The Ritz Wins Early Victory Against §38 Damage Claims

On March 9, 2009, U.S. District Court Judge Norma Shapiro found that a Pennsylvania company’s counterclaims for damages under 15 U.S.C. §1120 arising from alleged fraudulent registrations were barred by the statute of limitations. See The Ritz Hotel, Ltd. v. Shen Manufacturing Co., Inc., 2009 U.S. Dist. LEXIS 18873, Case No. 05-cv-04730 (E.D. Penn. March 9, 2009).

The Ritz

(London, England)

On January 7, 2005, The Ritz Hotel, Ltd. (“RHL”), the United Kingdom corporation which owns the famed “Ritz” hotel chain along with various trademark registrations containing the word RITZ including, among others, RITZ PARIS, HOTEL RITZ, RITZ ESCOFFIER, and THE RITZ KIDS, filed for declaratory relief of noninfringement against Shen Manufacturing Co., Inc. (“Shen”), which also holds various registered trademarks for the mark RITZ for cleaning and polishing clothes, ironing board pads and covers, tablecloths and beach towels, and bathrobes, aprons, and laundry bags, dish clothes, towels, mitts, and place mats along with various unregistered common law marks such as RITZ PRO SERIES, RITZ STERLING, RITZ SUPREME, RITZ ROYALE, and RITZ CLASSICS. The action, which had been filed by RHL in the Southern District of New York, was transferred to the Eastern District of Pennsylvania on August 22, 2005, pursuant to 28 U.S.C. §1404(a).

In response to RHL’s declaratory judgment action, Shen, on September 16, 2005, filed its original answer and counterclaims against RHL (later amended on August 16, 2006) to include a counterclaim for damages under §38 of the Lanham Act, 15 U.S.C. §§1120, for damages resulting from RHL’s alleged fraudulent registration of five trademarks with the United States Patent and Trademark Office (“PTO”). Section 38 of the Lanham Act (15 U.S.C. §1120) states: “Any person who shall procure registration in the Patent and Trademark Office of a mark by a false or fraudulent declaration or representation, oral or in writing, or by any false means, shall be liable in a civil action by any person injured thereby for any damages sustained in consequence thereof.” An action for damages under §38 is for damages resulting from the PTO's registration of a trademark based on fraud on the PTO by the registrant.

In this case, three of the five RHL trademark registrations at issue in Shen’s §38 counterclaim were RITZ for cutlery, RITZ ESCOFFIER for food products, and RITZ PARIS for cosmetics (the remaining two were voluntarily abandoned by RHL). Shen sought to recover damages resulting from alleged fraud or falsity in RHL's applications for these three marks, including lost profits as the result of its inability to market its own Ritz-branded cookware, as well as recovering attorneys' fees and costs for contesting the alleged fraudulent registrations.

RHL filed a motion for partial summary judgment to dismiss Shen’s §38 counterclaim on the basis that the fraud claims had not been plead with sufficient specificity and on the grounds that the counterclaims were not filed within the applicable statute of limitations.

Since the Lanham Act has no statute of limitations, courts look to state statute of limitations for analogous types of actions to determine whether such claims are timely filed. Because the counterclaims in this case were filed subsequent to the case being transferred, the state statute of limitations governing Shen’s §38 fraud counterclaim depends on whether the counterclaim is deemed a compulsory or permissive counterclaim.

For compulsory counterclaims, the statute of limitations applicable in the forum where the complaint was filed governs not only the complaint but also compulsory counterclaims filed subsequent to transfer under 28 U.S.C. §1404(a). However, the court held that because a permissible counterclaim does not “relate back” to the events underlying an opposing party's claim, then, by definition, it was filed independently of the opposing claim and not in direct response. As such, a permissive counterclaim filed after transfer under §1404(a) should therefore be decided under the same governing law as would apply had it been filed ab initio in the transferee forum.

