Monday, December 10, 2012

4 decades of laches = permanent injunction

Via David Coale and his firm’s blog on commercial litigation in the Fifth Circuit Court of Appeals, Abraham v. Alpha Chi Omega, No. 12-10525 (5th Cir. Dec. 6, 2012).

Abraham, who does business as Paddle Tramps Manufacturing Company, appealed the district court’s entry of a partial preliminary injunction against his use of trademarks belonging to 32 fraternity and sorority organizations; the Greek organizations cross-appealed the limitation on the injunction. (Abraham should have set up shop in the 9th Circuit, where Job’s Daughters provides the rule.) The court affirmed.

Paddle Tramps was founded in 1961 making wooden paddles and decorations for fraternity and sorority members; it has always sold products bearing Greek organizations’ names and used their names to advertise its products. Abraham began selling by showing samples and taking orders at house visits. By the late 1960s, he was wholesaling component parts, such as wooden Greek and Roman letters and wood-carved crests, to college bookstores and craft stores for customers to asemble. He was also distributing catalogues with Greek organizations’ names and crests. He invested heavily, including rebuilding the business three times after two fires and a tornado. In 1997, he started a website, which began taking direct orders in 2001. At all times, it continued to sell almost exactly the same products it had been selling in the 1960s.

In 1990, the Greek organizations contacted him for the first time about licensing. Abraham ignored the first letter, from an entity called Greek Properties. He ignored a second letter in 1991 (which had contained an application for admission into Greek Properties, requiring him to sign a statement promising not to use any member organization’s marks or terminology without written consent). In 1992, Greek Properties sent him a brochure, but never again tried to get him to join. In 1995, Sigma Chi sent a letter threatening suit. Paddle Tramps responded that it wasn’t interested in a license since it had continuously used Sigma Chi’s name and crest on its products for 34 years without complaint. For the next 13 years, the same person who’d written on behalf of Sigma Chi periodically sent additional letters on behalf of an entity called Affinity Marketing Consultants, which represented about 70 fraternities and sororities. The letters sometimes invited Paddle Tramps to join a licensing program, sometimes ordered it to cease and desist, and sometimes threatened to sue. Paddle Tramps either ignored the letters or responded by refusing to enter into a licensing program.

In 2007, the Greek organizations in the present litigation sued Abraham for patent infringement and unfair competition in the Southern District of Florida. The Florida court dismissed the suit for improper venue. Abraham then sued in 2008 for a declaratory judgment of noninfringement; the Greek organizations counterclaimed for trademark infringement and state dilution. The district court found that Abraham infringed and diluted the marks, a finding Abraham didn’t challenge on appeal, and ordered a trial on Abraham’s affirmative defenses of laches and acquiescence. The jury’s special verdict found that Abraham proved his laches defense; that he proved acquiescence with respect to one of the Greek organizations, Pi Kappa Alpha; and that the Greek organizations didn’t prove unclean hands.

The court found that laches precluded monetary relief, but didn’t bar entry of a permanent injunction against future use of the marks. Paddle Tramps was enjoined from selling or using in advertising (1) the Greek letter combinations associated with the parties to this lawsuit; (2) the full names or nicknames associated with the parties to this lawsuit; and (3) any crest, coat of arms, seal, flag, badge, emblem, or slogan identifiable with any of the parties to this lawsuit, including copies of their crests Abraham carved out of wood. Abraham was allowed to sell and advertise decals of the crests purchased from licensed vendors, as well as “double raised crest backing,” which is carved in the shape of a given organization’s crest and to which Paddle Tramps affixes a licensed decal. (Ironically, it’s hard to imagine this being ok in the 9th Circuit, under Au-tomotive Gold.)

The organizations’ cross-appeal claimed that the jury instructions were fatally flawed and that the laches and unclean hands findings were unsupported by sufficient evidence, because intentional infringement with bad faith intent to capitalize on the trademark owner’s goodwill lacks the clean hands necessary to assert an equitable defense. (I am having a hard time on these facts imagining any jury, however instructed, failing to find laches. Take your prospective injunction and be grateful you got away with that, guys.) Jury instructions are reviewed for abuse of discretion and even erroneous instructions only matter if they affect an outcome; the non-moving party’s evidence is credited whenever the jury wouldn’t have been required to believe evidence favorable to the moving party. The challenged instruction was:

To prevail on their claim that Mr. Abraham may not assert the laches or acquiescence defenses because he has unclean hands, the Greek Organizations must prove by a preponderance of the evidence that Mr. Abraham knowingly intended to use the Greek Organizations’ marks for the purpose of deriving benefit from the Greek Organizations’ goodwill. Unclean hands may be found only where the unlicensed user “subjectively and knowingly” intended to cause mistake or to confuse or deceive buyers. Mere awareness of a trademark owner’s claim to the same mark does not amount to having unclean hands nor establishes bad intent necessary to preclude laches and acquiescence defenses. The owner of the mark must demonstrate that at the time the unlicensed user began using the marks or sometime thereafter, said unlicensed user knowingly and intentionally did so with the bad faith intent to benefit from or capitalize on the mark owner’s goodwill.

