Expert Commentary

Rethinking Trademark Litigation

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.


Intellectual Property
February 2007

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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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