Ninth Circuit: DJ dismissal reversed; concurrent TTAB proceedings, Rule 408 don't warrant dismissal

October 17, 2007
Post by Blog Staff

On Monday, the Ninth Circuit addressed the issue of a federal court's subject matter jurisdiction over a trademark declaratory relief action when an infringement action has not been brought and proceedings related to the trademark are pending at the Trademark Trial and Appeal Board (TTAB). The district court dismissed the case as not presenting a sufficient case or controversy to support jurisdiction, and also noted that the case should be dismissed under the doctrine of "primary jurisdiction" given the concurrent proceedings at the TTAB.The court held (1) that a defendant had shown a real controversy in order to establish subject matter jurisdiction, (2) that related proceedings at the TTAB could not be the basis for denying jurisdiction under the doctrine of primary jurisdiction, and (3) that the district court abused its discretion when it declined jurisdiction under 28 U.S.C. § 2201. In doing so, the court rejected the declaratory judgment defendant's contention that any proof of a "case or controversy" was privileged under Rule 408 for purposes of establishing jurisdiction, as the settlement letters were not offered for one of the enumerated reasons in the Rule. The court also remanded the case back to a different judge. More detail of Rhoades v. Avon Prods., Inc. after the jump.

Plaintiff DermaNew began marketing skin care products under various slogans such as "DermaNew" and "KeraNew." Avon contested registration of these marks at the TTAB based on its skin care product, "ANEW." The parties then began settlement negotiations lasting four years, during which DermaNew claimed that Avon (1) made statements indicating it would bring an infringement action, (2) wrote a letter indicating it would initiate additional proceedings and litigation in order to protect its trademark rights, and (3) declared that it would not give up its right to damages during the settlement. Relying on these statements, DermaNew initiated this action asking for declaratory judgment that its trademark applications did not infringe Avon's rights. Avon brought a motion to dismiss, and the district court dismissed the claim for lack of jurisdiction. The district court held there was no true case or controversy, and the TTAB proceedings were the proper place to resolve the dispute under the doctrine of primary jurisdiction. The court also found that it would not exercise its equitable discretion to hear the declaratory judgment action because the complaint was brought with improper motive. In doing so, the court granted the motion to dismiss without allowing DermaNew's counsel an opportunity to respond to the issue of the court's equitable discretion. Instead, the court simply stated that the declaratory action was brought for improper motive. DermaNew timely appealed. The Ninth Circuit reversed. The court first addressed whether there was a true case or controversy sufficient to support federal subject matter jurisdiction. In declaratory judgment actions, this could be shown if a plaintiff has a "real and reasonable apprehension that he will be subject to liability." The court found that the actions Avon engaged in were concrete threats such that DermaNew's apprehension of an infringement suit was reasonable, especially in light of the years of unsuccessful settlement negotiations. Avon then argued that jurisdiction should be denied because the threats were "wholly fabricated" and, even if they were not fabricated, they were protected as privileged information from the settlement proceedings. The Ninth Circuit rejected these arguments. It first stated the proper test is "whether the complaint itself is sufficient to survive a motion to dismiss, not whether the alleged facts [in the complaint] will ultimately prove accurate." The court also found that, under Federal Rules of Evidence Rule 408, evidence from settlement negotiations is only privileged when it is offered to prove liability for, invalidity of, or amount of a claim. Here, the threats made during settlement negotiations were used to satisfy the jurisdictional requirements of an action for declaratory relief, namely, show a threat of a controversy. Thus, the use of the evidence was not prohibited by Rule 408. Avon also argued that jurisdiction should not be found because of DermaNew's bad faith, claiming that DermaNew was trying to short-circuit the TTAB proceedings and avoid discovery through the declaratory proceeding. The Ninth Circuit, however, found that this argument was irrelevant, and that there was only de minimis evidence of bad faith if bad faith existed. This was because DermaNew would be required to produce the discovery materials anyway during the federal court case, and there was no "showing of bad faith so substantial as to foreclose equitable relief" from DermaNew simply bringing the declaratory action to begin with. The Ninth Circuit also addressed the district court's dismissal of the declaratory judgment based on its equitable discretion under 28 U.S.C. § 2201. It first stated that the district court could not decline jurisdiction under the primary jurisdiction doctrine based on the TTAB proceedings, because the doctrine should not apply to TTAB proceedings when the district court addresses issues of infringement. In holding so, the court looked to similar cases in the First and Second Circuits which held that primary jurisdiction ordinarly does not apply to the TTAB, because it is not like ordinary administrative agencies and that, when an infringement claim is involved, there is more urgency to grant relief which can not be granted at the TTAB. Thus, because the TTAB is not primarily designed to deal with declaratory actions of noninfringement, the primary jurisdiction doctrine should not be applicable to this type of proceeding. The court did note, however, that the doctrine may be applicable when the "district court's actions involve only the issue of whether a mark is entitled to registration" and the same issue was pending at the TTAB. In light of these findings, the Ninth Circuit found that the district court abused its discretion in declining jurisdiction. Lastly, the court remanded the case back to a different judge based on 28 U.S.C. § 2106, which, in the Ninth Circuit, permits reassignment on remand if there "is a demonstration of personal bias or unusual circumstances." The court looked at the district court's refusal to hear DermaNew's counsel regarding equitable discretion and the court's reasoning that the claim was brought for improper motive. The court found that the district judge could not "reasonably be expected upon remand to disregard his previous expressed views" in the matter, which met the requirement of an "unusual circumstance" under the statutory language. To read the full decision in Rhoades v. Avon Prods., Inc., click here.

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