Supreme Court Reverses Second Circuit Approach to Defense Preclusion in Win for Lucky Brand

As predicted following oral arguments, the U.S. Supreme Court today ruled that Marcel Fashion Groups, Inc. cannot preclude Lucky Brand Dungarees, Inc. from raising new defenses under federal preclusion principles, but left open the possibility that it may be appropriate to apply claim preclusion to defenses in certain circumstances. The opinion was authored by Justice Sotomayor.

The Fight to Get LUCKY

The case stretches back nearly 20 years, to 2001. The first suit between the two parties resulted in a 2003 settlement agreement in which Marcel released all claims related to Lucky Brand’s use of the LUCKY BRAND trademark. In the 2011 suit, the district court twice handed wins to Lucky Brand, which were vacated and remanded on appeal to the U.S. Court of Appeals for the Second Circuit. In the second appeal, the Second Circuit determined that Lucky Brand 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 Brand argued that the Second Circuit’s defense preclusion principle creates a split with the Federal Circuit, the Eleventh Circuit and the Ninth Circuit. Lucky Brand 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.

During oral arguments earlier this year, Dale Cendali of Kirkland & Ellis further argued for Lucky Brand that Supreme Court precedent undermines the decision entered by the Second Circuit, including Cromwell v. County of Sac (1876), Davis v. Brown (1876) and Taylor v. Sturgell (2008). The proper interpretation of these cases, Cendali argued, led to the conclusion that a defendant is free to argue any previously unresolved defense it may have to new claims.

Michael Kimberly of McDermott Will & Emery countered for Marcel that Lucky Brand’s second lawsuit did not involve new claims, portraying the second case as stemming from the same cause of action.

In Marcel’s 2011 action, the company alleged that Lucky Brand continued to infringe Marcel’s “Get Lucky” mark and, in so doing, contravened the judgment issued in the 2005 Action and requested that the District Court enjoin Lucky Brand from using any of Lucky Brand’s marks containing the word “Lucky.” The district court first granted summary judgment to Lucky Brand, and on appeal, the Second Circuit vacated and remanded. Back at the district court, Lucky Brand argued for the first time since its motion to dismiss and answer in the 2005 action that Marcel had released its claims by entering the settlement agreement. Marcel argued that Lucky Brand was precluded from invoking the release defense, because it could have pursued the defense fully in the 2005 Action but had neglected to do so. The district court disagreed and granted Lucky Brand’s motion to dismiss, but on appeal back to the Second Circuit, the Court vacated and remanded, invoking the “defense preclusion” doctrine, which it said prohibited Lucky Brand from raising the release defense in the 2011 action.

It’s Different

However, the High Court today held that “Marcel’s 2011 Action challenged different conduct—and raised different claims—from the 2005 Action.”

“Unlike issue preclusion [which precludes a party from relitigating an issue actually decided in a prior case and necessary to the judgment], claim preclusion prevents parties from raising issues that could have been raised and decided in a prior action—even if they were not actually litigated,” explained the Court. It continued:

If a later suit advances the same claim as an earlier suit between the same parties, the earlier suit’s judgment “prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding.”… Suits involve the same claim (or “cause of action”) when they “ ‘aris[e] from the same transaction,’”…or involve a “common nucleus of operative facts.” [citations omitted]

However, “’[i]f the second lawsuit involves a new claim or cause of action, the parties may raise assertions or defenses that were omitted from the first lawsuit even though they were equally relevant to the first cause of action,’” wrote the Court, citing “Wright, H. Miller, & E. Cooper, Federal Practice and Procedure.”

In this case, since the parties agreed that issue preclusion did not apply, a defense could be barred only if the “’causes of action are the same” in the two suits—that is, where they share a “‘common nucleus of operative fact[s].’” The Court concluded:

Put simply, the two suits here were grounded on different conduct, involving different marks, occurring at different times. They thus did not share a “common nucleus of operative facts.”

The Court explained that the 2011 action “did not imperil the judgment of the 2005 Action because the lawsuits involved different conduct and different trademarks.” It added that the complained-of conduct in the 2011action occurred after the conclusion of the 2005 Action, and “claim preclusion generally ‘does not bar claims that are predicated on events that post date the filing of the initial complaint.”

The Court further opined that the latter concept has particular relevance for the case at hand:

This principle takes on particular force in the trademark context, where the enforceability of a mark and likelihood of confusion between marks often turns on extrinsic facts that change over time. As Lucky Brand points out, liability for trademark infringement turns on marketplace realities that can change dramatically from year to year.

The Second Circuit decision was thus reversed and the case remanded, continuing the long battle between the two brands.

Limited Impact

Trademark attorneys following the case said the ruling will having a more limited effect on civil litigation than some anticipated. Christian Liedtke of Acuminis said that, on the issue of whether res judicata in the form of claim preclusion can also apply to defenses, “the Second Circuit said yes and per today’s ruling, the Supreme Court seems to say ‘maybe’”. He added:

Just like with many actual two-party battles, the benefit of today’s decision for the (civil litigation) community as a whole is limited to say the least. As a footnote of today’s unanimous decision authored by Justice Sotomayor makes clear: “Here, however, this Court need not determine when (if ever) applying claim preclusion to defenses may be appropriate, because a necessary predicate—identity of claims—is lacking.” [Emphasis added]

In other words, the Supreme Court refused to definitively position itself on the issue of defense preclusion. However, from the Court’s unanimous opinion it seems as though the Court is at least sympathetic in principle to the idea of applying the concept of claim preclusion to defenses. That is, if recognized requirements for claim preclusion are met, which simply was not the case here.

Debevoise & Plimpton trademark attorney Megan Bannigan said she and her colleagues agreed with the Court’s approach:

While preclusion defenses serve an important purpose, it is equally important that they be allowed only in situations that are fair.  Here, the Court rightfully recognized in its unanimous opinion that the two suits at issue were ‘grounded on different conduct, involving different marks, occurring at different times’ and thus did not ‘share a common nucleus of operative facts’ to warrant preclusion in this circumstance.  Given the complex facts and long history of this case, we don’t expect to see a significant impact on general trademark litigation going forward. 

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