The Use of the Laches Defense in 5th Circuit Trademark Litigation

Good Things Do Not Always Come to Those Who Wait:

The Use of the Laches Defense in 5th Circuit Trademark Litigation

The time-tested adage, “good things come to those who wait,” extols the virtue of patience and has been used throughout pop culture to explain phenomena ranging from love to job prospects.  But in the context of trademark protections, the concept of “waiting” can be fatal to a plaintiff’s claim for relief when a defendant asserts the affirmative defense of “laches.”

Basic Tenets

“Laches” is defined as an inexcusable delay that results in prejudice to a defendant. Abraham v. Alpha Chi Omega, 796 F. Supp. 2d 837, 846 (N.D. Tex. 2011).  The claim can be raised as an equitable defense available for those alleged infringers who lack the requisite “bad faith intent to capitalize on the markholder’s [goodwill].” Bd. of Supervisors for La. State Univ. Agric. &  Mech. Coll. v. Smack Apparel Co., 550 F.3d 465, 490 (5th Cir. 2008).  Thus, to establish a “laches” defense, the defendant has the burden to show: “(1) [plaintiff’s] delay in asserting one’s trademark rights; (2) [plaintiff’s] lack of excuse for the delay, and (3) undue prejudice to the alleged infringer caused by the delay.” Id. at 489-90.  In so analyzing the defense, courts in the Fifth Circuit take a “totality of the circumstances” approach by making factual inquiries regarding “the combined effect of the [p]laintiff’s delay and the prejudice resulting to the [d]efendant[ ].” New Century Fin., Inc. v. New Century Fin. Corp., No. C-04-437, 2005 WL 2453204, at *10 (S.D.Tex. Oct. 4, 2005).  Factual insufficiencies in any one of the three prongs will prove fatal to the defendant’s assertion of the affirmative defense.

The Fifth Circuit has simplified the inquiry by utilizing the more rigid equation of “LACHES = DELAY x PREJUDICE” as a quantitative or mathematical tool to assist the trial court in deciding, as a matter of considerable discretion, whether estoppel by laches is appropriate equitable relief. See Armco, Inc. v. Armco Burglar Alarm Co., 693 F.2d 1155, 1161 (5th Cir. 1982).  Courts will typically combine the Smack Apparel inquiries with regard to elements (1) and (2), and simply bifurcate the analysis so that a plaintiff’s failure to satisfy either element—delay or prejudice—will bar that particular claim.

Delay and Excuse

The first judicial inquiry begins with an analysis regarding the length of time, or delay, in assertion of the plaintiff’s claim for relief.  In the Fifth Circuit, the period of delay for measuring “laches” begins at the time when the plaintiff knew or should have known of the infringement. Am. Rice, Inc. v. Producers Rice Mill, Inc., 518 F.3d 321, 334 (5th Cir. 2008).  The delay period ends when the plaintiff informs the defendant of its objections, for example by filing suit or sending a cease and desist letter.  See Studiengesellshaft Kohle v. Eastman Kodak Co., 616 F.2d 1315, 1328 (5th Cir. 1980).

But, the “[m]ere passage of time[,] even a considerable amount of time[,] will not automatically perfect a claim for such an equitable bar.” New Century Fin., Inc., 2005 WL 2453204, at *10.  While the Fifth Circuit has yet to adopt a bright-line rule, generally the courts will look to analogous state statutes of limitation to aid in determining what length of delay is excusable for purposes of defense of “laches” to a claim of trademark infringement under the Lanham Act. Mary Kay, Inc. v. Weber, 601 F. Supp. 2d 839, 859 (N.D. Tex. 2009) (looking at analogous four-year statute of limitations under Texas state law for period of excusable delay).  Accordingly, periods of inexcusable delay range all over the board, from just a few years to several decades. See Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1082-83 (5th Cir. 1997) (period of twenty years was unreasonable under Texas standard); Abraham, 796 F. Supp. 2d at 856 (period of four years to formally assert claim was unreasonable where plaintiffs were aware of possible infringement for several decades).

