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Federal Circuit Holds Cancellation Standing Does Not Require Proprietary Interest in Asserted Mark

Publications / Jul 28, 2020

Article by Clyde Shuman

The U.S. Court of Appeals for the Federal Circuit has held that a petitioner seeking to cancel a trademark registration establishes standing to bring a cancellation proceeding under 15 U.S.C. § 1064 by demonstrating a real interest in the cancellation proceeding and a reasonable belief of damage regardless of whether the petitioner lacks a proprietary interest in an asserted unregistered mark. In Australian Therapeutic Supplies Pty. Ltd. v. Naked TM, LLC, Appeal No. 2019-156, the Court reversed and remanded a decision of the Trademark Trial and Appeal Board holding that Australian lacked standing to petition for cancellation of a trademark registration because it had contracted away its proprietary rights in its unregistered marks. On appeal, the Federal Circuit held that an absence of proprietary rights does not in itself negate an interest in the proceeding or a reasonable belief of damage. The Court found that Australian had a real interest in the proceeding and a reasonable belief of damage, satisfying the statutory requirements to seek cancellation of a registered trademark under § 1064.

By way of background, Australian first adopted the mark NAKED for condoms in early 2000 and started advertising, promoting, and selling condoms under the marks NAKED and NAKED CONDOM in Australia. By April 2003, Australian, via its website, was advertising, selling, and shipping condoms featuring its unregistered NAKED mark to customers in the United States.

Naked owns a U.S. trademark registration for the mark NAKED for condoms. In late 2005, Australian learned that Naked’s predecessor-in-interest had filed a trademark

application for NAKED condoms in 2003. in 2006, Australian contacted Naked and claimed rights in its unregistered mark. For the next several months, Australian and Naked engaged in settlement negotiations via email. The parties dispute whether the email correspondence is evidence of an agreement.

In 2006, Australian filed a petition to cancel registration of the NAKED mark, asserting prior use of the mark and alleging fraud, likelihood of confusion, false suggestion of a connection, and lack of bona fide intent to use the mark. Naked argued, inter alia, that Australian lacked standing to seek cancellation and was contractually and equitably estopped from pursuing the cancellation. Following trial, the Board concluded that Australian lacked standing to bring a petition for cancellation. The Board reasoned that, to show that it had standing, Australian was required to establish proprietary rights in its unregistered mark, which it did not do. The Board found that, although no formal written agreement existed, the parties entered into an informal agreement whereby Australian agreed it would not use or register its unregistered mark in the United States and Naked could use and register its NAKED mark there. The Board found that Australian led Naked to “reasonably believe that [Australian] had abandoned its rights in the United States to the NAKED mark in connection with condoms.” Per the Board, Australian lacked standing to petition to cancel the NAKED mark because it could not establish a real interest in the cancellation or a reasonable basis to believe it would suffer damage from the continued registration of the NAKED mark.

On appeal, the Federal Circuit first held that entitlement to bring a cancellation proceeding under 15 U.S.C. § 1064 is not contingent on whether a petitioner has proprietary rights in its own mark. Per the Court, neither § 1064 nor Federal Circuit precedent requires that a petitioner have a proprietary right in its own mark in order to demonstrate a cause of action before the Board.

Relevant here, the Court also held that contracting away one’s rights to use a trademark does not preclude a petitioner from challenging a mark before the Board. Per the Court, “While an agreement could ultimately bar Australian from proving actual damage, § 1064 requires only a belief of damage.”

On the question of real interest and reasonable belief of damage, the Court noted that a petitioner may demonstrate a real interest and reasonable belief of damage where the petitioner has filed a trademark application that is refused registration based on a likelihood of confusion with the mark subject to cancellation. A petitioner may also demonstrate a real interest and reasonable belief of damage by producing and selling merchandise bearing the registered mark.

Per the Court, Australian demonstrated a real interest in the proceeding because it twice tried to register its NAKED mark. Also, Australian demonstrated a belief of damage because the USPTO refused registration of both applications based on a likelihood of confusion with Naked’s registered mark. The Court further noted that the USPTO had suspended prosecution of one application pending termination of the present cancellation proceeding, further demonstrating a belief of damage.

