Thursday, March 03, 2016

Trademark defendant wins rare unclean hands defense to injunction

Cochran Firm, P.C. v. Cochran Firm Los Angeles LLP, --- Fed.Appx. ---, 2016 WL 770129, No. 15–55816 (9th Cir. Feb. 29, 2016)
A rare unclean hands win for a trademark defendant!  The Cochran Firm appealed the district court’s order dissolving a preliminary injunction against Randy H. McMurray, P.C. and McMurray individually.  The majority found that the trial court implicitly made a finding of bad faith by the Firm, and considered “evidence of actual deception of consumers, such as when a former client attempted to obtain a judgment against the Firm.”  Moreover, the district court considered whether the Firm’s misconduct had an “immediate and necessary relation to the equity [it] seeks.”  In previous proceedings, the court of appeals had noted, “The structure of [the Firm’s] business is important in assessing whether [the Firm] has unclean hands. Specifically, [the Firm] may be misusing the trademark to deceive the public into believing it is a single, national firm, when in fact it is a network of separate partnerships.”  Indeed, the majority said in a footnote,
The Firm’s marketing of itself and its regional offices as a “single” law firm is likely to bear an “immediate and necessary relation” to the equity the Firm seeks. Given the singular form of the noun “firm,” “The Cochran Firm” trademark suggests that all practices bearing that mark are part of a single firm.
Nor did the district court abuse its discretion in using California’s Rules of Professional Conduct’s definition of a law firm or expert testimony to guide its findings.
Finally, McMurray’s own unclean hands didn’t bar him from raising the defense.  The district court didn’t abuse its discretion in finding that there was insufficient evidence to support the Firm’s unclean hands argument, and even if there were sufficient evidence, that the Firm was more culpable than McMurray.
Judge Callahan dissented, reasoning that unclean hands findings should be rare in trademark cases. “The Firm’s marketing is not misleading and has little to do with the trademark at stake.”  Worse, “[m]ulti-office businesses will be surprised to learn that they are misleading the public by advertising themselves as ‘single’ and ‘national’ in stature, and thus may not protect any right they hold to their company’s name.”  The dissent complained that the district court had wrongly federalized the definition of a “law firm.”
Initially, the dissent emphasized the “increasingly limited scope” of unclean hands in trademark infringement suits (as Mark McKenna might say, tracking the shift from a business to a consumer protection focus of the overall cause of action, given the dissent’s concession that unclean hands is an “established defense”).  A defendant must demonstrate by “clear, convincing evidence” that (1) plaintiff’s conduct is inequitable and (2) the misconduct relates to the subject matter of plaintiff’s trademark infringement claim.   Inequitable conduct requires a showing that the plaintiff used the trademark to deceive consumers. “[E]ven where bad intent is demonstrated, an appreciable number of consumers must also have actually been deceived for the defense to succeed.”  Then, the defendant must show that the plaintiff’s “misdeeds ... have an immediate and necessary relation to the equity that [the plaintiff] seeks in respect of the matter in litigation,” generally requiring the trademark itself to be misleading or the plaintiff to have acquired its rights with unclean hands.  Using the mark as part of misleading advertising is much less likely to have the requisite relation.
The district court’s findings that the Firm had misrepresented (1) that it was “national” and (2) that its offices were part of a “single” law firm were insufficient to the dissent.  First, the district court didn’t explicitly find that the Firm acted in bad faith in advertising itself as a single, national law firm, or any actual deception.  Second, the district court didn’t find that the Firm’s marketing had an “immediate and necessary relation” to the relief it sought—which was to stop McMurray from trading on the Firm’s goodwill and deceiving the public into believing that he is still a part of The Cochran Firm.
The “single firm” advertising wasn’t sufficiently inequitable to bar relief.  There was no survey evidence of deception, and the trademark itself wasn’t clearly misleading, so “courts should demand at least some comparable evidence of consumer deception.”  (Indeed, the dissent said, surveys should rarely be necessary, because only egregiously misleading marketing featuring the trademark should support an unclean hands defense.)  The evidence cited by the majority was that “a lawyer for a former client’s conservator named the Firm as a defendant in a lawsuit seeking to recover a judgment”; the dissent dismissed this as a mere litigation tactic, which didn’t show that the former client herself was misled. 
The dissent would also have found that the district court erred in relying on California’s Rules of Professional Conduct for lawyers to inform its understanding of how the public understands the term “law firm.”  Even if the public did follow that understanding, the dissent argued that the Firm’s “hub and spoke” structure wasn’t contrary to any rule.  An ABA opinion expressly condones, “at least from the ethical point of view,” the franchise-like “licensing” of a law firm’s name “to create a national network of firms, all of which will use the original firm’s name under a licensing agreement by which the original firm will provide all marketing for the firms in the network.”
The California Practice Guide to Professional Responsibility similarly provides that franchising of a law firm’s name is permissible where “the franchisor is in a partnership with each franchisee.” The dissent noted that the Firm complied with this guidance, and also highlighted the district court’s findings that the Firm had nationwide “prestige”; coordinated across offices on class actions and multi-district litigation; had numerous nation-wide standardized resources and procedures; required regional offices to carry liability insurance; vetted employees and ensured “that the regional offices are managed by a managing partner that Johnnie Cochran knew”; and exerted a degree of “control over the regional offices.”
Thus, neither the “single” nor “national” branding was inequitable, and “national” had no immediate and necessary relation to the trademark.   
The dissent closed by warning that many law firms use a similar structure.  “The closeness of bonds between the offices that comprise a firm varies significantly by office and firm. It does not follow that regional offices that operate more independently mislead the public or violate rules of professional conduct by holding themselves out as part of a larger, single law firm.”

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