Rethinking Trademark Litigation
February 2007
Trademark litigation can be both expensive
and time-consuming. In fact, when both parties in a dispute claim exclusive
rights to a particular trademark, the result can be unpredictable.
by Sanford
E. Warren Jr. and Brandon Lee
Akin Gump Strauss
Hauer & Feld LLP
In an unusual turn of events, a Texas state court in 2006 awarded millions
of dollars in damages and attorney fees to the defendant in a trademark suit,
despite the plaintiff having a federal registration in the contested mark “DFW.”
After a jury trial, the 271st District Court in Wise County, Texas, found the
plaintiff had secured the federal registration fraudulently and ordered the
plaintiff to compensate the defendant for the plaintiff’s willful infringement
of the defendant’s unregistered DFW mark.
In the Texas case, plaintiff National Diversified Sales (NDS) had purchased
Texas-based Hefco Products, Inc., which had previously used the mark DFW/HPI
on products produced in conjunction with defendant DFW Plastics. After NDS’s
acquisition of Hefco, NDS registered the mark DFW with the U.S. Patent and Trademark
Office (USPTO) in 1999, allegedly believing it had purchased the rights to the
DFW mark and also claiming priority to DFW Plastics’ first use in 1978. After
a jury trial, defendants DFW Plastics and DFW Alliance were awarded $14.6 million
in damages. The court then increased the award to $56.3 million, including attorney
fees, after finding NDS willfully engaged in fraudulent conduct before the USPTO
in acquiring the DFW mark. In view of defendant DFW Plastics’ alleged annual
sales of $3-5 million, the award was substantial.
Although this case is likely an outlier compared to typical trademark litigation,
the substantial award for the defendant should certainly raise concerns for
anyone thinking about the prospect of trademark litigation. When considering
the unpredictable nature of trademark litigation and the unusual aspects of
trademark law, every plaintiff and defendant may want to consider creative case-specific
solutions to facilitate a settlement of any disputes.
For the Owner of the Asserted Mark
As the DFW case points out, even the owner of a federally registered mark
is not immune from significant exposure for trademark infringement. Therefore,
before pursuing alleged infringers, it may be prudent to double-check the list
of available trademark protections. Each mark owner needs to have an understanding
of both the federal and state statutory rights to registered marks, as well
as any common-law rights to unregistered marks. If ownership of the mark has
been assigned from another entity, an inquiry into the chain of title and governing
documents may be necessary. The U.S. Patent and Trademark Office provides a
list of the recorded assignment history for every federally registered mark,
but does not review the recorded documents for accuracy and cannot provide any
information about unrecorded assignments of a registered mark or assignments
of state or common-law marks.
In addition to an understanding of the mark to be asserted against alleged
infringers, it will frequently be appropriate to understand the business value
of the mark to the alleged infringer. If the alleged infringer just recently
introduced the product or service to market and has not invested significant
financial resources into the product or service, they may be willing to discontinue
use rather than engage in litigation. In such cases, rather than litigate the
matter to trial, the mark owner may offer to compensate the alleged infringer
for changing their mark in exchange for an acknowledgment of the owner’s exclusive
right to the mark. However, if an alleged infringer has invested significant
resources into the products or services bearing the infringing mark, they will
be more likely to pursue the case to trial. In that case, it is even more important
to take an accurate assessment of the strength of the owner’s right to the mark.
For an Alleged Infringer
As soon as trademark infringement is alleged, the alleged infringer should
also make an independent and accurate assessment of the mark’s value to the
alleged infringer’s business. If the alleged infringer has not invested substantial
money in the product and services bearing the infringing mark, and the owner
has a relatively strong case, the alleged infringer should seriously consider
discontinuing the use of the mark. On the other hand, if the alleged infringer
has invested substantial money into the product or services bearing the mark,
and does not believe the opposing party has a strong case, the alleged infringer
may wish to pursue the case to trial if a settlement cannot be reached.
Between these two extremes are the cases where the alleged infringer has
invested significant money and/or the owner of the mark has an average or marginal
case. In these cases, the alleged infringer may wish to seek compensation from
the mark’s owner in exchange for discontinuing use of the mark and acknowledging
the owner’s exclusive right to use the mark.
As soon as an initial assessment is made, the alleged infringer may want
to implement temporary measures, if appropriate, to protect itself from increased
liability if the owner has a strong case. The measures may include temporarily
discontinuing use of a mark or placing disclaimers on the product or services
as appropriate.
For an Insurer
Insurance coverage for an alleged infringer, as exists in many cases, can
skew the assessment greatly. For an alleged infringer, insurance coverage under
a particular policy means the cost of defending the case is no longer as large
a factor in evaluating the value of a mark and whether to discontinue use thereof.
When coverage does exist, the alleged infringer may desire to go to trial, hopefully
securing its own rights to the particular mark. An inevitable conflict of interest
may develop between the insurer who seeks to keep its exposure to a minimum
and the insured who is interested in maximizing their value in the mark. Therefore,
the insurer and insured should discuss at an early stage the value of the mark
to the insured and agree to a mutually acceptable strategy for pursuing the
case.
For potential plaintiffs, insurance coverage may make it difficult to reach
a settlement with an alleged infringer who will not bear the costs of litigation.
One potential solution is to negotiate a settlement wherein the insurer will
compensate the insured, the alleged infringer, for the costs of phasing out
an infringing mark. The owner of the mark gets an agreement acknowledging the
validity of the mark and the alleged infringer agrees to cease use of the mark.
From the insurer’s perspective, paying the insured to phase out the mark may
make economic sense when compared to significant defense costs, even if liability
is small.
Conclusion
Trademark litigation requires each and every party involved to be cognizant
of the value of the mark to the others involved. Taking a realistic assessment
of the business value of the mark, and the strength exhibited when protecting
the mark, are critical to reducing risk. Finally, because of the unusual nature
of trademark litigation, each party should be open to discuss alternative, nontraditional
settlements between the parties, being sure to include any insurers in the discussions.
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