Because RHL’s original claim was for declaratory relief that its trademarks and business activities in the United States do not infringe on Shen's trademarks and Shen’s §38 fraud counterclaim was for damages resulting from RHL's alleged false or fraudulent statements made to the PTO while procuring certain registrations, the court found this counterclaim to be permissive. “The issues in resolving Shen's counterclaim for damages for fraudulent procurement relate entirely to whether the registrations were issued by the PTO in reliance on false or fraudulent representations, and what if any damages Shen suffered as a result. Whether RHL infringed Shen's trademarks is not the same legal or factual issue. Because counterclaim count III is permissive, Pennsylvania choice of law principles determine the applicable statute of limitations.”

In analyzing Pennsylvania’s choice of law principles, the law of two states could apply – Pennsylvania (Shen’s domicile) or Virginia (where the PTO is located and where RHL's alleged fraudulent conduct occurred). Because both states have two year statute of limitations for fraud, the court chose to apply Pennsylvania law.

Having determined the statute of limitations, the court next turned to when Shen first had notice of the fraud. The court noted that, under Section 22 of the Lanham Act (15 U.S.C. §1072) “Registration of a mark on the principal register . . . shall be constructive notice of the registrant's claim of ownership thereof.”

With respect to RHL’s RITZ ESCOFFIER mark, the mark was registered on December 31, 2002, and thus, a timely claim for fraud under §38 would have been on or before January 2, 2005. Thus, Shen’s counterclaim for fraud with respect to this mark was not filed until September 16, 2005, and so the court held that this claim was barred by the statute of limitations.

With respect to RHL’s RITZ PARIS mark, the mark was registered on December 3, 2003, and thus a timely claim for fraud under §38 would have been on or before December 3, 2005. Because Shen’s counterclaim for fraud with respect to this mark was not filed until September 16, 2005, the court held that this claim also was barred by the statute of limitations.

Shen attempted to argue that the constructive notice provisions of §1072 were inapplicable to this particular mark, which actually registered based on §44 of the Lanham Act (15 U.S.C. §1126) because such registration does not require actual use in U.S. commerce to register. The court rejected this argument stating:

Section 22 does not distinguish between a domestic registration under §1 and a foreign registration under §44. Section 44 allows a would-be registrant to apply for trademark protection with a “bona-fide intention to use” without meeting §1(b)'s requirement that the registrant demonstrate actual use within six months following registration. Sections 1 and 44 were amended simultaneously in 1988 to allow an application to the PTO for trademark registration with a bona fide intention to use, Pub. L. 100-667, §§103, 133, 102 Stat. 3935, 3946 (1988); this suggests a Congressional intent that a §1(b) and §44 registration function equally except when otherwise provided.

The court felt no sympathy for Shen’s pleas that applying §22's constructive notice provision to a §44 registration makes it almost impossible to sue a foreign registrant under §38. Shen argued that an intelligent foreign registrant could gain immunity from a §38 claim by applying to the PTO under §44 with a fraudulent affidavit of bona fide intention to use and keeping the mark out of U.S. commerce long enough to have the fraud claim barred by the state-law statute of limitations. The court simply stated that “the court will not invalidate §38's statute of limitations with regard to a false or fraudulent §44 registration without an explicit Congressional statement.”

Finally, with respect to RHL’s RITZ mark, the mark originally registered on June 18, 1996, and an affidavit of continued use was filed in June 2002. The court noted that §22's constructive notice provision applies only to the original trademark registration, and that the June 2002 affidavit of continued use was not constructive notice of asserted ownership of the mark in calculating the timeliness of Shen's claim.

The court noted, however, that Shen had been put on notice of RHL’s claims of ownership as of July 21, 2003, when RHL invoked the registered mark as a defense against claims brought by Shen. The court held that a timely claim by Shen based on a false or fraudulent declaration by RHL would have to have been filed on or before July 21, 2005. Because Shen’s original counterclaim for fraud with respect to this mark was not filed until September 16, 2005, the court held that this claim also was barred by the statute of limitations.

Thus, the court granted RHL's motion for partial summary judgment of Shen’s counterclaim for damages under §38 of the Lanham Act based on RHL’s alleged fraudulent procurement of three trademark registration was granted on the basis that Shen’s counterclaim was time-barred as to all three registrations.