigate” the Lanham Act profits issue, after which Romag filed its petition for writ.
In the petition, Romag argued that the circuit courts of appeals were “intractably divided” on the issue of whether willfulness is required to recover profits for trademark infringement. Willfulness isn’t required for a consideration of awarding profits in six circuits: the Third, Fourth, Fifth, Sixth, Seventh, and Eleventh Circuits. In the Fifth Circuit’s decision in Quick Technologies v. Sage Group (2002), the appellate court noted that there was no bright line rule stemming from a 1999 amendment to 15 U.S.C. § 1117(a) indicating that willful infringement must be found to award profits, although it was an important consideration. This multifactor approach has been followed in the Third, Fourth and Sixth Circuits. The Eleventh Circuit’s 2007 decision in Optimum Technologies v. Home Depot found that an accounting of defendant’s profits was appropriate in circumstances that didn’t involve willful infringement.
By contrast, six other circuits require a willfulness finding to award profits, including the First, Second, Eighth, Ninth, Tenth and D.C. Circuits. The situation has been acknowledged by academics published in several law journals, three treatises on trademark law and the American Law Institute’s Restatement of Unfair Competition, leading many to believe that Supreme Court review is required to break the impasse.
Supreme Court Review Required for Uniform Application of Lanham Act
Romag’s petition noted that the question presented is a recurring one, with district courts deciding more than a dozen such claims for infringers’ profits in the past year and reaching conflicting results. At least one district court noted the circuit split on the issue in avoiding the question of willfulness altogether. Damages are difficult to come by in trademark cases as its often difficult to prove actual consumer confusion or deception, so an award of profits “can be the difference between a meaningful recovery for trademark infringement and no recovery at all.” The fact that eligibility for recovering infringers’ profits depends on the court deciding the dispute is contrary to the national uniformity in trademark law that Congress was seeking in enacting the Lanham Act.
Finally, Romag argued that the Federal Circuit’s decision flouts the plain text meaning of Section 1117(a), which provides that profits may be recovered when a violation under 15 U.S.C. § 1125(a) for false designation of origin or a willful violation under Section 1125(c) is found. Prior to the 1999 amendment which added language on willfulness, Section 1117(a) provided that infringers’ profits could be recovered for a Section 1125(a) violation. While some circuits interpreted the pre-1999 language as requiring willfulness, Congressional amendments preserved a distinction between violations of Section 1125(a) trademark infringement and willful violations of Section 1125(c) trademark dilution:
“If background principles of equity require a showing of willfulness before any award of profits, as the Second Circuit and the courts that agree with it have held, then Congress would not have needed to specify that infringer’s profits were available only for ‘a willful violation of [Section 1125(c].’”
The imposition of a willfulness requirement onto profits awards hinders the Lanham Act’s objective of protecting the public by depriving the infringer of benefitting from its violation, Romag contended. By limiting willfulness requirements to cases involving dilution, Congress “sensibly” limited profits awards in cases involving non-competing uses of similar marks.
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