This instruction used language from a Fifth Circuit case, which also said that “the plaintiff must offer something more than mere objective evidence to demonstrate that the defendant employed the allegedly infringing mark with the wrongful intent of capitalizing on its goodwill.”  

The Greek organizations argued that this ignored the teaching of Boston Professional Hockey that the confusion requirement is met because Paddle Tramps duplicated the marks and sold them knowing that the public would identify them as the organizations’ marks.  But Boston Professional Hockey isn’t an unclean hands case.  “If the confusion or deception required to make out a case of trademark infringement were the same as the confusion or deception required to make out an unclean hands counter-defense, then every trademark infringer would necessarily have unclean hands.”

The Greek organizations then argued that it was error to say that “mere awareness” of a trademark owner’s claim is insufficient; the court should have said that the pertinent confusion should be inferred or presumed if Abraham “intended to derive benefit from or capitalize” on the marks. This again confused the elements of infringement with unclean hands.  Evidence that gives rise to a presumption of intent to cause confusion for the purposes of infringement analysis does not give rise to a presumption that the defendant intended to appropriate the plaintiff’s goodwill.  (Of course, this distinction is entirely silly, but that’s because the Fifth Circuit’s definition of what counts as intent for purposes of infringement analysis is ridiculously overbroad.)  The district court’s instructions didn’t abuse its discretion.

Next, the organizations argued that the jury’s rejection of unclean hands was unsupported by the evidence because Abraham stated at trial that his infringing products “drive the sales” of Paddle Tramps’s other products, which they interpreted to mean that he intentionally capitalized on their goodwill.  Snack Apparel affirmed a finding of unclean hands where an apparel manufacturer “admitted that it intentionally incorporated the [trademark owner] Universities’ color schemes and other indicia in order to specifically call the Universities to the public’s mind, thus deriving a benefit from the Universities’ reputation.” But the situation was different here because Abraham’s business began before the definition of “confusion” expanded to its current ridiculous size.  Well, the court of appeals said it was different because of Abraham’s evidence “tending to show a lack of bad faith,” but look what it is:

Paddle Tramps helped to create the market for fraternity and sorority paddles decades before the Greek Organizations had a licencing program, Abraham’s intent was to service fraternities and sororities, not to capitalize on their goodwill in bad faith, the products are virtually the same today as they were in the 1960s, and Paddle Tramps never passed itself off as being sponsored or endorsed by the Greek Organizations.

Given the deferential standard of review, this evidence was legally sufficient to allow a jury to find for Abraham on the unclean hands issue. (Frankly I don’t see why it’s not more than sufficient to have granted Abraham summary judgment, but I don’t live under Boston Professional Hockey.)

Then, the Greek organizations challenged the laches finding.  Laches requires “(1) delay in asserting one’s trademark rights, (2) lack of excuse for the delay, and (3) undue prejudice to the alleged infringer caused by the delay.” The organizations argued that the jury was improperly instructed on “lack of excuse” and “undue prejudice,” and also had insufficient evidence to find each element satisfied.  The Greek organizations argued that the lack of excuse instruction should have explained that a trademark owner is excused from delay in taking action against de minimis infringements.  Governing Fifth Circuit precedent says, “Since incidental and isolated infringement may be difficult to detect and cost ineffective to halt, a plaintiff may make a conscious business decision to prosecute only those defendants who pose a threat to its mark.”  But that’s about whether laches bars a permanent injunction, not about whether laches applies.  “[I]t might not make economic sense for a trademark owner to go after de minimis infringers, but if a de minimis infringer begins to diminish the value of the mark more in the future, the trademark holder should be entitled to a permanent injunction notwithstanding the applicability of laches.”  The jury was instructed on the doctrine of progressive encroachment, which excuses delay when the unlicensed user later modifies or intensifies its use of a mark so that it starts to significantly impact the trademark owner.  Given this instruction, the district court didn’t abuse its discretion.

