IP Law Daily, TRADEMARK—8th Cir.: District court lacked jurisdiction to cancel registrations obtained by fraud, (Aug 15, 2016)

By Cheryl Beise, J.D.

In a trademark infringement suit between two packing companies over rights in the name “PAKSTER,” the federal district court in Waterloo, Iowa, lacked jurisdiction to cancel two federal trademark registrations fraudulently obtained by defendant PI, Inc., because its rival, East Iowa Plastics, Inc., (“EIP”) failed to established that it suffered any damages as a result of the registrations, the U.S. Court of Appeals in St. Louis has decided. The appeals court vacated the district court’s cancellation order, and reversed its exceptional case finding and award of $585,000 in attorney fees to EIP (East Iowa Plastics, Inc. v. PI, Inc., August 11, 2016, Kelly, J.).

The PAKSTER trademark was originally owned by a manufacturing company called KenTech, which used the common law mark in connection with the molded plastic goods for use in the egg and poultry industries. In 1997, KenTech sold its Iowa-based operation and its corresponding thermoformed line of products to EIP through an Asset Purchase Agreement (APA). The APA transferred KenTech’s rights to the PAKSTER trademark, but granted back to KenTech a perpetual, irrevocable, royalty-free, and “freely assignable” “license to use the ‘Pakster’ name and mark in connection with the production and sale of injection molded plastic products. KenTech sold its Kentucky-based injection mold plastic manufacturing business to PI, based in Tennessee.

For several years, EIP made PAKSTER-branded products using the thermoforming method, while PI made PAKSTER-branded products using injection molding. The present dispute arose when PI applied for and obtained two trademark registrations from the USPTO for the mark “PAKSTER,” one in standard character form, and the other as part of a design mark. PI later admitted that it falsely had certified to the USPTO that no other party had the right to use the PAKSTER mark.

In 2012, PI sent EIP a demand letter, claiming federal trademark rights in PAKSTER and threatening legal action unless EIP ceased using the mark. PI offered to sell its PAKSTER molds to EIP for $3 million, but EIP refused and filed suit instead, bringing claims for: (1) cancellation of the federal registrations of the PAKSTER marks and damages under Sections 37 and 38 of the Lanham Act; (2) false statements and unfair competition under Section 43(a) of the Lanham Act; (3) trademark infringement, misappropriation, misuse and unfair competition under section 43(a) of the Lanham Act and common law; (4) conversion; and (5) breach of contract. It additionally sought a declaration that it owned the PAKSTER trademark. PI filed counterclaims for infringement and unfair competition, but dismissed them before trial. EIP dismissed its contract claim.

The jury found in EIP’s favor. At the end of the trial, however, the district court granted PI’s motion for judgment as a matter of law on EIP’s conversion and Section 43(a) claims, finding that the evidence was insufficient for the jury to award damages. The district court determined that EIP established ownership of the PAKSTER trademark and cancelled PI’s trademark registrations as a remedy for the Section 38 violation. The court then found that EIP was the “prevailing party” and that the case qualified as “exceptional” under Section 35 of Lanham Act because PI’s actions “were deliberate, willful, and taken in bad faith.” The court said that fees were “also warranted” under Section 38 of the Lanham Act due to PI’s “fraud on the PTO.” The court awarded EIP attorney fees of $585,000, but denied its request for an injunction.

PI appealed the attorney fee award. On appeal, PI argued that EIP was not a “prevailing party” for purposes of Section 35’s fee shifting provision because PI prevailed on its Section 43(a) claims. PI countered that it had prevailed on its Section 38 claim.

Cancellation jurisdiction. Although neither party initially raised any jurisdictional issues, the Eighth Circuit asked the parties to file supplemental briefs on whether the district court had subject matter jurisdiction to cancel the federal registrations. After reviewing the briefs, the appeals court concluded that it did not.

The Eighth Circuit explained that EIP’s standing to seek the remedy of cancellation of PI’s trademarks under Section 37 of the Lanham Act was dependent on its Section 38 claim, because Section 37 only provides remedies for some other violation of the trademark laws, and is not an independent cause of action. “Once the district court had determined that EIP did not suffer any damages from PI’s violation of section 38, there was no further basis for EIP to have standing to seek cancellation of the PAKSTER registrations,” the appeals court reasoned. Even assuming that PI’s threats of suit gave EIP Article III standing to pursue trademark cancellation at the outset of the suit, that basis no longer existed after PI dismissed its counterclaims with prejudice.

While PI’s false and fraudulent declaration may have misled the PTO into registering its trademarks, and while “some generalized injury… results from the PTO’s Register of Trademarks containing marks that it shouldn’t contain,… any such injury is not particular to EIP, and cannot support its standing to bring a section 38 suit,” the court said. The court also rejected EIP’s argument that sanding may be based on its being forced to litigate this suit. PI brought counterclaims under both Sections 32 and 43(a), and there was no indication that EIP suffered additional injury from being forced to defend against both claims, as opposed to Section 32 alone. “In other words, EIP would have faced an essentially identical counterclaim even if PI had never obtained a trademark registration by fraud, so any injury based on litigating counterclaims is not ‘fairly traceable’ to that fraud,” the court explained. EIP’s success with respect the counterclaims that PI dismissed also was not sufficient to make it the prevailing party. PI was the prevailing party based on obtaining JNOV on EIP’s infringement, false statement, and unfair competition claims.

Lastly, EIP argued that it should obtain attorney fees because it successfully obtained a declaration that it owned the PAKSTER trademark. However, the district court’s findings regarding EIP’s ownership rights and the scope of the license to PI were unclear. Moreover, the ownership of the PAKSTER trademark turned on state contract law, not federal law. Neither party had addressed the issue of which state law applied, much less whether attorney fees were available. This issue was better handled by the district court on remand.

The appeals court concluded that the district court lacked jurisdiction to cancel the federal registrations of PI’s trademarks, and vacated the cancellation. Having obtained no damages, injunction, or cancellation from its Section 38 claim, there was no basis for concluding that EIP was the “prevailing party” for the purpose of the Lanham Act’s fee shifting. The court accordingly reversed the grant of attorney fees and remanded the case for further proceedings.

The case is No. 15-2757.

Attorneys: Jeffrey Harty (Nyemaster & Goode) for East Iowa Plastics, Inc. Kevin J. Caster (Shuttleworth & Ingersoll) and Joanna Robertson O'Hagan (Quist & Cone) for PI, Inc.

Companies: East Iowa Plastics, Inc.; PI, Inc.

Cases: Trademark ArkansasNews IowaNews MinnesotaNews MissouriNews NebraskaNews NorthDakotaNews SouthDakotaNews