IP Law Daily, TRADEMARK—S.D.N.Y.: Trademark reinstatement agreement may violate Sherman Act, (Sep 12, 2023)

By Martin A. Steinberg, J.D.

Use of settlement payments to fund additional trademark infringement lawsuits did not raise anticompetitive concerns.

The federal district court in New York City partially granted a motion to dismiss filed by GMA Accessories Inc. (GMA) in a case where Atallah Group US Inc. (Atallah) alleged that GMA entered into various trademark settlement agreements with competitors in violation of §1 of the Sherman Act. The court granted GMA’s motion to dismiss the complaint as to various Settlement Agreements but denied it as to a Reinstatement Agreement. The court found that the complaint only sufficiently alleged anticompetitive effects of the Reinstatement Agreements. Defendant's requests to file a Rule 11 motion and for costs and fees was also denied (Atallah Group US Inc. v. GMA Accessories Inc., September 7, 2023, Schofield, L.).

Atallah owns an online e-commerce platform named SSENSE that specializes in the sale of designer fashion and streetwear, including products by a designer named Charlotte Knowles. GMA owns several trademark registrations for the mark "CHARLOTTE" for certain clothing, footwear and accessories (Charlotte Registrations). The complaint alleged that, in 2018, GMA entered into an improper trademark settlement agreement with Charlotte Olympia Holdings, Ltd. (Reinstatement Agreement) that reinstated certain Charlotte Registrations that the Trademark Trial and Appeal Board (TTAB) had deemed abandoned. GMA sued Atallah for infringement of one of these reinstated Charlotte Registrations in a related trademark infringement lawsuit. The complaint alleged without further detail that GMA had entered into similar agreements with other competitors, thus preserving GMA's abandoned trademarks.

Atallah also claimed that GMA has pursued sham trademark litigation against many clothing companies that use the word Charlotte, then settled the claims via Settlement Agreements that go on to fund further vexatious litigation, including against Atallah. Allegedly, both the settlement agreements and GMA's reinstatement agreements with various competitors resulted in increased clothing prices in the market. For example, Charlotte Knowles had needed to increase the price of her company's clothing to reimburse Atallah for the costs incurred by these lawsuits. Supposedly these agreements had forced other shops to discontinue sales of their products because they cannot afford to litigate against GMA.

The complaint described GMA as a "trademark troll," which used the Charlotte Registrations primarily to engage in vexatious litigation, thereby causing some competitors to stop competing with GMA and others to pay a "settlement tax" to GMA that ultimately is paid by consumers. Allegedly some boutique shops had been forced to discontinue sales of their products because they cannot afford to litigate against GMA. This resulted in increased prices to cover litigation costs, such as occurred with Charlotte Knowles' clothing line price increase.

Sherman Act pleading requirements. The court held that the antitrust claim was sufficiently pleaded to the extent it arose out of the Reinstatement Agreement, but did not state a claim based on the Settlement Agreements. To plead a violation of §1, a plaintiff must allege facts showing (1) some form of concerted action between at least two legally distinct economic entities, and (2) the agreement's objective was an "unreasonable restraint of trade either per se or under the rule of reason." Trademark settlement agreements are analyzed under the rule of reason to determine if they are unreasonable restraints on trade, because they implicate trademark policy and could reasonably be thought to have a net procompetitive effect.

Both types of agreements satisfied the first element of a §1 claim because they were undeniably contracts between GMA and its competitors. As to the second element, the complaint sufficiently alleged that the Reinstatement Agreement had an actual adverse effect on competition as a whole in the relevant market, but the allegations about the Settlement Agreements failed to satisfy this element.

Regarding the Reinstatement Agreements, the complaint alleged that GMA opposed the registration of the mark "Charlotte Olympia." This caused the TTAB to examine and ultimately cancel two of GMA's Charlotte Registrations as abandoned because GMA had made no showing that it had used those Charlotte Registrations in commerce from 2011 to 2015. One of the cancelled registrations listed GMA as the owner of the mark CHARLOTTE for "clothing, footwear and headgear, namely hats, scarves, gloves and socks." GMA nevertheless then sued Charlotte Olympia Holdings, Ltd. for use of the same marks that had just been held to be abandoned. GMA then settled the suit against Charlotte Olympia Holdings, Ltd. pursuant to the Reinstatement Agreement, under which the parties agreed to vacate the TTAB abandonment order. The TTAB, on consent and agreement between the parties, vacated its order. Coupled with the alleged increase in costs caused by the vexatious litigation and the increased prices to consumers, the complaint plausibly alleged that the Reinstatement Agreement was improper because it had a direct anticompetitive effect on competition in the relevant market.

The complaint pleaded such exceptional circumstances in alleging that the Reinstatement Agreement improperly revived abandoned marks and that those abandoned marks were the basis for GMA's infringement suits. The court noted, however, that GMA's introduction of a procompetitive justification for the challenged agreement constituted the second step of the rule of reason analysis and would thus be premature at the motion to dismiss stage.

Conversely, the court found that the complaint failed to plead that the Settlement Agreements caused an anti-competitive effect. The complaint alleged that the Settlement Agreements enabled restraint of trade through the use of the settlement payments to fund additional trademark infringement lawsuits by GMA. This funding argument, however, was too attenuated to plead causation. Had GMA financed its litigation with money from another source, such as a bank loan, the loan agreement between GMA and the bank would not be considered an illegal, anti-competitive agreement under the Sherman Act. Similarly, the Settlement Agreements were not anti-competitive agreements. As occurred with the Reinstatement Agreement, the complaint did not allege that the Settlement Agreements contained anti-competitive terms. Instead, the complaint challenged the monetary payments GMA obtained, which are typical of settlement agreements but did not raise anticompetitive concerns.

The Case is No. 22 Civ. 7438 (LGS).

Attorneys: Christopher Serbagi (Serbagi Law Firm, P.C.) for Atallah Group US Inc. John Peter Bostany (Bostany Law Firm PLLC) for GMA Accessories Inc.

Companies: Atallah Group US Inc.; GMA Accessories Inc.

Cases: Trademark NewYorkNews