Wednesday, October 17, 2007

Ninth Circuit reverses district court’s dismissal of DermaNew’s declaratory judgment action against Avon

The Ninth Circuit Court of Appeals overturned a district court’s decision to dismiss a trademark declaratory judgment action for lack of subject matter jurisdiction. See Rhoades v. Avon Products, Inc., No. 05-56047 (9th Cir. October 15, 2007) (decision here).

Dean Rhoades owns DermaNew, Inc. (“DermaNew”), a cosmetics and skin care company that sells hand-held microdermabrasion devices and related skin care products. Rhoades filed several trademark registration applications with the USPTO for the names of various products and slogans, including “DermaNew,” “KeraNew,” “GemaNew,” “DermaNew Institute,” “If It Is Not DermaNew, It Is Not Personal Microdermabrasion,” and “DermaNew Palm Microdermabrasion System.”

Since 2001, Avon Products, Inc. (“Avon”), which sells a skin-care product line called ANEW, has filed oppositions to five of DermaNew’s applications (Opposition Nos. 91121754, 91151696, 91160851, 91160985, and 91162392) and filed cancellation proceedings against two of DermaNew’s registered marks (Cancellation Nos. 92043538 and 92043601). See also three additional oppositions (91171771, 91171772, and 76477667) initiated by Avon since the original lawsuit was filed. Avon has pursued similar opposition and cancellation proceedings against DermaNew in other countries, including Brazil, Canada, Hong Kong, Israel, South Korea, and the European Community. (Interesting to note that Avon’s registered trademark for ANEW, which was the basis for its original opposition, was subsequently cancelled for failure to file its Section 8 and Section 9 declarations).

The parties began contentious settlement talks that went on four years without resolution. According to DermaNew, at one settlement conference, Avon’s in-house counsel threatened a trademark infringement action if DermaNew did not get rid of all of its products within 60 days. A letter sent by Avon’s counsel in 2001 after the first TTAB proceeding had been initiated threatened to proceed with the pending proceeding and initiate whatever additional proceedings or litigations is necessary to protect Avon’s trademarks. Finally, on March 22, 2005, Avon’s counsel informed DermaNew’s counsel that Avon would not give up its right to damages unless DermaNew accepted Avon’s proposed settlement.

On March 24, 2005, DermaNew filed a complaint in the U.S. District Court for the Central District of California, seeking a declaratory judgment under 28 U.S.C. § 2201 that its trademark applications and registrations do not infringe on any of Avon’s trademarks. Avon responded with a motion to dismiss under Federal Rules of Civil Procedure 12(b)(1), arguing that the district court lacked subject matter jurisdiction because DermaNew had not stated a case or controversy, or alternatively, under 12(b)(6), arguing that the court should decline to exercise jurisdiction because the action was brought in bad faith.

At the hearing on the motion to dismiss, DermaNew’s counsel tried to respond to Avon’s arguments, but the court ruled, without any additional elaboration: “I think that the complaint is improper, brought for an improper motive, and I’m not exercising my discretion to undertake the declaratory judgment action since it should be back where it belongs and be finished there motion [sic].”

The Court of Appeals reviewed de novo the district court’s dismissal under Rules 12(b)(1) and 12(b)(6), presuming as true all facts alleged in the complaint. Holcombe v. Hosmer, 477 F.3d 1094, 1097 (9th Cr. 2007). The district court’s decision not to hear a declaratory relief action is reviewed for abuse of discretion. Wilton v. Seven Falls Co., 515 U.S. 277, 289-90 (1995).

Dismissal Under Rule 12(b)(1)
The court initially noted that since Avon’s motion to dismiss was based entirely on the argument that DermaNew had not satisfied the “cases or controversy” requirement and since a motion to dismiss on such grounds can only be brought under Rule 12(b)(1), the court construed the district court’s ruling as based solely on Rule 12(b)(1).

