Friday, April 18, 2008

CAFC Bars Cancellation Petition as Collateral Attack on Prior Federal Court Judgment

In a precedential ruling, the CAFC affirmed the TTAB's decision granting summary judgment to Nylok Corporation and dismissing Nasalak Coating Corporation's petition for cancellation of a Nylok registration. The Board (here) found that the petition was barred by res judicata (claim preclusion) in light of a federal court default judgment entered against Nasalok in Nylok's trademark infringement action. The CAFC took a slightly different tack, ruling that Nasalok's petition for cancellation "amounted to a collateral attack on the district court's judgment," and therefore that "the rules of defendant preclusion are properly applied to bar Nasalok from asserting that claim." Nasalok Coating Corp. v. Nylok Corp., 86 USPQ2d 1369 (Fed. Cir. 2008) [precedential].

The U.S. District Court for the Northern District of Illinois had entered a default judgment against Nasalok in 2005. The court enjoined Nasalok from selling or importing "any self-locking fastener having a nylon locking element ... having the color blue ...."

Five months later, Nasalok filed a petition for cancellation of one of Nylok's involved registrations, alleging that the registration was invalid on various grounds.

Nylok moved for summary judgment before the Board, leading to the Board's decision that the petition was barred by the doctrine of claim preclusion.

The CAFC observed the Board's ruling presented questions of law, which the appellate court reviews without deference. It pointed out that res judicata involves two related concepts: claim preclusion and issue preclusion. Because the district court's judgment was issued on default, no particular issues were decided, and so issue preclusion does not apply.

The Board erroneously applied the test for claim preclusion that is applicable to a second action by the same plaintiff. Somewhat different rules apply against a defendant in the first action who brings a later action: a defendant is precluded only if (1) the claim or defense it attempts to raise was a compulsory counterclaim that it failed to raise in the first action, or (2) the claim or defense amounts to a collateral attack on the first judgment.

The CAFC concluded, on an issue of first impression, that Defendant's claim for trademark invalidity was not a compulsory counterclaim in the federal action. First, the subject matter of plaintiff's infringement claim and the subject matter of the petition for cancellation do not arise out of the same "transaction or occurrence." See FRCP 13(a)(1)(A).

"In this case, therefore, the 'essential facts' alleged by Nylok in the infringement action - related to Nylok's ownership of the mark and Nasalok's allegedly infringing behaviour - do not form the basis of the cancellation claim now asserted by Nasalok, which is based on attributes of Nylok's mark and on Nylok's actions in obtaining registration of that mark."

The CAFC noted that in the patent context, it has explicitly held that "a determination of patent infringement in an infringement suit, or even an explicit determination of patent invalidity does not preclude the assertion of an invalidity defense in a second action involving different products." Moreover, according to the CAFC, "the policy considerations driving those [patent] decisions are equally applicable here."

"A plaintiff who brings an infringement suit as to one allegedly infringing use of a mark would not be precluded from later bringing a second infringement suit as to another use; similarly a defendant in the first infringement suit should not be precluded from raising invalidity of the mark in the second action simply because it was not raised as a counterclaim in the first action."

"Finally, 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." See Lear, Inc. v. Adkins, 395 U.S. 653 (1969).

The court then turned to the second basis for applying defendant preclusion, and concluded that the later action essentially amounts to an improper collateral attack on the district court judgment.

"Allowing Nasalok to challenge the validity of the '840 Registration, which grants Nylok rights in the use of 'a patch of the color blue on a selected number of treads of an externally threaded fastener,' would effectively undo the relief granted by the district court in the infringement action."

The district court judgment was based on a determination that Nasalok had infringed "one or more" of seven registered trademarks, and it enjoined Nasalok from using the color blue on "any self-locking fastener." Cancellation of the '840 registration would therefore require modification of the injunction to permit the use of the color blue on "externally threaded fastener[s], with the blue patch extending more that 90 degrees and less than 30 degrees around the circumference of the fasteners ... since the other six trademarks in question would not cover such use."

Therefore, the CAFC affirmed the summary judgment granted by the Board to Nylok.

In a concurring opinion, Judge Pauline Newman would affirm the Board's decision on the original ground stated by the Board: claim preclusion. She found the compulsory counterclaim issue to be irrelevant here because the validity of the mark was before the district court. Neither the parties nor the TTAB raised the issue of defendant preclusion.

Nasolok did not appeal any aspect of the district court's decision. As the TTAB observed, validity was decided and was not appealed. The discussion of compulsory counterclaims is irrelevant because "the validity aspects that might have been contested by counterclaim were presented as a premise of the complaint."

Furthermore, Judge Newman pointed out that patent public policy and trademark public policy are not the same. "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.

TTABlog comment: I agree with Judge Newman. I think that by defaulting in the district court case, Nasalok should lose all right to challenge the validity of the registrations that were put into issue by the plaintiff.

Note the recent, precedential Board decision in the FORADODGE case (TTABlogged here), granting a summary judgment motion to Opposer based upon a prior district court ruling. It seems like you just can't get a second bite of the apple when you want one.

Text Copyright John L. Welch 2008.


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