More B&B: Fraud on the PTO that led to years of extra litigation isn't "exceptional" for fee purposes

B&B Hardware, Inc. v. Hargis Industries, Inc., No. 17-1570 (8th Cir. Dec. 21, 2018)

H/T C.E. Petit. This comedy of errors might (might!) be ending. The court of appeals affirmed the district court’s judgment in favor of Hargis and its denial of Hargis’s motion for fees and costs.

For those of you who understandably haven’t followed the ins and outs, the opinion does an admirable job of summarizing:

In B&B’s trademark infringement action against Hargis in May 2000, a jury found that B&B’s “Sealtight” mark was not entitled to protection because it lacked secondary meaning. We affirmed. In June 2006, B&B filed for incontestability status for its trademark with the Patent and Trademark Office (PTO). The PTO issued a Notice of Acknowledgment in September 2006, concluding that B&B’s affidavit of incontestability met the statutory requirements.

… Immediately after its 2006 filing for incontestability, B&B brought suit against Hargis again for trademark infringement, unfair competition, trademark dilution, and false designation of origin. …

[T]he Supreme Court of the United States .. found that the district court should have given preclusive effect to a decision of the Trademark Trial and Appeal Board (TTAB) finding that there was a likelihood of confusion between “Sealtight” and “Sealtite.” …

At trial, Hargis argued that B&B obtained its incontestability status through fraud, presenting evidence that B&B failed to inform the PTO about the 2000 jury verdict that B&B’s “Sealtight” mark was merely descriptive.…

The jury found that Hargis infringed on B&B’s trademark but did not do so willfully, awarded B&B none of Hargis’s profits, and found for Hargis on its counterclaims and its affirmative defense of fraud. Based on the jury’s fraud finding, the district court found that “Sealtight” was not entitled to incontestability status, and that B&B therefore had not pled an intervening change in circumstances allowing it to relitigate claims raised inthe 2000 jury trial. The district court therefore entered judgment for Hargis on all claims.

B&B appealed, arguing that the jury verdict finding fraud and a lack of willfulness was clearly erroneous; and that the district court abused its discretion in refusing to disgorge Hargis of its profits. The court of appeals found no plain error.

Incontestability requires an applicant to file an affidavit with the PTO declaring that “there has been no final decision adverse to [his] claim of ownership of such mark . . . or to [his] right to register the same or to keep the same on the register . . . .” “At least one circuit treats a district court’s finding of mere descriptiveness at summary judgment as such an adverse decision.” [And I don’t see how one could conclude otherwise, since descriptiveness means that the symbol is not a mark and thus can’t be owned as a mark. Failure to disclose is important since the PTO doesn’t examine §15 affidavits on the merits as long as it’s facially complete. And the affidavit is “especially important because a defendant accused of infringing an incontestable trademark may raise an affirmative defense that ‘the registration or the incontestable right to use the mark was obtained fraudulently.’” Fraud on the PTO “consists of willfully withholding material information that, if disclosed, would result in an unfavorable outcome.”  Here, materiality means information that a reasonable examiner would have considered important.

Warning: bad argument alert, not fully called out by the court of appeals.  B&B argued that the 2000 verdict wasn’t a final adverse decision. The court of appeals responded that, in 2007, the TTAB explicitly stated that the 2000 jury verdict was an adverse decision that extinguished B&B’s common-law rights in the “Sealtight” name, so there was no plain error in the district court so finding. B&B then argued that its deception wasn’t willful because it didn’t realize the jury verdict was a final adverse decision and that it didn’t disclose that verdict based on the advice of counsel. The jury was entitled to disbelieve B&B’s owner’s testimony on this point. 

15 U.S.C. § 1065 specifies that the affidavit has to include statements that “(1) there has been no final decision adverse to the owner’s claim of ownership of such mark for such goods or services, or to the owner’s right to register the same or to keep the same on the register; and (2) there is no proceeding involving said rights pending in the United States Patent and Trademark Office or in a court and not finally disposed of.” B&B’s predicate to its defense, that “finality” was what mattered, is thus fatally flawed.  Of course, it is in theory possible that its counsel was so incompetent as not to understand this very clear provision of law, especially since courts of appeal apparently feel no need to mention it, but the true requirements for an incontestable registration might lend even more plausibility to the jury’s conclusion.

Given that incontestability was barred by fraud, the court of appeals affirmed the conclusion that collateral estoppel from the 2000 trial now applied again since there was no significant, nonfraudulent intervening factual change. Once Hargis proved the affirmative defense of fraud, B&B lost the benefits of incontestability, including the presumption of validity.  B&B argued that the 2000 district court lacked subject matter jurisdiction to determine whether “Sealtight” had secondary meaning because incontestability precludes any review of descriptiveness, but the mark wasn’t incontestable in 2000. “Absent any evidence that B&B’s mark has developed secondary meaning since the 2000 trial, we decline to allow B&B to relitigate that issue.”

Hargis also wanted its fees, and I sympathize (we haven’t even talked about the other facts B&B played fast & loose with, no pun intended), given that it’s been fighting this ridiculous case for decades.  Despite the fraud finding, the court concluded that “[t]his case does not present an example of groundless, unreasonable, or vexatious litigation, as it has arguable merit on both sides—evidenced by the fact that both parties have prevailed at various times throughout its 12-year history. We cannot say that B&B pursued litigation in bad faith, as it received a favorable Supreme Court ruling and reasonably believed it could prevail.” This conclusion demonstrates the importance of selecting a starting point.  I would have started instead with B&B’s decisions to go to the PTO seeking a workaround to the failure of the first case, to fail to disclose that material adverse result to the PTO, and to deliberately leverage that wrongly granted incontestability as the sole reason to relitigate the whole case.  I would have thought that taking a matter to the Supreme Court on a premise that itself was based in fraud was “exceptional.”  It’s probably also true that Hargis could have disposed of the matter earlier had its attorneys been unusually attentive to the actual requirements of incontestability and had the district court also understood incontestability, but as between the parties I would attribute the responsibility to B&B.