While not formally adopted by the Fifth Circuit, some plaintiffs have attempted to counter questions concerning the period of delay in various district courts by asserting the doctrine of “progressive encroachment” as reason for the delay. See Abraham, 796 F. Supp. 2d at 852-53.  Under this doctrine, delay is justifiable if the infringer began its infringing use in a market outside the trademark owner’s, but later on “directs its marketing . . . efforts such that it is placed more squarely in competition with the [owner].” Id. at 853.  The basis for this doctrine is that “a plaintiff is justified in delaying suit until its legal right has clearly ripened.” H.G. Shopping Ctrs., L.P. v. Birney, No. H-99-0622, 2000 WL 33538621, at *7 (S.D. Tex. Nov. 29, 2000).  In other words, a claim may not ripen until likelihood of confusion is clear, which in turn, might not occur until the infringer increases or expands its use. See id.

The doctrine of progressive encroachment “goes hand-in-hand” with excuse for delay. Abraham, 796 F. Supp. 2d at 852.  In Abraham,the trademark owners, various student campus Greek organizations, argued progressive encroachment as an excuse for their delay. Id..  They argued that the recent placement of infringing products on the infringer’s website was progressive encroachment, and that this expansion of the infringing vendor’s business was “markedly more impermissible” than selling locally through catalogs. Id.  The court said that although “‘normal business growth’” does not alone establish progressive encroachment, some actions, such as purchasing internet keywords on search engines or continuing to expand after the owner objected to the infringer’s use, created a material fact issue. Id. at 853.  But because the doctrine of progressive encroachment has yet to be formally adopted by the Fifth Circuit, plaintiffs must still overcome the  heavy burden to prove valid excuse for unreasonable delays in prosecuting their claim. See Exxon Corp., 109 F.3d at 1082-83 (plaintiff’s delay unreasonable where plaintiff delayed assertion of claim until suffering “reputational injury” based upon Exxon Valdez verdict) .

One final point to note, in situations concerning the possibility of “progressive encroachment,” although the court may be able to enjoin the alleged infringer in current and future endeavors, if the defendant can show established use at a local level, the court may limit the scope of its injunction to permit the defendant to continue use of the mark in that particular local market. See Conan Props., Inc. v. Conans Pizza, Inc., 752 F.2d 145, 154-55 (5th Cir. 1985).

Prejudice

The final element of a “laches” defense is proof of prejudicial harm to the defendant.   To show prejudice, the defendant must show that it “has done something it otherwise would not have done absent the plaintiff’s conduct.” Conan Props., 752 F.2d at 153. It is not enough that one merely “loses what otherwise he would have kept.” Baylor Univ. Med. Ctr. v. Heckler, 758 F.2d 1052, 1058 (5th Cir. 1985).  Notably, because the Fifth Circuit has not formally adopted a minimum period of delay to absolutely bar a plaintiff’s claim, even a short delay can constitute “laches” if the resulting prejudice is overwhelmingly great.  See 6 McCarthy on Trademarks and Unfair Competition § 31:12.

Prejudice can be shown in a number of ways but one of the best ways is by showing that the delay caused the alleged infringer to rely on the holder’s inaction when it “buil[t] up a valuable business around its trademark.” Abraham, 796 F. Supp. 2d at 854.  The Northern District of Texas has said, however, that “‘prejudice’ must constitute more than expenditures in promoting a business.” SeeMarshall v. Fulton, No. 3:08-CV-1921-L, 2011 WL 1630661, at *6 (N.D. Tex. Apr. 29, 2011).  For example, in Exxon Corp., the plaintiff’s claim against Exxon was barred by laches because Exxon, acting in reliance upon the federal registration of its marks and its strict policing of similar marks, had accrued tremendous investment costs and resultant goodwill in the challenged marks while the plaintiff remained quiescent to Exxon’s actions. Exxon Corp., 109 F.3d at 1082-83.  Defendant’s prejudice is limited “to the period prior to notice of another party’s objection” because after receiving such notice, all acts are at the defendant’s own risk. Conan Props., 752 F.2d at 152.

