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Res Judicata Precluded Party from Bringing Trademark Cancellation Proceeding at TTAB After Default Judgment of Infringement Entered by District Court

April 14, 2008

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Last Month at the Federal Circuit - May 2008

Judges: Newman (concurring), Gajarsa, Dyk (author)

[Appealed from: TTAB]

In Nasalok Coating Corp. v. Nylok Corp., No. 07-1432 (Fed. Cir. Apr. 14, 2008), the Federal Circuit affirmed a decision of the TTAB granting SJ in favor of appellee Nylok Corporation (“Nylok”) in a cancellation proceeding brought by Nasalok Coating Corporation (“Nasalok”).

Both parties are engaged in business related to self-locking fasteners using nylon locking elements. A nylon element, such as a patch or strip of nylon, is applied to the threads of such a fastener, and prevents the fastener from loosening when exposed to vibration, stress, or temperature extremes. Nylok is the owner of federal trademark Registration No. 2,398,840 (“the ’840 Registration”). The registered mark consists of “a patch of the color blue on a selected number of threads of an externally threaded fastener, with the blue patch extending more than 90 degrees and less than 360 degrees around the circumference of the fastener” and is designated for use on “metal externally threaded fasteners.” Slip op. at 2.

Nylok filed a complaint against Nasalok in the U.S. District Court for the Northern District of Illinois, alleging infringement of several trademarks, including the ’840 Registration. Although properly served with the complaint, Nasalok failed to enter an appearance, and the district court entered a default judgment of trademark infringement in favor of Nylok and subsequently entered an injunction prohibiting Nasalok from “selling within or importing to the United States of America any self-locking fastener having a nylon locking element . . . having the color blue, or any color confusingly similar to the color blue,” and from “promoting or advertising the color blue in the United States of America on or in association with any self-locking fastener, except when Nasalok has received express and written permission by Nylok.” Id. at 2-3. The district court’s order also stated that Nylok was the proper owner of the ’840 Registration and that the trademark was valid and enforceable. Nasalok did not appeal the district court’s order.

Five months after the default judgment, Nasalok filed a petition to cancel the ’840 Registration with the Board, alleging that the mark was invalid for various reasons. Nylok moved for SJ, arguing that Nasalok was barred under the doctrine of res judicata (claim preclusion) from claiming that the ’840 Registration was invalid because it could have asserted, but did not assert, a claim of invalidity in the earlier infringement action brought by Nylok. Relying on the three-part test for claim preclusion set out in Jet, Inc. v. Sewage Aeration Systems, 223 F.3d 1360 (Fed. Cir. 2000), the Board granted SJ in favor of Nylok, finding that the doctrine of claim preclusion barred Nasalok’s cancellation petition.

On appeal, the Federal Circuit rejected the Board’s application of Jet because that three-part test for claim preclusion is the test to determine whether a plaintiff, who brings a second action related to a first action, is precluded. When determining whether a defendant is precluded, however, “the somewhat different rules of ‘defendant preclusion’ apply.” Slip op. at 6 (citing 18 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 4414 (2d ed. 2002)). Under those rules, a defendant is precluded only if “(1) the claim or defense asserted in the second action was a compulsory counterclaim that the defendant failed to assert in the first action, or (2) the claim or defense represents what is essentially a collateral attack on the first judgment.” Id.

In addressing the first part of the test for defendant preclusion, the Federal Circuit began its analysis with Fed. R. Civ. P. 13(a)(1). The Federal Circuit noted that it has applied three tests to determine whether the “transaction or occurrence” test of Rule 13(a) is met: “(1) whether the legal and factual issues raised by the claim and counterclaim are largely the same; (2) whether substantially the same evidence supports or refutes both the claim and the counterclaim; and (3) whether there is a logical relationship between the claim and the counterclaim.” Id. at 9.

Focusing on the particular facts in this case, Nylok’s trademark infringement claim was based on Nylok’s alleged ownership of a registered mark, Nasalok’s alleged use of the color blue in nylon patches on the external threads of self-locking fasteners, its promotion of those fasteners in advertisements in publications distributed in the United States, and the likelihood of confusion of the consuming public as a result of Nasalok’s activities. Invalidity of the mark was an affirmative defense that could have been raised, although not part of Nylok’s cause of action. Nasalok’s cancellation petition, by contrast, was based on alleged attributes of Nylok’s registered mark that rendered it subject to cancellation, including allegations that the mark was functional and was a phantom mark, and on Nylok’s allegedly fraudulent actions in obtaining registration of the mark.