Under Article III of the U.S. Constitution, federal courts may adjudicate only actual cases or controversies. See U.S. CONST. art. III, § 2, cl.1. The requirement of a true case or controversy ensures that a judgment from a federal court faced with a claim for a declaratory judgment is not simply rendering an advisory opinion. See Pub. Serv. Comm’n v. Wycoff, Co., 344 U.S. 237, 244 (1952).

The court, citing Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555-56 (9th Cir. 1990), stated that an action for a declaratory judgment that a trademark is invalid or that a plaintiff is not infringing another party’s trademark presents a case or controversy if the plaintiff has a real and reasonable apprehension of being subjected to liability if the plaintiff continues to sell his goods or services. The court analyzes this apprehension from the plaintiff’s perspective to determine if the threat perceived by the plaintiff was real and reasonable. See Cheesebrough-Pond’s, Inc. v. Faberge, Inc., 666 F.2d 393, 396 (9th Cir. 1982).

The court concluded that DermaNew sufficiently alleged the required real and reasonable apprehension necessary for Rule 12(b)(1). While the court noted that concrete threats are not required under the Ninth Circuit’s “flexible approach” (unlike the Federal Circuit’s approach, which requires places a heavier burden on plaintiffs to show an explicit threat or other action), the court nonetheless found the above alleged threats by Avon’s counsel to be sufficiently concrete.

The statement by Avon’s counsel that the company would pursue a trademark infringement action if DermaNew did not get rid of all of its products within 60 days was an explicit threat. Avon had already filed all of the TTAB actions that it could, and a federal infringement action would be the only other “additional” litigation that could be pursued. Finally, Avon’s reference to damages must refer to an infringement action because the TTAB cannot award damages. After all, the TTAB’s powers are limited to determining and deciding rights with respect to trademark registration (see 15 U.S.C. §§ 1067(a), 1063(a), and 1064), while a federal district court can determine registration rights (15 U.S.C. § 1119) as well as trademark infringement (15 U.S.C. § 1114) and may grant injunctive relief (15 U.S.C. § 1116) and award damages (15 U.S.C. § 1117). All of these threats were made after Avon had initiated seven actions in the TTAB, and the last threat made after years of unsuccessful and tense settlement negotiations. Under these circumstances, the court found that DermaNew’s apprehension of being subjected to liability was more than reasonable: “DermaNew thus had good reason to worry about the stability and profitability of its product lines, and to suspect that Avon would make good on its threats and seek hefty damages for any infringement.” Slip op. at 13954.

The court brushed aside Avon’s arguments regarding bad faith, finding Avon’s evidence as either irrelevant or de minimis. If anything, the evidence of the long-running settlement negotiations demonstrated DermaNew’s good faith attempt to resolve the matter and suggest that DermaNew filed the action after settlement negotiations had stalled out of fear of an infringement lawsuit by Avon.

Factual Allegations and Rule 408 Privilege
Avon argued that DermaNew’s evidence of threats were a) “wholly fabricated” and b) were privileged and cannot be admitted as evidence by the court because they occurred during the course of settlement negotiations.

In response to Avon’s arguments that DermaNew’s allegations are “wholly fabricated,” the court reminded Avon that the court must accept DermaNew’s version of events as true for the purposes of establishing jurisdiction and surviving a 12(b)(1) motion.

With respect to Avon’s privilege argument, the court reminded Avon that the plain text of Rule 408 states that evidence from settlement negotiations may not be considered in court when offered to prove liability for, invalidity of, or amount of a claim that was disputed as to validity or amount, or to impeach through a prior inconsistent statement or contradiction. The court stated “Rule 408 is designed to ensure that parties may make offers during settlement negotiations without fear that those same offers will be used to establish liability should settlement efforts fail. When statements made during settlement are introduced for a purpose unrelated to liability, the policy underlying the Rule is not injured.” Slip op. at 13960.