Conclusion

Because trademarks today have become safeguards of business reputations, litigation concerning the rights to those marks will continually remain necessary to the viability of many trademark owners.  While the jurisprudence surrounding the defense of “laches” in the Fifth Circuit provides little in the way of hard deadlines for periods of delay or minimum damage amounts for prejudice, what remains clear is that the case law disfavors those plaintiffs who fail to take a proactive approach in guarding their marks.  As such, defendants who can successfully substantiate a prolonged and established use of the mark and a resulting goodwill from the mark’s use will find the “laches” defense a helpful jurisprudential safeguard.

Tom Jacks is a partner with Chalker Flores, LLP in Dallas, Texas. He concentrates his practice on patent, trademark, copyright and general commercial litigation.  

John Sokatch is a 3L law student at Southern Methodist University and a law clerk with Chalker Flores, LLP in Dallas, Texas. 

 

 

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WHAT IS A RETAINER AGREEMENT?

A retainer agreement is a legal contract between a law firm (or attorney) and the client by which the client agrees to hire the law firm for particular legal services.  The retainer agreement provides a detailed description of the parties to the agreement, the scope of legal services to be performed, the rules and manner in which those services will be performed, and a recitation of the agreed-upon fee arrangement between the parties.  Generally speaking, the law firm will require the client to review the agreement, sign the agreement if there are no changes to be made, and return the executed agreement along with a retainer fee (or deposit) to the law firm before any legal services are performed on a particular matter.

Authored by: Scott A. Meyer and John Sokatch

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Chalker Flores, LLP provides business, corporate, litigation and intellectual property legal services to individuals, inventors, entrepreneurs, start-ups, spin-offs, universities, research institutes, and small to large public and private companies and businesses.  Founded by Dr. Edwin Flores and Daniel Chalker, additional partners include Scott Meyer, Chainey Singleton and Tom Jacks.  The lawyers of Chalker Flores, LLP provide big-firm expertise with boutique service and pricing.

If you would like more information about Chalker Flores, LLP, or to schedule an appointment please contact us 214-445-4040 or info@chalkerflores.com.  Please follow us on Twitter at @chalkerflores.

Rep. Paul Seeks Assistance from United Nations in Acquiring RonPaul.com from Loyal Supporters

In a seemingly ironic series of events, former U.S. Congressman and three-time presidential candidate, Rep. Ron Paul, has turned to, of all places, the United Nations, an international organization repeatedly criticized by Rep. Paul throughout his political campaigns, for assistance in acquiring the domain name rights of two websites bearing his own namesake: <RonPaul.com> and <RonPaul.org>.  Even more surprising may be the fact that the Respondents in this case appear to be ardent grassroots supporters of Rep. Paul who initially created the websites during Rep. Paul’s 2008 presidential campaign.

The World Intellectual Property Organization (“WIPO”), one of the seventeen specialized agencies of the United Nations, permits trademark owners to file complaints against domain-name registrants for purposes of obtaining relief or resolving disputes in matters concerning the registration and ownership of domain names.  For example, oftentimes, the Uniform Domain-Name Dispute-Resolution Policy (“UDRP”) procedures will be used to combat cybersquatting or situations where an individual will register a domain name with the bad faith intent to profiteer from the goodwill associated with another’s trademark by selling the rights to the mark owner at an inflated price.

On February 7, 2013, Rep. Paul filed his complaint against several unknown Respondents generally alleging in accordance with UDRP requirements that:

1)      The domain names are identical or confusingly similar to Ron Paul’s RON PAUL trademark;

2)      The registrants have no rights or legitimate interests in the domain names; and

3)      The registrants have registered and are using the domain names in “bad faith.”

The complaint further requests that the two domain names be transferred to Rep. Paul without any form of compensation to the current registrants.

While the complaint fails to allege any federal registrations of the RON PAUL mark, Rep. Paul’s complaint, instead, claims common-law rights to the RON PAUL mark by virtue of its use in the United States and in association with Rep. Paul’s “books, articles, public appearances, and political commentary.”  Even though UDRP procedures do not require successful claimants to obtain federal registrations of their marks, such evidence can be helpful in establishing the complainant’s ownership of the mark.  Notably, a search on the Trademark Electronic Search System (“TESS”) reveals that the rights to a RON PAUL mark once held by the Ron Paul Consulting Company were abandoned in November of 2009 due to a failure to file a Statement of Use of the mark.

