Friday, August 1, 2008

Hobbit Travel Successfully Asserts Laches Defense Against Tolkien Enterprises’s Trademark Infringement Lawsuit

Saul Zaentz Company d/b/a Tolkien Enterprises (“Tolkien”), which owns the rights to use and license others to use marks and other intellectual property related to novelist J.R.R. Tolkien's books, including The Hobbit, was defeated in its attempt to stop a Minnesota-based travel agency, Wozniak Travel, Inc. (“Wozniak Travel”), from operating under the name “Hobbit Travel.” See The Saul Zaentz Company d/b/a Tolkien Enterprises v. Wozniak Travel, Inc., 2008 U.S. Dist. LEXIS 57285, Case No. 06-5421 (N.D. Cal. July 2008).

The decision, written by U.S. District Court Judge Marilyn Hall Patel, granted Wozniak Travel’s motion for summary judgment on whether the affirmative defense of laches bars Tolkien’s trademark infringement related claims.

The court first provided some background on the origin of the term “Hobbit” – the race of fictional three-foot tall, human-like creatures who inhabit the mythical world of Middle Earth in which the late J.R.R. Tolkien’s novels The Hobbit and The Lord of the Rings trilogy are set – as well as a detailed history on the commercialization efforts by the owners of the rights to J.R.R. Tolkien's works during the 70s, 80s, and 90s up to and including the recent The Lord of the Rings movies released by New Line Cinema. The court notes that Tolkien or its licensees have even marketed travel-related goods and services, including an agreement with Air New Zealand in 2002 to market the carrier as “Airline to Middle-earth” and to allow Hobbit characters to be painted on the jets. Tolkien owns over one hundred trademark registrations for various marks associated with Tolkien’s books, including five current HOBBIT marks (although none are for use in connection with travel goods and services).

George Wozniak, the owner/founder of Wozniak Travel, opened Hobbit Travel in 1976 under the name Wozniak’s Hobbit Travel in partnership with a Chicago-based travel agency, Hobbit International, which also did business under the name Hobbit Travel. He later dropped the surname because of customer difficult in spelling and pronunciation. Hobbit Travel does not use any other signs, ads, or logos which invoke Tolkien’s novels or their characters although Hobbit Travel has adopted some recognizable Tokien terms in his business (e.g., a 401(k) name "Tolkien Trust" and the company packages its wholesale packages under the name “Trilogy Tours.”). Wozniak Travel has steadily grown into one of the largest travel agencies in Minnesota, and since 1996, has offered its services online at

Tolkien first claimed to have learned about Wozniak Travel in November 2003 because of the company’s growing internet presence. In 2004, New Line Cinema sent a cease-and-desist letter, but Wozniak Travel continued to operate as Hobbit Travel. In 2005, Wozniak Travel filed an application with the United States Patent and Trademark Office to register the mark HOBBIT TRAVEL for travel agency services (although the application was later voluntarily withdrawn before a decision was rendered in this litigation, which had put on hold the pending TTAB opposition that Tolkien had filed against registration of the mark). Tolkien filed suit against Wozniak Travel in 2006 alleging five causes of action: trademark infringement (15 U.S.C. § 1114), unfair competition and false designation of origin (15 U.S.C. § 1125(a)), trademark dilution under 15 U.S.C. § 1125(c), trademark dilution under California law (Cal. Bus. & Prof. Code § 14330), and unfair competition under California law (Cal. Bus. & Prof. Code § 17200 et seq.). Wozniak Travel moved for summary judgment on the grounds that Tolkien’s claims are barred by laches.

