Thinking About Fraud: Where Does "Inadvertence" End and "Reckless Disregard" Begin?

Countless articles, seminars, webinars, and postings have informed us that in In re Bose Corporation, 91 USPQ2d 1938 (Fed. Cir. 2009), the CAFC rejected the "knew or should have known" standard for fraud set out by the TTAB in Medinol Ltd. v. Neuro Vasx, Inc., 67 USPQ2d 1205 (TTAB 2003). The CAFC ruled that the Board, "[b]y equating 'should have known' with a subjective intent," had "erroneously lowered the fraud standard to a simple negligence standard." But what if the Medinol case were to come down the pike today? Applying Bose, was it fraud when Neuro Vasx filed its Statement of Use and "overlooked" one of two items in the identification of goods?


In Bose, the CAFC held that "a trademark is obtained fraudulently under the Lanham Act only if the applicant or registrant knowingly makes a false, material representation with the intent to deceive the PTO."

"There is no fraud if a false misrepresentation is occasioned by an honest misunderstanding or inadvertence without a willful intent to deceive."

The facts in Bose fell under the "honest misunderstanding" umbrella. Do the Medinol facts qualify for the "inadvertence" shield? Let's explore.


Honest Misunderstanding: Bose's General Counsel, Mark Sullivan, signed a Section 8 Declaration in 2001 verifying that the mark WAVE was still in use for audio recorders. Sullivan explained that in his belief, Bose's repairing of the damaged, previously-sold WAVE audio tape recorders and players and returning the repaired goods to the customers met the "use in commerce" requirement for the renewal of the trademark.

It turned out that Sullivan's statement was legally incorrect -- returning repaired goods does not constitute "use" of the mark -- but prior to 2001, neither the PTO nor any court had interpreted "use in commerce" to exclude the repairing and shipping of repaired goods.

Sullivan testified under oath that he believed the statement was true at the time he signed the renewal application. Unless the challenger can point to evidence to support an inference of deceptive intent, it has failed to satisfy the clear and convincing evidence standard required to establish a fraud claim.

The CAFC found "no substantial evidence that Bose intended to deceive the PTO in the renewal process," and it therefore reversed the TTAB's fraud ruling.

"Subjective intent to deceive, however difficult it may be to prove, is an indispensable element in the analysis. Of course, 'because direct evidence of deceptive intent is rarely available, such intent can be inferred from indirect and circumstantial evidence. But such evidence must still be clear and convincing, and inferences drawn from lesser evidence cannot satisfy the deceptive intent requirement.'" [citation omitted].

So Bose had an explanation for the false statement of use. The law was unclear, and Sullivan could honestly believe that the WAVE mark was still in "use" for audio recorders. [The TTAB had questioned whether this belief was reasonable, but the CAFC stated that reasonableness "is not part of the analysis." That seems a bit strange to me, since an honest, totally off-the-wall, belief would hardly seem a legitimate explanation that would avoid fraud.]

We have seen at least one other fraud case in which the declarant was absolved of fraud because of an honest (reasonable) belief in the truth of the statement made: Maids to Order of Ohio, Inc. v. Maid-to-Order, Inc., 78 USPQ2d 1899 (TTAB 2006) ["It was not unreasonable for Ms. Kern, as a layperson, to believe that the ... activities constituted use of the MAID TO ORDER mark in interstate commerce."] But a claimed failure to understand basic trademark law does not excuse fraud. See, e.g. Hurley Int'l LLC v. Volta, 82 USPQ2d 1339 (TTAB 2007) [Board rejected Australian Applicants' claim of misunderstanding as to the requirements of Section 1(a)]; Standard Knitting, Ltd. v. Toyota Jidosha Kabushiki Kaisha, 77 USPQ2d 1917 (TTAB 2006) [Board rejected claim of Canadian registrant that it did not understand the term "use in commerce"].