Additionally, the complaint alleges a lack of any evidence that the Respondents have actually used the two domain names “in connection with a bona fide offering of goods and services,” that the Respondents only registered the two domain names for the purposes of “selling them to [Rep. Paul] for more than [Respondents’] out-of-pocket costs,” and that “the domain names are being used to sell Ron Paul merchandise by third party vendors which competes directly with [Rep. Paul].”

Many reports indicate that the domain owners initially made an offer to sell the domain name <RonPaul.com> to Rep. Paul prior to his filing of the complaint for $848,000.  The owners subsequently reduced their offer to only $250,000 and were even willing to throw in the rights to <RonPaul.org>.

To date, it does not appear that the Respondents have answered the Complaint or made any further efforts to settle or resolve the matter outside of the UDRP process.

Authored by: Scott A. Meyer and John Sokatch, March 9, 2013.

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Chalker Flores, LLP provides business, corporate, litigation and intellectual property legal services to individuals, inventors, entrepreneurs, start-ups, spin-offs, universities, research institutes, and small to large public and private companies and businesses.  Founded by Dr. Edwin Flores and Daniel Chalker, additional partners include Scott Meyer, Chainey Singleton and Tom Jacks.  The lawyers of Chalker Flores, LLP provide big-firm expertise with boutique service and pricing.

If you would like more information about Chalker Flores, LLP, or to schedule an appointment please contact us 214-445-4040 or info@chalkerflores.com.  Please follow us on Twitter at @chalkerflores.

Unilaterally-Issued “Covenant Not to Sue” May Divest Trademark Claimants of Article III Standing

According to the recent Supreme Court ruling in Already, LLC v. Nike, Inc., __U.S.__, 133 S. Ct. 721 (2013), a broadly-drafted, unilaterally-issued “Covenant Not to Sue” may now provide defendants with alternative measures to combat cancellations of their federally-registered trademarks.

In July of 2009, Nike, Inc. (“Nike”) filed a complaint against Already, LLC d/b/a Yums (“Yums”) generally alleging claims of trademark infringement of the design of Nike’s Air Force 1 shoe product line.  Known for its distinctive stitching and numerous color combinations, Nike had originally obtained the registration for the Air Force 1’s shoe design in June of 2008 (U.S. Reg. No. 3,451,905).  In response, Yums filed a counter-claim by challenging the validity of the mark’s registration and seeking cancellation.

Four months later, Nike delivered to Yums a comprehensive “Covenant Not to Sue,” whereby Nike “unconditionally and irrevocably covenant[ed] to refrain from making any claim(s) or demand(s) . . . against [Yums] . . . on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law . . . relating to the [Air Force 1 mark] based on appearance of any of [Yums’] current and/or previous footwear product designs, and any colorable imitations thereof . . ..”  Nike also dropped the remainder of its claims against Yums.

Amid investors’ prospective concerns for potential lawsuits from Nike and fear of tarnishment of its reputation in the shoe industry, Yums ignored Nike’s efforts to dismiss the matter in its entirety and continued to maintain its counter-claims to cancel Nike’s design mark.

But according to Nike’s attorneys, Yums’ federal claims had been rendered moot vis-à-vis Nike’s unilateral “Covenant Not to Sue”—i.e., Yums no longer possessed Article III standing as there was no longer a “case” or “controversy” between Nike and Yums.  Yums countered with evidence of investor concerns and statements that Nike had intimidated other retailers into refusing to carry Yums’ products, but to no avail.  The district court dismissed Yums’ counter-claims and the issue was appealed up to the Supreme Court.

Reviewing the issue in light of the “voluntary cessation” doctrine, the Court determined that the breadth of Nike’s unconditional and irrevocable Covenant sufficiently demonstrated that it “could not reasonably be expected” to resume its enforcement efforts again Yums.  In other words, once Nike asserted that it would permit Yums to produce all of its existing footwear designs, or any “colorable imitations” of the Air Force 1’s design, such assurances made it “absolutely clear” that Nike would no longer seek to enforce its mark against Yums.