In order to assert the defense of laches, Wozniak Travel had to show that Tolkien’s delay in filing suit was unreasonable and that Wozniak Travel would suffer prejudice caused by the delay if the lawsuit were to continue. The factors used by Ninth Circuit in deciding whether a plaintiff's delay was unreasonable are: “(1) strength and value of the trademark rights asserted; (2) plaintiff's diligence in enforcing mark; (3) harm to senior user if relief is denied; (4) good faith ignorance by junior user; (5) competition between senior and junior users; and (6) extent of harm suffered by the junior user because of senior user's delay.” See E-Systems, Inc. v. Monitek, Inc., 720 F.2d 604, 607 (9th Cir. 1983); Tillamook Country Smoker, Inc. v. Tillamook County Creamery Ass'n, 465 F.3d 1102, 1108 (9th Cir. 2006).

Unreasonable Delay
The two step process for determining whether a party exercised unreasonable delay in filing a lawsuit is first, the court must assess the length of delay, measured from the time the plaintiff knew (had actual notice) or should have known (had constructive notice) about its potential cause of action, and second, the court then must determine whether such a delay was unreasonable. See Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829, 838 (9th Cir. 2002).

In this case, the evidence showed that Tolkien had been made aware of Wozniak Travel’s “Hobbit Travel” name since at least 1988 (18 years before Tolkien filed suit) when the name appeared one of Tolkien’s trademark search reports. A subsequent report provided to Tolkien in 1992 (fourteen years before filing suit) by AT&T (as part of a litigation) again disclosed Hobbit Travel. Finally, Tolkien’s counsel in 2000 (six year before filing suit) ordered a search report that again disclosed Hobbit Travel.

Despite having these reports disclosing Wozniak Travel’s open, continuous, and not insignificant use of the Hobbit Travel name, Tolkien did not take any action. In addition, the court noted that Hobbit Travel since its inception had been receiving a growing amount of publicity (spending more than $10 million in advertising and receiving media coverage on Oprah), and thus Hobbit Travel would have been easily discovered had Tolkien acted as a reasonably prudent person and conducted further research upon seeing the name in the search reports. The court determined that Tolkien had constructive notice of Hobbit Travel as least as early as 1988.

Reasonableness of Delay
In determining whether a plaintiff’s delay may be excused as reasonable, the court considers the relevant statute of limitations for the causes of action at issue as well as any legitimate excuse by a plaintiff for the delay.

Because the Lanham Act does not contain an explicit statute of limitations, the Ninth Circuit presumes that Congress intended to “borrow” the statute of limitations for the analogous state causes of action. Under California law, the statute of limitations for the analogous state causes of action is either three or four years (depending on the state law action relied upon) – the court did not bother determining which since Tolkien’s delay of 18 years is far beyond either limitations period. Furthermore, the court rejected Tolkien’s excuse for delay (“defendant's subjective ignorance and lack of curiosity prior to 2003 are not valid excuses since plaintiff is charged with constructive knowledge as of 1988.”).

Tolkien tried to argue that the doctrine of progressive encroachment justified its delay. Under this doctrine, a trademark owner is not obligate to file suit over de minimis infringement but instead is obligated only when the junior user redirects or expands its business into different regions or markets bringing it into direct competition with the trademark owner. The court noted, however, that a junior user’s growth of its existing business and the concomitant increase in its use of the mark do not constitute progressive encroachment.

In this case, Wozniak Travel’s use of Hobbit Travel was certainly not de minimis (the company generated over $1 billion in travel sales over its 30 year history). As the court stated, “Had plaintiff chosen to examine Hobbit Travel, Hobbit Travel would not have been difficult to find.”

While Tolkien attempted to argue that Wozniak Travel’s expansion into internet sales brought the company into a new market and squarely into competition with Tolkien, the court rejected such argument on the basis that expansion into internet sales represented natural business growth for a company with an already growing national customer base (i.e., going online is a natural expansion of such a company’s existing business). The court also noted that Wozniak Travel was not really in direct competition with Tolkien, thus further making progressive encroachment an improper grounds for delay (“Tolkien's trademarks cover consumer goods and merchandise such as games, clothing, jewelry and collectibles, and Wozniak's business involves only travel services. . . . Wozniak has always sold travel services and travel services only, and at no point in time has it sought to expand the type of services it sells, or use its mark in a significantly different way.”)

