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The Federal Circuit “OK”s a Questionable Path to Petitioning for Cancellation of a Trademark Registration

December 15, 2020

In Australian Therapeutic Supplies Pty Ltd. v. Naked TM, LLC, the Federal Circuit recently denied a petition for rehearing en banc of a panel decision finding that a petitioner who contracted away its rights to unregistered marks still had standing to seek cancellation of those marks because it had a “real interest” in cancellation and a “reasonable belief of damage.” Judge Wallach dissented from the denial, expressing disagreement with the majority’s broadening of the “zone of interests” available to a party petitioning for cancellation. He also warned of the potential confusion the denial of rehearing will cause and questioned the majority’s apparent silent expansion of Supreme Court precedent on the conferral of standing.

Naked TM, LLC (“Naked”) and Australian Therapeutic Supplies Pt. Ltd. (“Australian”) both sold condoms in the United States.1 Australian advertised and sold condoms under the unregistered NAKED trademark through its websites since at least 2003.2 Naked filed an application for registration of the NAKED mark in 2003, which Australian learned about in 2005, when Australian filed its first intent-to-use application for the mark.3 The parties engaged in settlement negotiations via email beginning in 2006.4 They entered into an “informal” settlement agreement in April 2007, under which Australian agreed it would not use or register any mark containing the word NAKED in the United States.5 The parties did not formalize the agreement in writing.6 According to Australian, there was “no need to put anything on paper. Just makes lawyers a lot of money. We no longer have any Naked condoms in the USA, so it should be clear sailing for you. Good luck with the launch.”7

Australian did not tell Naked it had any plans to continue selling NAKED products in the United States, via the Internet, from Australia.8 Naked’s application for the NAKED mark registered in October 2007.9 Australian subsequently abandoned its application for the mark in 2011 because “a registration wasn’t required for the product at the time due to the global financial crisis,” and because it allowed Australian “to stall for time.”10 The present dispute began in 2011 when Naked emailed Australian, asking Australian to remove the NAKED mark from its Twitter site because it was causing confusion.11 Undeterred, Australian’s position was that the parties “have no agreement in place other than we agreed to co-exist.”12

In October 2012, Australian went on the offensive, alleging prior use of the NAKED mark and filing a petition to cancel Naked’s registration on the grounds of fraud, likelihood of confusion, and false suggestion of a connection.13 Australian then amended its petition for cancellation, adding the ground that Naked did not possess the requisite bona fide intent to use the mark when it filed for registration.14 Soon thereafter, Australian applied for registration of the NAKED mark for the second time.15 The TTAB found, after trial, that the parties’ previous communications amounted to an enforceable contract.16 Thus, Australian lacked standing to cancel the NAKED registration.17

On appeal, the majority reversed and remanded, finding that the TTAB erroneously required Australian to establish proprietary rights in its unregistered mark in order to demonstrate a cause of action for cancellation.18 The majority also held that Australian’s contractual agreement did not preclude it from challenging the mark before the TTAB.19 The majority found that Australian demonstrated a real interest and reasonable belief of damage sufficient to confer standing in a 15 U.S.C. § 1064 cancellation of registration suit because it filed two applications to register its unregistered mark in the United States, and advertised and sold NAKED condoms in the United States.20 Judge Wallach dissented; he did not agree that the TTAB required a proprietary interest from Australian, or that Australian met its burden of proving a real interest and reasonable belief in damages.21 Naked petitioned for rehearing en banc.22

“Statutory standing is a question of ‘whether a legislatively conferred cause of action encompasses a particular plaintiff’s claim.’”23 The courts have inconsistently called this inquiry “prudential standing,” “statutory standing,” and a “cause of action” requirement.24 For example, in Lexmark Int’l, Inc. v. Static Control Components, Inc., a case concerning false advertising under 15 U.S.C. § 1125(a), the Supreme Court noted that the term “statutory standing” is “an improvement over the language of ‘prudential standing,’” yet it is imperfect since whether a plaintiff has “a valid . . . cause of action does not implicate subject-matter jurisdiction[.]” Rather, a cause of action relates to whether a plaintiff’s “interests fall within the zone of interests protected by the law invoked.”26 Following Lexmark, whether a legislatively conferred cause of action encompasses a particular plaintiff’s claim has been referred to interchangeably as “statutory standing” or a “cause of action” requirement.27 The TTAB since stated that “[o]ur decisions have previously analyzed the requirements of . . . 15 U.S.C. § 1063-64 [opposition to registration and cancellation of registration], under the rubric of ‘standing.’ We now refer to this inquiry as entitlement to a statutory cause of action. Despite the change in nomenclature, our prior decisions and those of the Federal Circuit interpreting [15 U.S.C. § 1063-64] remain applicable.”28

