United States: Rehearing Dissent Again Attacks Federal Circuit Standing Decision

Federal Circuit Judge Evan J. Wallach once again has disagreed with the Court's decision in Australian Therapeutic Supplies Pty. Ltd. v. Naked TM, LLC (Australian III), 965 F.3d 1370 (Fed. Cir. 2020), this time dissenting from the denial of a petition for rehearing en banc. In particular, Judge Wallach again takes issue with the Court's holding that "proprietary rights" are not required to bring a petition for trademark cancellation, and that petitioner's cause of action was not precluded by a prior settlement agreement. According to Judge Wallach, the Court's decision in Australian III (i) conflicts with Federal Circuit precedent requiring a "legitimate commercial interest" to have a valid cause of action for cancellation under 15 U.S.C. § 1064; (ii) undermines Federal Circuit law favoring the enforcement of settlement agreements; and (3) raises questions on the impact of Supreme Court precedent on Federal Circuit statutory standing decisions.

The procedural background, briefly, is as follows: Naked TM, LLC and Australian Therapeutic Supplies Pty. Ltd. both sell condoms in the U.S. Naked and Australian entered into an "informal" settlement agreement under which Australian "agreed that it would not use or register the mark NAKED for condoms in the United States and that [Naked] could use and register the mark NAKED for condoms in the United States.". Subsequently, Naked's application for the mark NAKED (typed drawing) for condoms was registered on the Principal Register. Almost five years later, Australian filed a petition to cancel Naked's registration of the NAKED mark, alleging fraud, likelihood of confusion, and false suggestion of a connection and asserting statutory standing based on Australian's prior use and attempted registration of the mark NAKED and NAKED CONDOMS both for condoms in the U.S.

The TTAB concluded that there was a "likelihood of confusion and inevitable confusion" between the two NAKED marks. The Board also found, however, that "genuine disputes of material fact exist[ed] regarding [Australian's] [statutory] standing." Following trial, the Board concluded that Australian had failed to prove that it had statutory standing to petition for cancellation of Naked's registration of the NAKED mark. Per the Board, under its prior settlement agreement with Naked Australian had "agreed that it would not use or register the mark NAKED for condoms in the United States and that [Naked] could use and register the mark NAKED for condoms in the United States." As such, Australian, having "contracted away its right to use and register NAKED and by extension NAKED CONDOMS," had "failed to prove that it has standing to cancel the [NAKED] registration."

On appeal, in Australian III, the Federal Circuit reversed and remanded the Board's decision, concluding that the Board "erred when it determined that Australian must have proprietary rights" to petition for cancellation under § 1064, and "that[,] based on the facts established before the Board, Australian has a real interest in the cancellation proceeding and a reasonable belief of damage, thereby satisfying the statutory requirements to seek cancellation." The Court explained that Australian had "demonstrate[d] a real interest in the proceeding because it twice filed an application to register its unregistered mark" and had undertaken "advertising and sales in the United States" using the NAKED mark. Judge Wallach dissented, arguing that Australian had failed to show "a legitimate commercial interest," and therefore any real interest and reasonable belief in damages, in Naked's registration. Per Judge's Wallach's dissent in the principal ruling, while "[c]ontracting away one's rights to use a trademark" may not "preclude a petitioner from challenging" the registration of that mark before the Board, seeking cancellation in breach of a settlement agreement, and pleading standing on the basis of additional breaches of that agreement, does preclude a petitioner from challenging that mark.

With respect to his argument that Australian III is contrary to Federal Circuit case law requiring that petitioners have a "legitimate commercial interest" to bring a cancellation proceeding, Judge Wallach noted that the Court there concluded that Australian had a valid cause of action to challenge Naked's registration, based on Australian's prior uses and attempted registrations of NAKED. However, again, Australian and Naked had previously entered into a settlement agreement under which Australian agreed not to register the NAKED mark in the United States, not to use the NAKED mark in the U.S, and not to challenge Naked's use and registration of the NAKED mark there. Thus, per Judge Wallach, Australian's petition for cancellation and its proffered bases for its claim were either superseded by or in breach of its settlement agreement with Naked, and Australian accordingly lacked a valid cause of action against Naked for registration of that mark.

With respect to his argument that Australian III is contrary Federal Circuit case law favoring enforcement of settlement agreements, Judge Wallach argued that the Court there did not "meaningfully address" the Board's findings and conclusions with respect to the prior settlement agreement. Judge Wallach noted that, on appeal, Australian did not substantively challenge the Board's finding that the settlement agreement existed, and further noted that the Court in Australian III did not conclude that the Board's finding was unsupported by substantial evidence or that the Board misread the settlement terms. Rather, per Judge Wallach, "without comment or analysis," the Court in Australian III recharacterized the settlement agreement, and the parties' conduct in response to that agreement.

Judge Wallach found internally contradictory Australian III's statement that (i) the Board found "Australian [had] agreed it would not use or register [its NAKED] mark in the United States and . . . Naked could use and register its NAKED mark" there, and (ii) the Board "made no finding" that "Australian [had] agreed not to challenge Naked's use and registration of the NAKED mark." Per Judge Wallach, Australian agreed to Naked's registration of the NAKED mark. A petition for cancellation is contrary to that agreement.

Judge Wallach also found the Court's analysis incorrect. The Board did find that Australian's standing to bring a petition to cancel Naked's registration was "intrinsically connected" with whether the parties had an enforceable agreement precluding Australian from, inter alia, challenging Naked's use and registration of NAKED, and it did conclude that there was such an agreement. Even if Australian's petition itself was not precluded by the settlement agreement, its bases for standing were pre-empted by or in violation of the agreement.

Per Judge Wallach, the Australian III Court's decision risked "weaken[ing] the efficacy of settlements generally.'"

Finally, Judge Wallach argued that the Court's decision in Australian III raised questions as to whether a party must have a valid cause of action at the time of filing. The Court concluded that Australian's trademark application post-dating its petition for cancellation, conferred standing. However, Judge Wallach Noted that the Court had not previously held that use of a "post filing" application is sufficient to establish a statutory cause of action. "Instead, our current jurisprudence suggests the opposite."

Concluding, Judge Wallach said that Australian lacked a legitimate commercial interest in the NAKED mark and, therefore, a valid cause of action against Naked. Any "real controversy between the parties" was resolved by the settlement agreement and Australian was "no more than an intermeddler" in the instant action.

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