Friday, March 20, 2009

Ninth Circuit “Eviscerates” Laches Defense Against Trademark Infringement

The Ninth Circuit has denied a defendant the defense of laches against a plaintiff despite the fact that the plaintiff waited seven years to assert its trademark rights – all because the defendant had (in the majority’s view) not spent that enough money developing the alleged infringing mark as its own (and thus was not prejudiced by the delay). See Internet Specialties West, Inc. v. Milon-Digiorgio Enterprises, Inc., Nos. 07-55199, 07-55087 (9th Cir. March 17, 2009).

Internet Specialties West, Inc. (“ISW”) and Milon-Digiorgio Enterprises, Inc. (“MDE”) are both internet service providers. ISW registered the domain name in May 1996. In July 1998, MDE registered the domain name ISW discovered MDE’s website in late 1998, but took no action at the time supposedly because while ISW offered dial-up, DSL and T-1 internet access nationwide, MDE only offered dial-up access in Southern California.

MDE expanded it business nationwide in 2002 and began offering DSL in 2004. In 2005, ISW sent a cease and desist letter to MDE and later brought a trademark infringement lawsuit against MDE’s use of the name ISPWest. See Internet Specialties West, Inc. v. Milon-Digiorgio Enterprises, Inc., Case No. 05-cv-03296, 05-cv-03296 (C.D. Cal.). A jury found that while MDE had infringed ISW’s mark, there was no damages from the infringement. Nonetheless, with such finding, the district court imposed an injunction against any further use of the mark by MDE. Moreover, the district court also determined that ISW’s claims were not barred by laches.

MDE appealed the district court’s decision to the Ninth Circuit Court of Appeal. A divided Ninth Circuit panel affirmed the jury’s verdict on infringement and also upheld the district court’s decisions on laches and the injunction imposed on MDE.

The defense of laches is often categorized as embodying the principle that a plaintiff cannot sit on the knowledge that another company is using its trademark, and then later come forward and seek to enforce its rights. See Grupo Gigante S.A. de C.V. v. Dallo & Co., 391 F.3d 1088, 1102-03 (9th Cir. 2004). The two part test for the defense of laches is 1) was the plaintiff’s delay in bringing suit was unreasonable and 2) was the defendant prejudiced by the delay. See Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829, 838 (9th Cir. 2002); Tillamook Country Smoker, Inc. v. Tillamook County Creamery Association, 465 F.3d 1102, 1108 (9th Cir. 2006). The six factors analyzed by courts in deciding whether laches precludes a claim are: “1) the strength and value of trademark rights asserted; 2) plaintiff’s diligence in enforcing mark; 3) harm to senior user if relief denied; 4) good faith ignorance by junior users; 5) competition between senior and junior users; and 6) extent of harm suffered by junior user because of senior user’s delay.” E-Systems, Inc. v. Monitek, Inc., 720 F.2d 604, 607 (9th Cir. 1983).

The Ninth Circuit found that the district court had wrongfully decided the first issue and that indeed ISW’s delay in bringing suit was unreasonable. The district court found that the relevant period of time started running in 2004; however, the court found that the earlier 1998 date was when ISW knew or should have known about its cause of action based on ISW’s actual notice of MDE’s use of the mark in connection with internet services. Based on this earlier date of 1998, ISW’s filing of an action outside of the applicable four-year statute-of-limitations period created a presumption that laches applied.

However, in analyzing the second factor (prejudice resulting from the unreasonable delay in bringing suit), the Court found that MDE was not prejudiced by the 7 year delay by ISW in enforcing its trademark rights. It is this particular point where the Ninth Circuit panel split. The dissent found obvious prejudice from MDE’s expansion of its business from 2,000 customers to 13,000 customers along with the accompanying sales and expenses.

The majority opinion, however, felt differently stating:
While we are sympathetic to MDE’s position, the meaning of prejudice in this context is not so simple. “If this prejudice could consist merely of expenditures in promoting the infringed name, then relief would have to be denied in practically every case of delay.” Tisch Hotels, Inc. v. Americana Inn, Inc., 350 F.2d 609, 615 (7th Cir. 1965). Laches is meant to protect an infringer whose efforts have been aimed at “build[ing] a valuable business around its trademark” and “an important reliance on the publicity of [its] mark.” 6 McCarthy on Trademarks and Unfair Competition § 31:12 (citations omitted) (emphases added). Therefore, we feel compelled to analyze whether MDE’s claim of prejudice is based on “mere[ ] expenditures in promoting the infringed name,” Tisch Hotels, 350 F.2d at 615, or whether it is based on an investment in the mark ISPWest as the identity of the business in the minds of the public. See Jarrow, 304 F.3d at 835-36 (finding prejudice where had the plaintiff “filed suit sooner, [the infringer] could have invested resources in an alternative identity . . . in the minds of the public.”)

