Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Haw.: “Uses in commerce” is not a jurisdictional limitation of Lanham Act claim, motion to dismiss denied, (Jul 15, 2013)

By Peter Reap, J.D., LL.M.

Because “uses in commerce” is not a jurisdictional limitation of a § 1125 Lanham Act claim, but instead an element of a claim for relief, a motion to dismiss a taco restaurant franchisor’s false designation of origin action against two Hawaii franchisees and their principal (collectively, the “Defendants”) on the ground that the court lacked subject matter jurisdiction was denied, the federal district court in Honolulu has ruled (Just Tacos, Inc. v. Zezulak, July 12, 2013, Seabright, J.). The Defendants’ contention that the court lacked subject matter jurisdiction because the franchisor’s claims under the Lanham Act pertained solely to economic activity within the state of Hawaii was without merit.

Background. In 2008, the Defendants entered into agreements to operate Just Tacos franchises in Pearl City and Hawaii Kai. In late 2011, the Defendants repudiated the franchise agreements and declared that they would change the name of their restaurants and begin operating independently. However, the franchisor alleged that the Defendants failed to make any changes and continued to use the “Just Tacos” marks without authorization.

The franchisor brought suit, alleging, among other things, unfair competition by false designation of origin under the Lanham Act, 15 U.S.C. § 1125. The Defendants’ Motion to Dismiss for lack of subject matter jurisdiction was before the court.

Analysis. Both parties appeared to assume that absent evidence supporting a use in interstate commerce, the court lacked subject matter jurisdiction. However, based on the Supreme Court’s decision in Arbaugh v. Y&H Corp., 546 U.S. 500 (2006), this approach was misguided, according to the court. The “uses in commerce” element, properly construed, is a merits-based determination and not a jurisdictional predicate to a § 1125 Lanham Act claim.

Arbaugh noted that “[j]urisdiction . . . is a word of many, too many, meanings,” 546 U.S. at 510, and that courts (including the Supreme Court) have been employing a “less than meticulous use of the term.” Id. at 511. In an effort to curb these “drive-by jurisdictional rulings,” the Court created a “readily administrable bright line” between a jurisdictional prerequisite and an element of a plaintiff’s claim for relief—unless Congress has “clearly state[d]” that a statutory limitation is jurisdictional, “courts should treat the restriction as nonjurisdictional in character.” Id. at 515-16.

Since Arbaugh, the Ninth Circuit has employed the Supreme Court’s analysis in determining the scope of federal court subject matter on various occasions. The Ninth Circuit considered three primary factors—derived from Arbaugh and its progeny—to determine whether a provision is jurisdictional or an element of a claim: whether (1) the provision is clearly labeled jurisdictional; (2) the provision is located in a jurisdiction-granting provision; and (3) other reasons necessitate that the provision be construed as jurisdictional.

15 U.S.C. § 1125, entitled “False designation of origin, false descriptions, and dilution forbidden,” provides, in relevant part, that: “(1) Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word…” the court noted.

A separate section, 15 U.S.C. § 1127,entitled “Constructions and definitions; intent of chapter” provides: “The word commerce means all commerce which may lawfully be regulated by Congress.” And the Lanham Act contains a specific jurisdictional provision, 15 U.S.C. § 1121, stating that “[t]he district and territorial courts of the United States shall have original jurisdiction . . . of all actions arising under this chapter, without regard to the amount in controversy or to diversity or lack of diversity of the citizenship of the parties.”

Looking to the first of the three Arbaugh factors, the “uses in commerce” requirement, contained in the statute setting forth the claim’s elements, more appropriately describes a substantive, non-jurisdictional element of a claim under the Act, the court determined. The “uses in commerce” provision was not clearly labeled jurisdictional.

Turning to the second Arbaugh factor, the “uses in commerce” requirement does not appear anywhere in 15 U.S.C. § 1121, the Lanham Act’s jurisdiction-granting provision, the court observed. Rather, the limitation’s placement outside of § 1121 (and more importantly its inclusion in § 1125(a)) suggested that Congress regarded the requirement as an element of a claim for relief, not a jurisdictional limitation.

The last Arbaugh factor is whether other reasons necessitated that the provision be construed as jurisdictional. The court could not discern any other factor suggesting that § 1125’s “uses in commerce” requirement could be interpreted as jurisdictional. Finding no clearly stated Congressional intent, the “uses in commerce” requirement is an element of a claim for relief, and not a jurisdictional predicate, the court held.

In reaching this conclusion, the court fully understood that the Ninth Circuit previously held that “uses in commerce” should be treated as a jurisdictional prerequisite. Bosley Med. Inst. v. Kramer, 403 F.3d 672, 677. However, Bosley was clearly irreconcilable with intervening higher authority, according to the court.

Bosley held in its one-sentence rationale: “[u]se in commerce is simply a jurisdictional predicate to any law passed by Congress under the Commerce clause.” 403 F.3d at 677. In reaching this decision, the Ninth Circuit obviously did not have the benefit of the Supreme Court’s clarification on the proper scope of jurisdictional rulings as articulated in Arbaugh and elsewhere.

Therefore, because the Defendants’ Motion is based on the incorrect premise that the “uses in commerce” requirement is jurisdictional, the Motion to Dismiss for lack of subject matter jurisdiction was denied.

The case is Civil No. 11-00663 JMS/KSC.

Attorneys: Marc E. Rousseau (Cades Schutte LLP) for Just Tacos, Inc. Jared A. Washkowitz (JAW Legal) for Michael Zezulak.

Companies: Just Tacos, Inc.

Cases: FranchisingDistribution HawaiiNews