In this case, DermaNew is not relying on Avon’s threats in an attempt to prove whose trademark is valid, or to impeach Avon, but instead, uses the threats to satisfy the jurisdictional requirements of an action for declaratory relief. Furthermore, it did not matter that Avon’s letter claimed an absolute privilege by warning that it was “written for settlement purposes only and shall not be admissible for any purpose in any legal proceeding.”

The court held that DermaNew’s complaint did allege a case or controversy, and therefore the district court did have subject matter jurisdiction to hear the case. As such, the district court erred in dismissing the case under 12(b)(1).

Discretionary Dismissal under the Primary Jurisdiction Doctrine
Because the district court at the oral hearing on the motion to dismiss stated that the complaint “should be back where it belongs and be finished there [in the TTAB]” and therefore was “not exercising . . . discretion to undertake the declaratory judgment action,” the Ninth Circuit took this statement to be an invocation of the doctrine of primary jurisdiction as a basis for declining to hear the case.

The court, citing United States v. Culliton, 328 F.3d 1074, 1081 (9th Cir. 2003), described the primary jurisdiction doctrine as follows: “The primary jurisdiction doctrine provides: When there is a basis for judicial action, independent of agency proceedings, courts may route the threshold decision as to certain issues to the agency charged with primary responsibility for governmental supervision or control of the particular industry or activity involved.” Slip op. at 13962.

The court cited with approval cases in the First and Second Circuit which had already addressed the issue of whether a district court should defer, on primary jurisdiction grounds, a trademark declaratory relief action pending the completion of related TTAB proceedings. See PHC v. Pioneer Healthcare, 75 F.3d 75 (1st Cir. 1996); Goya Foods, Inc. v. Tropicana Prod., Inc., 846 F.2d 848 (2d Cir. 1988). Both Circuits held that the primary jurisdiction doctrine does not justify deferral by a district court in such cases.

The court embraced the reasoning from those two decision, concluding that: “Allowing the district court to decline a declaratory relief action on a primary jurisdiction rationale is sensible only if the agency is better equipped to handle the action. Here, however, Congress has not installed the PTO as the exclusive expert in the field. As noted, parties may litigate these issues in federal court without previously exhausting their claims before the TTAB. See, e.g., 15 U.S.C. § 1071(b)(1).” Slip op. at 13962. The court focused on the fact that the TTAB’s proceedings regarding the registration rights of trademarks would not preclude a subsequent infringement action or necessarily be determinative of all of the issues that would be involved in such infringement action.

The court acknowledged that there may be some times where deferring a declaratory judgment case until TTAB proceedings have concluded would be more efficient (e.g., where the declaratory action involves an issue of the registerability of a trademark, in which case it would make more sense for the TTAB to decide such an issue). However, the primary determining factor is efficiency (i.e., the district court should exercise jurisdiction if to do so would be more efficient).

As such, the court held that district court abused its discretion in declining to hear DermaNew’s action on the basis of the primary jurisdiction doctrine and ordered the district court to adjudicate the lawsuit.

Remand to a Different Judge
One last issue addressed by the court was DermaNew’s request to have the case assigned to a different judge upon remand. See 28 U.S.C. §2106 (remand to a different judge is appropriate if there is evidence of personal bias or unusual circumstances); see also United Nat’l Ins. Co. v. R & D Latex Corp., 141 F.3d 916 (9th Cir. 1998). The court, upon reviewing the evidence, concluded that the assigned district court judge cannot reasonably be expected upon remand to disregard his previously expressed views in this matter. Given the erroneous nature of the judge’s decisions, the court determined that the district court judge would have substantial difficulty in putting his previously expressed views out of his mind.

As such, the court vacated the decision and remanded the case back to the district court with the direction that it be reassigned to a different judge, who should exercise jurisdiction over the case.

VegasTMEsq Comment:
If there is one lesson to be learned from this decision, it would be that you should be careful what any threatening communications during trademark infringement settlement negotiations. In addition, the little trick of putting “written for settlement purposes only and shall not be admissible for any purpose in any legal proceeding” may not provide the type of protection you thought.

1 comment:

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