As a result, the Court held that Yums lacked any “legally cognizable interest in the outcome” of the litigation and that the district court had been divested of subject-matter jurisdiction over Yums’ cancellation proceedings.  The Court additionally noted, however, that in any future trademark proceedings Nike would be bound by the Covenant’s broad language; therefore, Nike was precluded from initiating any suit against Yums for alleged infringement unless the shoe was “an exact copy or counterfeit version of the Air Force 1 shoe.”

Authored by: John C. Sokatch and Scott A. Meyer

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Chalker Flores, LLP provides intellectual property, business, corporate and litigation legal services to individuals, inventors, entrepreneurs, start-ups, spin-offs, universities, research institutes, and small to large public and private companies and businesses.  Founded by Dr. Edwin Flores and Daniel Chalker, additional partners include Scott Meyer, Chainey Singleton and Tom Jacks.  The lawyers of Chalker Flores, LLP provide big-firm expertise with boutique service and pricing.

If you would like more information about Chalker Flores, LLP, or to schedule an appointment please contact us 214-445-4021 or by email at info@chalkerflores.com.  Please follow us on Twitter at @chalkerflores.

SCOTT MEYER ASSISTS WITH $64 MILLION DEAL

Scott Meyer of Chalker Flores, LLP, recently helped close a stock sale valued at $64,000,000 for one of its valued clients.  Mr. Meyer dealt primarily with intellectual property issues related to the transaction.

The sale involved negotiations and agreement on the intellectual property to be transferred, concurrent use agreements, including a significant portfolio of patents and trademarks, licenses and the purchase of stock by a major industry player. “The sale allows our client to focus its business efforts on core strategies and on their development of new product materials,” reports Scott Meyer, one of the Chalker Flores partners who worked on the deal.

Authored by: Scott A. Meyer

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Chalker Flores, LLP provides intellectual property, business, corporate and litigation legal services to individuals, inventors, entrepreneurs, start-ups, spin-offs, universities, research institutes, and small to large public and private companies and businesses.  Founded by Dr. Edwin Flores and Daniel Chalker, additional partners include Scott Meyer, Chainey Singleton and Tom Jacks.  The lawyers of Chalker Flores, LLP provide big-firm expertise with boutique service and pricing.

If you would like more information about Chalker Flores, LLP, or to schedule an appointment please contact us at 214-445-4040 or send an email to info@chalkerflores.com.  Please follow us on Twitter at @chalkerflores.

Personal Liability of Officers for Corporate Guarantees

Last January, the 1st District Court of Appeals issued a noteworthy opinion reinforcing the personal liability for loan guarantees made by corporate officers while acting within their capacities as officers of the company.  The court’s ruling in 84 Lumber Co. v. Powers, No.-01009-00986-CV, 2012 Tex. App. LEXIS 590 (Tex. App.—Houston [1st Dist.] Jan. 26, 2012, no pet.), will likely force many corporate officers, including those in larger corporations, to now rethink placing their own necks on the line for those companies to which they owe fiduciary responsibilities.

David Powers, acting within his capacity as president of his company David Powers Homes, Inc., signed a statement that he “UNCONDITIONALLY AND IRREVOCABLY PERSONALLY GUARANTEE[D] [THE] CREDIT ACCOUNT….”  Mr. Powers took the position that he no longer possessed any personal liability for the loan because he signed the guarantee as a corporate officer and he no longer held that position.

In rejecting Mr. Powers’ stance that his personal liability was precluded by the statute of frauds (which requires the guaranty to be in writing and signed by the person to be charged), the court held that liability remained on Mr. Powers, individually, and not merely with the office of president of his company.  As the court noted, generally speaking a guarantor of a debt is an individual who willingly stands for the debt of another.  The court reasoned that had it ruled in favor of Mr. Powers, it would essentially render a guarantor agreement meaningless because personal liability would thereby reside in the same person—i.e., the company would then become both the account debtor and the guarantor of the corporate debt.