The organizations then argued that they had an excuse for their delay because Abraham’s infringement was always de minimis.  “Just under 2.5% of Paddle Tramps’s revenue derives from the sale of infringing products, and the average royalty owed by Paddle Tramps to each of the Greek Organizations for the past few years of infringing conduct was only $140.78 annually.”  But the evidence could support the jury’s finding, because of the creation of the website in 1997 and the sale of products directly from that site in 2001 could be considered an increase in scope, and a further delay of 6 years could support a finding of progressive encroachment.  On undue prejudice, the district court instructed:

An unlicensed user is unduly prejudiced when, in reliance on the trademark owner’s unexcused delay in filing suit, he or she makes major business investments or expansions that depend on the use of the marks; these investments and expansions would suffer appreciable loss if the marks were enforced; and this loss would not have been incurred had the trademark owner enforced his rights earlier. The amount of prejudice suffered by the unlicensed user in a given case may vary with the length of the delay; that is, the longer the period of delay, the more likely it is that undue prejudice has occurred.… [Y]ou must consider what business investments and expansions Mr. Abraham made between the time the Greek Organizations knew or should have known of his use of their marks and the time they filed suit against him.

The Greek organizations argued that the instructions should have asked whether an injunction would “destroy[] the investment in the capital,” quoting Elvis Presley Enter., Inc. v. Capece, 141 F.3d 188 (5th Cir. 1998), which held that there was no undue prejudice where changing the name of a nightclub wouldn’t destroy the investment of capital in that nightclub.  But that’s not the definitive test.  The question is whether the infringer would suffer losses that would have been avoided if the trademark owner hadn’t delayed, as McCarthy suggests.  The instruction wasn’t an abuse of discretion.

Then, the organizations argued that the finding of undue prejudice wasn’t supported by the evidence; the court of appeals found this a “close” question.  Here, the Greek organizations argued, the infringing items made up a small percentage of Paddle Tramp’s overall sales, and the equipment could be, and indeed mostly was, used to make noninfringing products.  However, Paddle Tramps put in enough evidence at trial to support the jury’s finding.  “Abraham testified he rebuilt the business three times—twice after fires and once after a tornado—and he would not have done so had he known the Greek Organizations would later sue him to enforce their trademarks.… In addition, Abraham testified the infringing products, while perhaps a small percentage of his total sales, drive the sale of his non-infringing products because without them customers might choose to purchase the component parts to their paddles somewhere else.”

Abraham, for his part, challenged the injunction given the length of the laches period and the harm to his noninfringing business.  Laches ordinarily doesn’t bar injunctive relief, just works as implied consent creating a revocable license (and apparently doesn’t invalidate the mark for lack of quality control).  However, laches may defeat claims for injunctive relief, with sufficient reliance, at least as to current activities.  An injunction barring defendant’s expansion is a different matter and should generally be granted, since the defendant will be hard pressed to show reliance before the expansion takes place.  An injunction must depend on the degree to which delay prejudiced the defendant.

Abraham argued that the district court wrongly put the burden on him to show why an injunction shouldn’t issue.  But that was consistent with McCarthy, who stated, “All that must be proven to establish liability and the need for an injunction against infringement is the likelihood of confusion—injury is presumed.”  (A couple of notes here—does that really apply in the presence of laches?  Does that really apply after eBay?  A yes answer to the latter question requires at least some serious thought.)  So, the district court didn’t err in looking at the degree of prejudice.

In terms of Abraham’s advertising, Abraham could easily continue to advertise all his products without using the Greek organizations’ names and insignia.  He could use names and insignia of other fraternities and sororities without licensing programs, or he could use fictional names.  The court rejected his request to use only disclaimers.

The district court also enjoined Abraham’s sale of objects containing the Greek Organizations’s full names, objects copied from the Greek Organizations’s crest or insignia, and wood reproductions of their crests. However, the prejudice to Paddle Tramps from banning the sale of the double raised crest backings was too much given Abraham’s investment in his business due to the trademark owners’ delay. This wasn’t an abuse of discretion.  “The injunction prevents Abraham from selling products that make up less than 2.44% of his total sales. This will not put Abraham out of business. The infringing item Abraham can continue to sell, the double raised crest backing, is the product Abraham contended drove his sales of other non-infringing products—the only item that if enjoined from selling, would cause Abraham substantial prejudice.”

Nor was the court required to use disclaimers if possible.  The court made no legal error; in Westchester Media v. PRL USA Holdings, Inc., 214 F.3d 658 (5th Cir. 2000), the court held that the lower court misinterpreted applicable law in discounting the First Amendment interests of Polo magazine in retaining its name, and that disclaimers should have been considered.  But here Abraham didn’t argue that his use of the Greek organizations’ marks was “expressive to an appreciable degree.”  (He should have, though I understand why he didn't.  Apparently a trademark’s only expressive when the owner uses it?  Oh hey, there’s a Fifth Circuit case from last month with completely opposite First Amendment reasoning about the free speech value of identifiers in a non-trademark context.)  Abraham argued that laches and acquiescence could also counsel in favor of disclaimers, but that was within the district court’s discretion in balancing the equities.

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