The court further noted that while senior users of a strong mark can prevent others from using a similar mark in an area of business that represents a “natural zone of expansion” of the senior user’s business, in this case, the natural expansion of Tolkien's Hobbit mark did not extend to travel services at the time Wozniak opened Hobbit Travel and Tolkien’s involvement in travel-related services was minimal throughout the 1970s, 1980s and 1990s when defendant's travel agency was growing increasingly large in size.

Not until 2002 did Tolkien begin to enter into licensing agreements for licensees to use its marks in connection with travel related services. As the court stated,

This late and sporadic foray into the travel services market does not aid Tolkien in countering laches. As Judge Hand explained, “The owner's rights in . . . appendant markets are easily lost; they must be asserted early lest they be made the means of reaping a harvest which others have sown.” Tillamook Country Smoker, Inc. v. Tillamook County Creamery Ass'n (“Country Smoker”), 311 F. Supp. 2d 1023, 1033 (D. Or. 2004) (quoting Dwinell-Wright Co. v. White House Milk Co., 132 F.2d 822, 825 (2d Cir. 1943)); see also E-Systems, Inc., 720 F.2d at 607

Finally, the court rejected as “specious” Tolkien’s argument that its claim for trademark dilution, based on a likelihood of dilution, could not be brought until Congress passed the Trademark Dilution Revision Act of 2006, which amended the federal trademark dilution statute to make likelihood of dilution the necessary showing. [Ed. – Is Tolkien acknowledging that there is no likelihood of confusion . . . why else the need to rely on likelihood of dilution?] Tolkien stated that it brought its dilution claim at the earliest possible time shortly after Congress passed the TDRA, but the court rejected Tolkien’s argument. First, Tokien’s dilution claims pled “actual dilution.” Second, trademark dilution has existed at the federal level since 1995 and state level (in California) since 1967. And most importantly, before the Supreme Court's decision in Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003) requiring a showing of actual dilution, the Ninth Circuit applied a “likelihood of dilution” standard to claims brought under the prior law. [Ed. – Oops!]

The court concluded that Tolkien’s delay of at least eighteen years was unreasonable, and since such delay far exceeds the statute of limitations period a presumption of laches applies and none of Tolkien’s excuses for its delay overcomes this presumption:

Plaintiff brought this action in 2006 to enjoin defendant's use of the mark Hobbit Travel, thirty years after defendant had adopted that mark, and eighteen years after plaintiff received the first of multiple trademark search reports informing it of defendant's potentially unlawful use. Despite having constructive notice of defendant's use, plaintiff did nothing about it--no communications were made, no letters were written, and no lawsuits were filed against defendant or any of the other entities operating travel agencies under the Hobbit mark.

Prejudice to Defendant
However, such unreasonable delay is not by itself sufficient to invoke laches – the court must also consider whether the defendant has suffered prejudice by plaintiff’s undue delay in bringing suit.

The two types of prejudice are 1) “expectations-based prejudice or “economic prejudice” (prejudice derived from taking actions, such as investing time, labor, and capital to build up a business based on presumed rights, or suffering consequences, such as the loss of such investment, that the defendant would not have suffered had the plaintiff filed suit promptly) and 2) evidentiary-based prejudice (prejudice suffered by a defendant when relevant records or witnesses are unavailable due to the natural passage of time since the time the cause of action accrued).

In this case, the court found the economic prejudice to Wozniak Travel’s business to be severe if it lost the right to use the name Hobbit Travel. The court found that the tens of millions of dollars on advertising and the substantial time on promotional efforts spent by Wozniak Travel during its thirty years in business in an effort to build up name recognition and goodwill demonstrated that Wozniak Travel would now suffer economic prejudice if it were enjoined from operating under the name Hobbit Travel.

While the court gave a passing mention to the evidentiary prejudice to Wozniak Travel (i.e., the likely loss of relevant records or death of witnesses due to the passage of time), when considered along with the “overwhelming economic prejudice,” the court found that the overall prejudice to Wozniak Travel to be substantial.