Ultimately, the court determined that Mr. Powers remained liable for his “unambiguous” guarantee of personal liability for the company’s debt, largely due to the fact that Mr. Powers was the owner of the company.  The court did, however, leave open the question regarding liability under situations involving more ambiguous contractual terms or where the corporate officer-guarantor owned minimal or no shares in his or her company.

Authored by Scott A. Meyer and John Sokatch.

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Chalker Flores, LLP provides intellectual property, business, corporate and litigation legal services to individuals, inventors, entrepreneurs, start-ups, spin-offs, universities, research institutes, and small to large public and private companies and businesses.  Founded by Dr. Edwin Flores and Daniel Chalker, additional partners include Scott Meyer, Chainey Singleton and Tom Jacks.  The lawyers of Chalker Flores, LLP provide big-firm expertise with boutique service and pricing.

If you would like more information about Chalker Flores, LLP, or to schedule an appointment please contact us at 214-445-4040.  Please follow us on Twitter at @chalkerflores.

Websites’ Terms of Use Agreement Traps

In response to the steady increase in online shopping and cyber-transactions, several website owners have resorted to implementing more precarious measures to increase website activity while still protecting the website’s legal interests.  Generally, “Terms and Conditions” of use for the website are accepted by forcing the user to manually click an “I Agree” or “Accept” button—a method termed in the industry as “Clickwrap” agreements.  This method of acceptance has been highly criticized for the manner in which it seemingly misleads consumers into accepting terms of which they are not fully aware.

More recently, however, many online shoppers have been forced to deal with a newer form of terms acceptance known as “Browsewrap” agreements.  Unlike the more readily-apparent “Clickwrap” agreements, “Browsewrap” agreements allow website owners to indiscreetly cache the content of such agreements somewhere on the website, which then become accessible only by clicking on the hidden hyperlink.

These “Browsewrap” agreements recently came under heavy judicial scrutiny when the online shopping website Zappos.com attempted to compel arbitration in a lawsuit with several customers whose online accounts had been hacked.  See In re Zappos.com, Inc., Customer Data Security Breach Litigation, Civ. No. 3:12-cv-00352-RCJ-VPC (D. Nev. Sept. 27, 2012).  Zappos.com’s “Disputes” section, which was buried within the site’s “Browsewrap” agreement, permitted Zappos to compel arbitration in the event a dispute arose between the website and the purchaser.

Despite the broad and liberal federal policy favoring arbitration, the District Court of Nevada maintained that “arbitration is a ‘matter of contract,’ and no party may be required to submit to arbitration [in] ‘any dispute which he has not agreed so to submit.’”  Id. (quoting Howsam v. Dean Witter Reynolders, Inc., 537 U.S. 79, 79 (2002).

In finding for the plaintiffs, the court struck down the arbitration provision because (1) the purchasers were never prompted to accept those terms and conditions, and (2) the provision permitted Zappos to unilaterally change the terms, thereby rendering the contract illusory.  The court’s ruling reinforced the notion that, notwithstanding the increased popularity of buying and selling on the Internet, such paradigmatic shift may not overcome even the basic principles of contractual formation (i.e., offer, acceptance, meeting of the minds, and consideration).  As such, the Zappos.com opinion appears to have essentially negated the enforceability of “Browsewrap” agreements, barring evidence that the user actually possessed constructive knowledge of their existence and terms of use.

Authored by: Scott A. Meyer and John Sokatch.

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Chalker Flores, LLP provides intellectual property, business, corporate and litigation legal services of the highest quality.  Founded by Dr. Edwin Flores and Daniel Chalker, additional partners include Scott Meyer, Chainey Singleton and Tom Jacks.  The lawyers of Chalker Flores, LLP provide big-firm expertise with boutique service and pricing.  Clients include individual inventors, start-ups, spin-offs, major national universities, research institutes and medium to large corporations.

If you would like more information about Chalker Flores, LLP, or to schedule an appointment please contact us 214-866-0001.  Please follow us on Twitter at @chalkerflores.