The Court thus concluded that, in this case, the “essential facts” alleged by Nylok in its infringement action related to Nylok’s ownership of the mark and Nasalok’s allegedly infringing behavior, and did not form the basis of the cancellation claim now asserted by Nasalok, which was based on attributes of Nylok’s mark and on Nylok’s actions in obtaining registration of that mark. Rather, the two claims raised different legal and factual issues, would not be supported or refuted by substantially the same evidence, and were not “logically related” in the sense described by Moore v. New York Cotton Exchange, 270 U.S. 593 (1926). Therefore, the Court concluded that the claims did not arise out of the same “transaction or occurrence,” and Nasalok’s petition to cancel was not a compulsory counterclaim in the infringement action.

The Court then noted that while it had not previously ruled on this specific issue, it had found that a determination of patent infringement in an infringement suit, or even an explicit determination of patent validity, does not preclude the assertion of an invalidity defense in a second action involving different products (i.e., products that are not “essentially the same”). Those decisions had necessarily assumed that an invalidity defense is not a compulsory counterclaim because in each of these cases a counterclaim of invalidity could have been asserted,and yet the Federal Circuit refused to find general preclusion of the invalidity defense.

Additionally, the Federal Circuit commented that the policy considerations in the patent context are equally applicable to the trademark context. A plaintiff, who brings a second infringement suit as to one allegedly infringing use of a mark, would not be precluded from bringing a second suit as to another use, nor would a defendant in such a situation be precluded from raising invalidity of the mark in the second action simply because it was not raised in the first.

Finally, the Court found that “treating challenges to trademark validity as compulsory counterclaims to infringement actions would violate the well-established policy of freely allowing challenges to the validity of claimed intellectual property protection,” as discussed in Lear, Inc. v. Adkins, 395 U.S. 653 (1969). Although Lear dealt with patent licensee estoppel, several courts, including the CCPA, have applied the Lear balancing test to trademarks as well as patents, recognizing the public interest in ensuring trademark validity. Thus, the Court found that public policy also favored the determination that Nasalok’s petition to cancel was not a compulsory counterclaim in Nylok’s infringement action.

The Court then addressed the second basis for applying claim preclusion against defendants— where the effect of the later action is to collaterally attack the judgment of the first action. “When a former defendant attempts to undermine a previous judgment by asserting in a subsequent action a claim or defense that was or could have been asserted in the earlier case, the rules of defendant preclusion will apply.” Slip op. at 14.

Here, the district court enjoined Nasalok from selling or importing into the United States any self-locking fastener with a blue (or similarly colored) nylon locking element, and from promoting or advertising the color blue in connection with its self-locking fasteners. The Court found that permitting Nasalok to challenge the validity of the ’840 Registration would effectively undo the relief granted by the district court in the infringement action. Additionally, the Court rejected Nasalok’s argument that preclusion should not apply to default judgments. Where, as here, a default judgment satisfies due process requirements, and the defendant in the original action attempts to collaterally attack the default judgment, such attack is barred by claim preclusion.

The Federal Circuit noted that its holding is consistent with the rules followed by the Court in the patent context. In that context, a defendant to an infringement suit that results in a judgment of infringement is “‘precluded from challenging validity in a suit for infringement of any device that is the same as the [alleged infringing device in the first suit], because invalidity was a defense that was or could have been raised in the prior litigation.’ . . . In other words, preclusion is necessary to protect the effect of the earlier judgment.” Id. at 15 (first alteration in original) (citations omitted). Thus, the Court affirmed the Board’s grant of SJ in favor of Nylok.

Judge Newman, concurring in the judgment, first chastised the majority for addressing the “irrelevant” question of whether Nasalok’s claim of invalidity was a compulsory counterclaim in the infringement action because validity of the mark was before the district court. Second, in following the Board’s analysis, Judge Newman would conclude that the issue of validity was decided in the district court, as evidenced by that court’s ruling that the trademark was valid and enforceable. Because the premises of a valid and enforceable mark, such as its distinctiveness and continuous use, were pleaded by Nylok, and as a party to the action, Nasalok did not dispute any of the pleadings, the issue is closed. Finally, Judge Newman criticized the majority’s public policy rationale based on Lear: “To state, even in dictum, that Lear favors a trademark system that facilitates attacks on trademark property ignores the differing public purposes of patents and trademarks, as well as misperceives the policy principles of Lear. Further, no aspect comparable to Lear is at issue in this case; the court’s discussion is inappropriate dictum.” Newman Concurrence at 3.