In short, if a party is going to rely on the "honest misunderstanding" excuse to avoid fraud, it had better have a good explanation. Unfamiliarity with basic trademark law will not do the trick.


stent (Medinaol, not Neuro Vasx)

Inadvertence: In Medinol, Registrant Neuro Vasx verified in its Statement of Use that its mark NEUROVASX had been in use for "medical devices, namely, neurological stents and catheters." After Medinol's petition for cancellation was filed alleging that the SOU was fraudulent, Neuro Vasx admitted in its answer that it had not used the mark for stents. It moved to amend the registration to delete "stents," claiming that the word had been "overlooked" when the SOU form was completed. The Board denied the motion to amend and instead entered summary judgment sua sponte against Neuro Vasx on the ground of fraud. Although it accepted the "overlooked" statement, the Board still found fraud under the now-defunct "knew or should have known standard."

Suppose the TTAB were deciding Medinol today? Would Neuro Vasx's alibi qualify as "inadvertence" under Bose? Is that all a declarant has to do to avoid a fraud ruling: claim the error was overlooked? Suppose an applicant or registrant "overlooked" not one of two items, but two out of four? 10 out of 20? 50 out of 100?

Just what "sins of overlooking" does the inadvertence shield cover? Is it more likely excusable to overlook one item out of 50 than one item out of two? Does it matter whether the overlooked item is closely related to the other(s): for example, overlooking "v-necked t-shirts" in a list of 100 clothing items may be more readily excusable than overlooking "nuclear power plants" in an identification that lists only "chewing gum and nuclear power plants."

Since it is highly unlikely that any applicant or registrant will admit that it intended to deceive the USPTO, maybe the question should be posed this way: When does failure to pay attention turn into "reckless disregard for the truth," and thus fraud? The CAFC in Bose declined to reach the issue of whether recklessness constitutes fraud. But the Board's recent precedential decision in DaimlerChrysler Corporation and Chrysler, LLC v. American Motors Corporation, Cancellation No. 92045099 (January 14, 2010) suggests that "reckless disregard" may suffice. There, in denying Daimler Chrysler's motion for summary judgment based on alleged fraud, the Board pointed out that Petitioner DC offered no direct evidence regarding AMC's intent to deceive the PTO, nor

"any indirect or circumstantial evidence which would lead us to the inevitable conclusion (which on summary judgment means the absence of any genuine issue of material fact) that respondent had the intent to deceive the office, or at least had a reckless disregard for the truth)." [emphasis supplied].

Other thoughts: As noted, one is not likely to obtain an admission that the declarant intended to deceive the USPTO, and so fraud will have to be proved by circumstantial evidence. Presumably, most applicants or registrants will claim either an honest misunderstanding of the law or inadvertence. Those who seek to establish a fraud defense will need to explore both aspects through discovery.

As we have seen, in some cases there may be legitimate doubt on the part of the declarant regarding whether there was "use" under the Lanham Act, and so the "honest misunderstanding" prong of Bose will apply. But in most cases the "honest misunderstanding" excuse will probably not be available because it will be clear (typically after discovery) that the mark had simply not been used with some of the identified goods or services.

In those many cases, the declarant will likely claim that the false statement resulted from "inadvertence" of some sort. But one suspects that, as a practical matter, the higher the ratio of "overlooked" goods or services to the total identified, the less the "inadvertence" excuse will be asserted. At some point the declarant will recognize that "indavertence" won't work, and that it will have to try some other explanation.

A declarant might claim (in desperation) that he or she failed to read the document that was verified, but that would certainly seem to fall within the "reckless disregard for the truth" category. Wouldn't that, shouldn't that, be fraud? If it isn't, then let's not bother with verification anymore.

Or suppose the declarant read the statement and assumed it was correct, but did nothing to investigate the truth of the statement? Medinol and its progeny stress that statements made with "such degree of solemnity" should be thoroughly investigated prior to signature." Is that a "reckless disregard" amounting to fraud?

If reckless disregard does support a fraud claim, one is left to wonder where "inadvertence" leaves off and "reckless disregard" begins. On which side of the line would Medinol fall? The answer to that question may tell us a lot about the viability of the fraud defense in TTAB proceedings.

The DaimlerChryler case provides welcome guidance on how to plead a fraud claim. Now we need the Board to populate the landscape with cases finding fraud so that we can draw the new fraud roadmap.

Text Copyright John L. Welch 2010.