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Party defaulting before district court and enjoined cannot attack registration via cancellation
April 17, 2008

In a decision this week, the Federal Circuit held that a party against whom a default judgment was entered in a trademark infringement case before a district court cannot thereafter petition to cancel the registration at issue before the TTAB. The TTAB held the claim barred by res judicata. The court held that res judicata did not apply, because an invalidity counterclaim in the district court was not compulsory under Rule 13, and therefore the party now seeking cancellation was not required to assert the invalidity counterclaim before the district court. However, the court held that the cancellation would be an impermissible collateral attack on the previous judgment, and affirmed the TTAB's decision on that basis.Judge Newman, concurring in the judgment, would have affirmed on the same grounds as the TTAB, namely that because the issue of the registration's validity was decided before the district court, res judicata applied to prevent relitigation of the issue.More detail of Nasalok Coating Corp. v. Nylok Corp. after the jump.Nylok and Nasalok are both in the business of self-locking fasteners using nylon locking elements. Nylok owns a trademark registration for metal externally threaded fasteners, consisting of "a patch of the color blue on a selected number of threads of an externally threaded fastener, with the blue patch extending more than 90 degrees and less than 360 degrees around the circumference of the fastener."In November 2003, Nylok sued Nasalok in the U.S. District Court for the Northern District of Illinois, alleging trademark infringement. Nasalok was properly served with a complaint, but failed to enter an appearance. The district court entered a default judgment infringement in favor of Nylok, finding Nylok's registration valid and infringed, and enjoined Nasalok from selling infringing fasteners in the United States. Nasalok did not appeal the district court's order.Five months after the default judgment, in October 2005, (it took 18 months to get the default judgment), Nasalok filed a petition to cancel Nylok's registration in the USPTO. The petition alleged that the registration was invalid because it was functional, a phantom mark, descriptive, generic, not distinctive, and ornamental; that Nylok's use had not been substantially exclusive; and that Nylok fraudulently obtained the registration by stating the mark had become distinctive through substantially exclusive and continuous use for five years. Nylok moved for summary judgment, arguing that Nasalok was barred by res judicata, for claiming that the registration was invalid because it could have asserted invalidity in the infringement action, but was not.The Trademark Trial and Appeal Board granted summary judgment, holding res judicata barred Nasalok's cancellation petition, as the infringement action and cancellation involved the same parties, the infringement action was a final judgment on the merits, and the cancellation arose out of the same facts as the civil action. Nasalok appealed.On appeal, the Federal Circuit noted the three-part test for whether res judicata applies: (1) identity of parties or their privies; (2) an earlier final judgment on the merits of the claims; and (3) the second claim is based on the same set of transactional facts as the first claim. In the context of defendants, however, the court held that preclusion only applies if (1) the claim or defense asserted in the second action was a compulsory counterclaim that the defendant failed to assert in the first action, or (2) the claim or defense represents what is essentially a collateral attack on the first judgment.

Applying the "defendant preclusion" test, the court first assessed whether an invalidity counterclaim is a compulsory counterclaim under Rule 13. Unable to find any applicable precedent, the court concluded that invalidity is not a compulsory counterclaim in a trademark infringement action. While defendants are permitted by statute, 15 U.S.C. § 1119, to assert a counterclaim to cancel a trademark registration, such a counterclaim is not compulsory, since the subject matter of infringement and invalidity do not arise out of the same transaction or occurrence. The "transaction or occurrence" test considers three factors: (1) Whether the legal and factual issues raised by the claim and counterclaim are largely the same; (2) whether substantially the same evidence supports or refutes both the claim and counterclaim; and (3) whether there is a logical relationship between the claim and the counterclaim. The question for each of these factors is the extent of factual overlap between what the plaintiff must establish to prove its infringement claim and what the defendant must establish to prove its invalidity counterclaim. The court reasoned that the essential facts for infringement action relate to ownership of the mark and the allegedly infringing behavior. In comparison, the basis for trademark cancellation are the attributes of the trademark and the actions in obtaining the registration of the mark. Thus, infringement and cancellation raise different legal and factual issues which are not supported or refuted by substantially the same evidence and are not logically related, such that the claims do not arise out of the same transaction or occurrence. The court also noted that 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, citing the Supreme Court patent licensee estoppel case of Lear, Inc. v. Adkins. In Lear, the Court found a strong federal policy favoring the full and free use of ideas in the public domain, which outweighed the contract principle that forbids a purchaser to repudiate his promise simply because he later becomes dissatisfied with the bargain he has made. Several courts have applied the Lear balancing test to trademarks, recognizing the public interest in ensuring trademark validity. This public interest further supports the court's conclusion that challenges to trademark validity should not be treated as compulsory counterclaims in trademark infringement actions.Accordingly, the petition to cancel was not a compulsory counterclaim in the infringement action, and that half of the defendant preclusion test did not apply.The court then turned to whether the cancellation was essentially a collateral attack on the previous judgment. The court concluded that allowing Nasalok to challenge the validity of the Nylok registration would effectively undo the injunction granted by the district court in the infringement action. Thus, defendant preclusion applied to bar a collateral attack on an earlier judgment. This is true even in a default judgment when due process was satisfied.Judge Newman concurred in the result. She noted that a separate test for defendant preclusion and whether trademark validity is a compulsory or permissive counterclaim in an infringement action were not raised on appeal, were not mentioned by the TTAB, and were never briefed by either party. According to Judge Newman, the majority's elaborate analysis was irrelevant. Instead, as the TTAB recognized, the cancellation proceeding raised the same grounds of invalidity that were decided by the district court, which ruled that the trademark was valid and enforceable. Under these facts, the TTAB properly applied res judicata, as Nylok pleaded validity and enforceability of the trademark before the district court, and Nasalok did not dispute the pleadings. As a result, res judicata prevented the issue from being relitigated at the TTAB: The parties were the same, the issues were the same, the transactional facts were the same, there was a final judgment of validity, and there was an opportunity for appeal.

Judge Newman also disagreed with the majority's extrapolation of the public policy aspects of Lear to the trademark context. She noted the purposes of patent law and trademark law are quite different. As stated by Judge Newman: "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."

To read the full decision in Nasalok Coating Corp. v. Nylok Corp., click here.

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