The court should have granted Naked’s petition for rehearing en banc for three reasons: denying the petition (1) conflicts with Federal Circuit case law requiring a “legitimate commercial interest” to have a valid cause of action under § 1064; (2) undermines Federal Circuit case law favoring enforcement of settlement agreements; and (3) raises questions as to the impact of Supreme Court precedent on Federal Circuit statutory standing jurisprudence.29

First, Australian lacked a valid cause of action.30 According to the Supreme Court in Lexmark, the “Lanham Act includes a detailed statement of its purposes, including, as relevant here, ‘protect[ing] persons engaged in [commerce within the control of Congress] against unfair competition.’”31 “Thus, to come within the zone of interests in a § 1125(a) false-advertising suit, a plaintiff must allege an injury to a commercial interest in reputation or sales.”32 Likewise, “a petitioner needs a legitimate commercial interest to have a valid cause of action [for cancellation of registration] under 15 U.S.C. § 1064.”33 This legitimate commercial interest must be rooted in fact and affirmatively proved.34 In a post-Lexmark case, Empresa Cubana Del Tabaco v. Gen. Cigar Co., 753 F.3d 1270 (Fed. Cir. 2014), the Federal Circuit then confusingly stated that a petitioner must show “it has both a real interest in the proceedings . . . [and] a reasonable basis for its belief of damage to have a valid cause of action under 15 U.S.C. § 1064.”35 However, the court recently clarified that there is “no meaningful, substantive difference between the analytical frameworks expressed in Lexmark and Empresa Cubana.”36

The majority found that Australian had a valid cause of action to challenge Naked’s registration based on its two applications for registration, and its prior advertising and sales of condoms in the United States.37 These bases for Australian’s cause of action and its petition, however, “were either superseded by or in breach of its settlement agreement” under which it “agreed not to register the NAKED mark in the United States, not to use the NAKED mark in the United States, and not to challenge Naked’s use and registration of the NAKED mark in the United States.”38 Australian, therefore, did not have a legitimate commercial interest, nor a valid cause of action against Naked.39 En banc review would have been appropriate to ensure uniformity among Federal Circuit precedent.40

Second, Federal Circuit precedent strongly favors settlement of litigation, and enforcement of settlement agreements.41 Here, the TTAB found that the settlement agreement in question existed.42 Australian effectively waived any argument that it did not contract away its proprietary rights with the settlement agreement when it provided a mere passing reference to the issue.43 The majority on appeal stated that the TTAB found “Australian agreed it would not use or register its unregistered mark in the United States and that Naked could use and register its NAKED mark in the United States.”44 However, the majority also stated that the TTAB “made no finding on whether Australian agreed not to challenge Naked’s use and registration of the NAKED mark.”45 First, the majority contradicts itself.46 Second, it is incorrect.47 The TTAB stated that Australian’s standing was intrinsically connected with the question of whether there was an enforceable agreement, and it concluded that there was such an agreement.48 Third, even if the agreement did not prevent Australian from petitioning for cancellation, Australian’s alleged bases for statutory standing were still preempted by the agreement or in violation of it.49

The majority misplaced its reliance on Selva & Sons, Inc. v. Nina Footwear, Inc., 705 F.2d 1316 (Fed. Cir. 1983) for support of the proposition that contracting away one’s rights to use a trademark does not preclude challenging a mark before the TTAB.50 The Federal Circuit in Selva did not reach the question of whether a settlement agreement could preclude statutory standing.51 The majority’s decision here is contrary to Federal Circuit case law enforcing settlement agreements against potential trademark challengers.52 Allowing Australian to circumvent the settlement agreement would “seriously decrease the willingness of parties to settle litigation on mutually agreeable terms and thus weaken the efficacy of settlements generally.”53 Rehearing en banc would have standardized the Federal Circuit’s decisions regarding enforcement of settlements.54