The majority noted that the district court had found that MDE did not demonstrate prejudice from ISW’s delay in bringing suit because MDE had not expend any time or resources during the interim developing brand recognition of its mark. The district court focused on the fact that most of MDE’s advertising was in the form of “pay-per-click” advertisements (which typically did not include the ISPWest mark) – efforts that the court stated “creates little to no brand awareness.” “It is a simple premise that MDE cannot create 'public association' between ISPWest and the company if it does not even use the ISPWest mark in its most prevalent form of advertising.” The district court also found that MDE would not have to undertake significant advertising expenditures to change its name at this juncture. Finally, the majority did not feel that its view of what constitutes prejudice was in defiance of the court’s prior decision in Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829, 838 (9th Cir. 2002) and Grupo Gigante S.A. de C.V. v. Dallo & Co., 391 F.3d 1088, 1102-03 (9th Cir. 2004).

As such, the majority found no error or abuse of discretion in the district court’s finding that MDE was not prejudiced, and thus laches would not bar ISW’s lawsuit. The majority also found the scope of the district court’s injunction requiring MDE to cease all use of the mark reasonable in order to prevent consumer confusion.

Judge Andew Kleinfeld’s dissenting opinion agrees with every part of the majority opinion’s decision on laches – except for the decision regarding prejudice, which Kleinfeld describes as an enunciating “a new and unfair standard for prejudice in trademark law. . . . The practical effect of this new rule is to eviscerate the defense of laches in trademark law.”

Kleinfeld noted that the key to the majority’s rationale was its holding that “[i]f this prejudice could consist merely of expenditures in promoting the infringed name, then relief would have to be denied in practically every case of delay.” The dissent further notes that this language came from a Seventh Circuit decision where the delay was less than under a year and the infringement was deliberate as opposed to the instant case where the delay was far in excess of the applicable statute of limitations and the infringement was arguably not deliberate.

Kleinfeld's dissent focuses on the fact that when ISW first discovered ISPWest, the company only had about 2000 customers; and yet by the time ISW brought action, ISPWest had grown to 13,000 customers with over $1.5 million in marketing expenses. In Kleinfeld's view, this showed that MDE continued to build a valuable business around its trademark during the time that the plaintiff delayed the exercise of its legal rights – which is sufficient for establishing prejudice. “All this expansion happened while Internet Specialties knew about the infringement and did nothing to stop it. Until today, ISPWest’s five or sixfold expansion of its business would have been more than enough to establish prejudice.”

One of the key (and most eloquent) statements made by Kleinfeld is the following:
As the majority concedes, Jarrow Formulas, Inc. v. Nutrition Now, Inc., establishes that laches is presumed to bar a claim made outside of the analogous limitations period, 4 years here. 304 F.3d 829, 835-36 (9th Cir. 2002).The district court did not apply this presumption because, as the majority holds, it failed to determine the proper period for laches. Majority Op. at 3410-11. In fact, the district court applied a presumption against laches. Accordingly, the district court necessarily committed an abuse of discretion on this issue, and we cannot properly defer to its discretion. The majority’s deferential review is erroneous.

Kleinfeld argued that the majority’s decision cannot be reconciled with the Ninth Circuit’s decision in Grupo Gigante in which the Ninth Circuit did not mention a need for “brand awareness” or “public association” before finding laches in the Grupo Gigante case – what mattered was that the party asserting laches “has continued to build a valuable business around its trademark during the time that the plaintiff delayed the exercise of its legal rights.” The same decision also reinforced the importance of a trademark holding conducting “an effective policing effort” in order to obtain judicial enforcement of its trademarks. Moreover, in Grupo Gigante, the Ninth Circuit held that the plaintiff “cannot simply wait without explanation to see how successful the defendant’s business will be and then ask for an injunction to take away the good will developed by defendant in the interim.”

Kleinfeld further notes that the Ninth Circuit based its decision to apply laches in E-Systems v. Monitek, Inc., where the defendant “incurred substantial advertising expenditures and rapidly expanded its business” despite the fact that the plaintiff sued the same year that it discovered the infringement but barred because of a 6-year delay from the time when it should have known about the infringement.

Kleinfeld argues that where the presumption of prejudice applies (and there is no question that it does in this case), the prejudice exists where an infringer is “forced to abandon its long-term investment in its presentation of [its product] to the public.” (citing Jarrow Formulas, 304 F.3d at 840).

Kleinfeld also added his own thoughts about the injunction being an abuse of discretion because it failed to take into account the “public interest” of the burden on MDE’s customers who will have to change their e-mail addresses because MDE can no longer use the domain name. “Thousands of individuals ought not be required to alert family, friends, business contacts, banks, listservs, and their online subscription providers of a change in e-mail address, all because of Internet Specialties’ delay. An injunction without even weighing these burdens on the innocent is an abuse of discretion.”

But nothing says it better than Kleinfeld’s closing paragraph:
The majority’s evisceration of laches means that a big company can lurk in the tall grass while its little prey gradually fattens itself by dint of great effort and expense. Then, when the small competitor has succeeded, the big company can shake it down for a cut of its hard-won success, or destroy the name under which it innocently did business for years. That is trademark law as protection racket, rather than trademark law as prevention of consumer confusion.
[Comment: What about trademark troll?]

Vegas™Esq. Comments:
If it’s not apparent from the tone of the above write-up, I find the majority’s decision quite troubling – for all of the reasons articulated by Judge Kleinfeld's eloquent dissent. This decision is screaming for en banc review and I certainly expect MDE to petition for such review.

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