The Court rejected Naked’s argument that Australian’s applications do not support a cancellation because Australian abandoned one application and filed the other in a “post filing,” “futile attempt to establish its standing.” Per the Court, a trademark owner does not abandon her rights in a mark by abandoning prosecution. Further per the Court, Australian’s advertising and sales in the United States also demonstrated a real interest and reasonable belief of damage. The Court also noted that section 1064 does not impose a minimum threshold of commercial activity to establish standing, “nor do we define one here.”

The Court concluded that the Board erred when it determined that Australian must have proprietary rights in its unregistered mark in order to bring a cancellation proceeding under § 1064. Based on the facts established before the Board, the Court held that Australian has a real interest in the cancellation proceeding and a reasonable belief of damage, thereby satisfying the statutory requirements to seek cancellation of a registered trademark.

In a dissenting opinion, Judge Wallach agreed with the Court that a party is not required to prove a proprietary interest in order to seek cancellation under 15 U.S.C. § 1064. However, he did not agree that the Board required a proprietary interest from Australian or that Australian met its burden of proving a real interest and a reasonable belief in damages.

Judge Wallach first argued that, although a petitioner under § 1064 need not have a proprietary interest, it must have a legitimate interest. He argued that the Court neglected the rule that, whatever commercial interest a petitioner asserts, it must be a

“legitimate commercial interest.” Judge Wallach noted that a petitioner may be deprived of a “legitimate commercial interest” under § 1064 if such interest is precluded by a prior judgment, or a prior settlement agreement.

Judge Wallach then argued that Australian failed to prove a real interest and a rea-sonable belief in damages. He discounted Australian’s evidence of advertising, marketing and offering for sale condoms on its website, focusing instead on the March 2007 agreement between Australian and Naked, under which Australian promised to discontinue use of the NAKED mark in the U.S. and consented to Naked’s use and registration of the NAKED mark in the U.S., in exchange for Naked’s consent to Australian’s use and registration of a NUDE mark. Per Judge Wallach, “Therefore, even if Australian has shown that it has a ‘commercial interest’ in Naked’s mark, it has contracted away any ‘legitimate commercial interest’ in that mark and, therefore, any ‘reasonable belief in damages’ related to Naked’s registration of that mark. Continuing, “As such, there is ‘no real controversy between the parties’ … leaving Australian ‘no more than an intermeddler’ here.”

Judge Wallach disagreed with the Court’s view that the Board erroneously required Australian to “establish proprietary rights in its unregistered [NAKED] mark.” Per Judge Wallach, the Board only required that Australian prove what it pled. “As the Board explained, ‘[Australian’s] standing is intrinsically connected with the question of whether the parties have an enforceable agreement that precludes [Australian] from using or registering the mark . . . and from challenging [Naked’s] use and registration of the . . . mark.’”

Judge Wallach further took issue with what he said was the Court’s failure to substantively address the Board’s finding that Australian and Naked had entered into a prior agreement. Instead, the Court incorrectly relied on its prior decision in Selva & Sons, Inc. v. Nina Footwear, Inc., 705 F.2d 1316 (Fed. Cir. 1983), the proposition “that contracting away one’s rights to use a trademark does not preclude challenging a mark before the Board.” Per Judge Wallach, Selva did not reach whether a prior agreement could preclude standing.

Finally, Judge Wallach argued that the Court erroneously found proof of Australian’s reasonable belief in damages elsewhere in the record, given the USPTO’s refusing registration for both of its applications. Per Judge Wallach, Australian abandoned its first application, did not file the second until after it had filed its petition against Naked’s mark, and did not raise this application as a basis for standing in either its initial petition or its subsequent amended petition. Judge Wallach noted the basic principles that standing “must exist at the commencement of the litigation” and “[a]bsent exceptional circumstances, a party cannot raise on appeal legal issues not raised and considered [before the Board].” He concluded that the Board correctly concluded that Australian had failed to prove it had a legitimate commercial interest on which to base its petition for cancellation of Naked’s registration.

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