Naked License Counter-defense to the Defense of Laches
Tolkien then attempted to argue make the “creative argument” that prejudice cannot be established by Wozniak Travel for laches purposes because Wozniak Travel abandoned its mark through naked licensing (which is more often cited as an affirmative defense to infringement). The concept of naked licensing is as follows:

Abandonment through naked licensing occurs when a trademark owner fails to take the reasonable steps necessary to monitor the quality of goods produced by a licensee. First Interstate Bancorp v. Stenquist, 1990 U.S. Dist. LEXIS 19426, 1990 WL 300321, at *3 (N.D. Cal. July 13, 1990) (Patel, J.). This failure to ensure quality control “may result in the trademark ceasing to function as a symbol of quality and controlled source.” 3 McCarthy § 18:48. As a result, “a court may find that the trademark owner has abandoned the trademark, in which case the owner would be estopped from asserting rights to the trademark.” Barcamerica Int'l USA Trust v. Tyfield Importers, Inc., 289 F.3d 589, 596 (9th Cir. 2002) (citing Moore Bus. Forms, Inc. v. Ryu, 960 F.2d 486, 489 (5th Cir. 1992)).

In this case, the “naked license” at issue was to a Wisconsin-based travel agency name Friedman's Hobbit Travel and later to a joint advertising campaign which listed its former partner, Hobbit International, as Hobbit Travel Tolkien argues that Wozniak Travel, by allowing Friedman's Hobbit Travel and Hobbit International to use the name Hobbit Travel without any kind of quality control restrictions on its use, granted a naked license. Thus, Tolkien argues, Wozniak Travel abandoned its right to use the name Hobbit Travel on account of these naked licenses, and therefore cannot suffer the prejudice required to invoke laches. [Ed. – So, in other words, because other people were using the mark as well without restriction, that makes Tolkien’s delay in suing Wozniak Travel suddenly non-prejudicial?]

In this sense, Tolkien is relying upon abandonment (through naked licensing) not as a defense to infringement, but instead to negate the prejudice element of Wozniak Travel’s laches defense. The court found no cases applying naked licensing to bar a party from defending an infringement claim on the basis of laches.

Tolkien’s supporting case law cites, which focused on language in those cases regarding how naked licensing is inherently deceptive and constitutes abandonment of any rights to the trademark, overlooked the context of those cases which, upon closer analysis, stood more for the proposition that a claimant may not advance an infringement claim after granting a naked license to his mark. If anything, Wozniak Travel’s naked licensing could mean that the company may face an abandonment defense should it attempt to exclude others from using the name Hobbit Travel at a later date – but as Wozniak Travel has not asserted an infringement counterclaim against Tolkien, the right to exclude is not at issue. The court stated, “Abandonment through naked licensing has never been applied in a case like this where a defendant asserts only the right to continue its use of a mark, and not its right to exclude use by another. The court declines to adopt such a rule today.” [Ed. – I smell a Ninth Circuit appeal already].

The court added that “To preclude laches based on the alleged naked licensing would depart too widely from precedent and work unfairness in what should be an equitable doctrine designed to achieve a just outcome. As a result, the court concludes that defendant has suffered both economic and evidentiary prejudice as a result of plaintiff's delay, and that defendant's conduct and relationships with respect to Friedman's Hobbit Travel and Hobbit International, allegedly a “naked license,” do not defeat defendant's showing of prejudice.”

With that, the court granted Wozniak Travel’s motion for summary judgment on the basis of laches.

The One Ring


Michael said...

Very informative post!!

I am a true Lord of The Rings nerd so I got a little kick out of that!!

Thanks for the resource.

Puzzled said...

Do you have any further information about the issue over AT&T's Hobbit chip? Seems odd that AT&T would roll over easily (and settle) if Tolkien Enterpr. had not expanded into making computers/microchips?