Third Circuit Takes the Wind Out of Sails of Trademark Bullies and Enhances the Possibility of Recovering Attorneys’ Fees from Them

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Third Circuit Takes the Wind Out of Sails of Trademark Bullies and Enhances the Possibility of Recovering Attorneys’ Fees from Them

On September 4, 2014, the Third Circuit, the circuit that covers Pennsylvania, New Jersey, Delaware and Virgin Islands, made it easier for a winning party to recover attorneys’ fees from a losing party in a trademark case. Fair Wind Sailing, Inc. v. Dempster, Nos. 13-3305 & 14-1572, 2014 U.S. App. LEXIS 17118 (Sept. 4, 2014).

In U.S., each litigant generally pays its own attorneys’ fees, win or lose, unless a special statute applies. As I wrote earlier this year, in a case captioned as Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014), the U.S. Supreme Court made it easier to recover attorneys’ fees in patent cases.

The Supreme Court relaxed the standard to invoke the counsel’s fee-shifting provision under §285 of the U.S. Patent Act. Until Fair Wind, it has been somewhat unclear whether the relaxed standard would apply in trademark cases. Before Octane Fitness, only a few lower courts expressly said that trademark (and copyright) cases should be treated in the same manner as far the application of the counsel’s fee-shifting provision. After Supreme Court’s Octane Fitness, it was unclear how each Circuit or a particular district court would actually interpret that decision and whether or not a court would actually extend its applicability to trademark cases. Third Circuit did. The Third Circuit Court of Appeals interpreted Octane Fitness as a clear message from the U.S. Supreme Court that it “was defining ‘exceptional’ not just for the fee provision in the Patent Act, but for the fee provision in the Trademark Act [also known as the Lanham Act] as well.”

It is important to understand the facts when you consider the award of attorneys’ fees, and the facts in Fair Wind are interesting. This is a case of a company (employer) suing its former employee. However, rather than using a breach of non-compete agreement and/or stealing trade secrets, the plaintiff company (unsuccessfully and some would say foolishly) invoked an unfair competition provision of the Trademark (Lanham) Act.

Fair Wind, a sailing school, sued its former employee, Scott Dempster, individually and the competing company Virgin Island Sailing School (VISS), he co-founded. Fair Wind alleged that Defendants violated Fair Wind’s trade dress under § 43(a) of the Lanham Act. (Fair Wind also alleged unjust enrichment by VISS by copying aspects of Fair Wind’s business model.)

The District Court dismissed Fair Wind’s trade dress and unjust enrichment claims, and subsequently awarded Defendants fees under Virgin Islands law. Fair Wind challenged both the dismissal of its claims and the award of attorneys’ fees.

The Third Circuit Court of Appeals upheld the dismissal of the claims, but reversed the award of fees to the extent that the award covered the Lanham Act claim. The District Court didn’t determine whether this case was “exceptional” (which merits attorneys’ fees). What significant though is that the Court of Appeals held that Supreme Court’s Octane Fitness standard applies to trademark cases.

The Court of Appeals held that “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigation position (considering both the governing law and the facts of the case) or the unreasonable manner in which it was litigated. Consequently, the previous standard in the Third Circuit, which required a finding of culpable behavior before awarding fees, is no longer a prerequisite.

The District Court awarded the attorney’s fees apparently for Fair Wind’s improper use of the Lanham Act for claiming infringement of unregistered trade dress. Section 43(a) of the Lanham Act protects from deceptive imitation not only a business’s traditional trademarks such as words (COCA-COLA) or logos (Nike’s swoosh), but also its “trade dress.” Trade dress has been defined as the total image or overall appearance of a product, and includes such features as size, shape, color or color combinations, texture, graphics, or even a particular sales technique. For example, the layout of Planet Hollywood restaurants would qualify for protection as trade dress. In particular, a menu, in combination with other aspects of a restaurant’s decor, can constitute protectable trade dress.

Unlike a “traditional” trademark, trade dress is often a combination of things. The visual appearance of a product or its packaging (for example, the artwork, colors and other features on a container for butter spread) or a service (for example, the design of a building or the “look and feel” of a website) that signify the source of the product to consumers. The important thing is that customers recognize that the “trade dress” is a brand, not just a functional element or feature of a product or service.

Compare: the shape of a baby bottle, for example, was held functional, so that a baby can hold the bottle.

In Fair Wind, plaintiff argued that its trade dress is “the combination of its choice to solely employ catamaran vessels” and its “unique teaching curriculum, student testimonials, and registered domain name,” which “all combine to identify Fair Wind’s uniquely configured business to the general public.” The Court described this as a “hodgepodge of unconnected pieces of its business, which together do not comprise any sort of composite visual effect.” The Court has concluded that plaintiff has failed to allege “overall look it wishes to protect” and affirmed the District Court’s dismissal of plaintiff’s complaint, without any trial.

The District Court awarded attorneys’ fees to VISS without segregating which fees were accrued defending the federal claim. The District Court also did not explain that the case was “exceptional” under § 35(a) of the Lanham Act. The Court of Appeals vacated the decision in that part noting the District Court should have done the analysis. The Court of Appeals itself declined to decide whether the case was exceptional, but noted that the District Court was in a better position for that task.

The Court of Appeals, however, provided guidance, in further explanation of Supreme Court’s Octane Fitness:

Under Octane Fitness, a district court may find a case “exceptional,” and therefore award fees to the prevailing party, when (a) there is an unusual discrepancy in the merits of the positions taken by the parties or (b) the losing party has litigated the case in an “unreasonable manner.” Whether litigation positions or litigation tactics are “exceptional” enough to merit attorneys’ fees must be determined by district courts “in the case-by-case exercise of their discretion, considering the totality of the circumstances.” Importantly, that discretion is not cabined by a threshold requirement that the losing party acted culpably. The losing party’s blameworthiness may well play a role in a district court’s analysis of the “exceptionality” of a case, but Octane Fitness has eliminated the first step in our two-step test for awarding fees under § 35(a) of the Lanham Act.

Third Circuit’s Fair Wind decision has several implications. The relaxed standard for the award of attorneys’ fees can be used by both plaintiffs and defendants. Normally, the most common remedy is to stop the infringer from further infringing activity. Money rarely changes hands in trademark cases. That rarity of financial exposure often emboldens infringers. When there is little at risk, infringers often challenge plaintiffs with defiance. Fair Wind obviously makes this type of behavior on the part of trademark infringers riskier. Thus, there will likely be more cases where a plaintiff can recover its attorney’ fees from a trademark infringer.

Conversely, small business owners can use Fair Wind to its advantage against trademark bullies. The United States Patent and Trademark Office (USPTO) has defined trademark bullying as the practice of a trademark holder using litigation tactics in an attempt to enforce trademark rights beyond a reasonable interpretation of the scope of the rights granted to the trademark holder. This means that some businesses, both large and small, are filing trademark suits against trademark holders in an attempt to forcefully dissuade that trademark holder from using their own trademark. (Monster Energy Drink went after Vermonster beer for trademark infringement and that case prompted Vermont Senator Patrick Leahy take an interest in trademark bullies. The subsequent studies including by USPTO ensued.) Just like it is said Octane Fitness is supposed to deter patent trolls, Fair Wind should equip small and middle size trademark owners against trademark bullies.

Text © Maxim A. Voltchenko 2014
* This piece is not intended to be a judicial or legal review. This posting may not necessarily represent the views of the author’s employing law firm. Although every effort has been made to verify the accuracy of items in this Blog, readers are urged to check independently on matters of specific concern or interest.