Third, the majority held that Australian’s second application, which it filed after its petition for cancellation, gave it statutory standing.55 This raises questions as to whether a party must have a valid cause of action at the time of filing.56 The Lexmark analytical framework is the applicable standard for determining whether a person is eligible to bring a petition for cancellation of a trademark registration.57 It is conceivable under Lexmark that use of a post-filing application is sufficient to establish a statutory cause of action, given that “statutory standing does not implicate an Article III court’s subject matter jurisdiction.”58 However, Federal Circuit precedent does not support such an argument.59 “Generally, ‘a party may not vindicate rights in court before the party actually possesses the rights.’”60 Statutory standing is still a threshold inquiry, such that “[t]rademark infringement claims require statutory standing at the time of filing.”61 The TTAB and majority did not address the timing of the post-filing application.62 The majority’s acceptance of the application as evidence of statutory standing appears to extend Lexmark sub silentio, but this is uncertain and would be quite unusual.63 En banc review would have clarified the impact of Lexmark on Federal Circuit jurisprudence.64

Throughout his opinion, Judge Wallach emphasized the need for en banc rehearing to secure the uniformity of the Federal Circuit’s decisions. He cautioned against the confusion in case law the denial will create.

1Australian Therapeutic Supplies Pty. Ltd., v. Naked TM, LLC (Australian IV), No. 2019-1567, 2020 U.S. App. LEXIS 37920, at *9 (Fed. Cir. Dec. 4, 2020) (Wallach, J., dissenting).
2Australian Therapeutic Supplies Pty. Ltd., v. Naked TM, LLC (Australian II), 2018 TTAB LEXIS 437, at *17-18 (T.T.A.B. 2018).
3Id. at *18.
4Australian Therapeutic Supplies Pty. Ltd., v. Naked TM, LLC (Australian III), 965 F.3d 1370, 1372 (Fed. Cir 2020).
5Australian IV, 2020 U.S. App. LEXIS 37920, at *9.
6Id.
7Australian II, 2018 TTAB LEXIS 437, at *20.
8Id. at *26.
9Australian IV, 2020 U.S. App. LEXIS 37920, at *9.
10Australian II, 2018 TTAB LEXIS 437, at *21 n.64.
11Id. at *20.
12Id. at *22.
13Id. at *1.
14Id. at *1-2.
15Australian IV, 2020 U.S. App. LEXIS 37920, at *14-15.
16Id. at *10-11.
17Id. at *11.
18Australian III, 965 F.3d at 1374.
19Id.
20Id. at 1375-76.
21Id. at 1377.
22Australian IV, 2020 U.S. App. LEXIS 37920 at *1.
23Id. at *2 (citing Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 17 (2014)).
24Id. at *2 n.1.
25Lexmark, 572 U.S. at 128 n.4.
26 Australian IV, 2020 U.S. App. LEXIS 37920 at *4 (internal quotation marks and citation omitted).
27Id. at *2 n.1.
28Id. at *5 n.4.
29Id. at *3.
30Id. at *16.
31Lexmark, 572 U.S. at 119 (alterations in original) (quoting 15 U.S.C. § 1127).
32Id.
33Australian IV, 2020 U.S. App. LEXIS 37920 at *5.
34Id. at *7.
35Id. at *4-5.
36Corcamore, LLC v. SFM, LLC, 978 F.3d 1298, 1303 (Fed. Cir. 2020).
37Australian IV, 2020 U.S. App. LEXIS 37920 at *15.
38Id. at *15-16.
39Id. at *16.
40Id. at *17.
41Id.
42Id. at *17-18.
43Id. at *18 n.8.
44Australian III, 965 F.3d at 1373.
45Id.
46Australian IV, 2020 U.S. App. LEXIS 37920 at *19.
47Id.
48Id.
49Id. at *19-20.
50Id. at *20.
51Id.
52Id. at *21.
53Id. at *21-22 (citing Hemstreet v. Spiegel, Inc., 851 F.2d 348, 350 (Fed. Cir. 1988)).
54Id. at *22.
55Id. at *23.
56Id. at *22.
57Id.
58Id. at *22-23.
59Id. at *24.
60Id. (citing Alps S., LLC v. Ohio Willow Wood Co., 787 F.3d 1379, 1384 (Fed. Cir. 2015)).
61Id.
62Id.at *24-25.
63Id. at *25.
64Id. at *26