World Trademark Review
August 2009

The laches defence can prove an effective weapon for striking out a trademark infringement claim in the United States. However, a controversial ruling from the Ninth Circuit may have served to raise the evidentiary burden placed on defendants.

One of the equitable defences available to defendants in US trademark infringement suits is laches. If proven, laches can bar some or all of the relief requested by the plaintiff. To establish laches, a defendant must prove that:

  • the plaintiff unreasonably delayed in enforcing its rights; and
  • the delay caused prejudice to the defendant.

While most cases involving laches have tended to focus on what constitutes 'unreasonable delay', a recent decision from the Ninth Circuit Court of Appeals provides new guidance on the concept of 'prejudice' and what a defendant must prove to establish this element. In Internet Specialties West Inc v Milon-DiGiorgio Enters Inc (559 F3d 985 (9th Cir 2009)), the Ninth Circuit held that prejudice requires more than showing that the defendant has sunk costs in the mark. Rather, it requires proving that the defendant's use of the mark generated actual brand recognition and goodwill.

Summary of decision

Founded in 1996 Internet Specialties West Inc (IS West) was an internet services provider (ISP) that provided nationwide internet services through dial-up, DSL, and T-1 connections. Starting in July 1998 Milon-DiGiorgio Enterprises InC (MDE) began providing dialup internet access to customers in southern California under the name ISPWest. Although IS West became aware of MDE's use of the ISPWest name in late 1998, it decided that:

  • MDE's regional service offerings were not competitive with IS West's nationwide service; and
  • in the then-volatile market for internet start-ups, MDE's chances of becoming a successful competitor were low.

Accordingly, it took no action against MDE at that time. Contrary to IS West's expectations, however, MDE grew and eventually expanded to offer nationwide dial-up service in 2002, followed by high-speed DSL service in 2004. IS West sent MDE a cease and desist letter in 2005, demanding that MDE cease use of the ISPWest name. When MDE refused, IS West sued for trademark infringement.

The district court dismissed MDE's laches defence, finding that:

  • IS West did not unreasonably delay in bringing suit because a likelihood of confusion did not exist until 2004 when MDE started to offer nationwide DSL services; and
  • IS West's delay did not prejudice MDE.

Upon a finding of likelihood of confusion by the jury, the district court enjoined MDE from using the ISPWEST mark. The Ninth Circuit Court of Appeals affirmed in a two-to-one split decision. Although the Ninth Circuit disagreed with the district court about the reasonableness of IS West's delay (saying that IS West should have recognized that a likelihood of confusion existed in 1998 when both companies were offering identical services in the same geographic area under similar business names), it affirmed the lower court ruling on the ground IS West's delay did not prejudice MDE.

The Ninth Circuit ruled that the prejudice inquiry must focus on the level of public awareness MDE actually built up in the ISPWEST mark during the period of IS West's delay. Citing the Seventh Circuit's decision in Tisch Hotels Inc v Americana Inn Inc (350 F2d 609, 615 (7th Cir 1965)), the court noted that "[if]...prejudice could consist merely of expenditures in promoting the infringed name, then relief would have to be denied in practically every case of delay". As to the public awareness of ISPWest, the court said the evidence at trial showed that MDE had made very little use of the mark. Most of MDE's advertising consisted of pay-per-click advertisements (which, the court noted, by their very nature create little, if any, brand awareness), and most of those pay-per-click advertisements did not contain the ISPWEST mark. Such minimal use of ISPWEST, the court held, could not have created any public awareness of the mark.

Accordingly, the Ninth Circuit affirmed both the denial of MDE's laches defence and the injunction enjoining MDE from using the ISPWest domain name and email addresses. And while the court acknowledged that MDE would face some hardship given that 13,000 of its customers would need to change their email addresses (as opposed to 2,000 had IS West not delayed in filing suit), the Ninth Circuit relied on the lower court findings that the financial burden to MDE would not be significant, including evidence that MDE had successfully changed its name in the past and that it was common for ISPs to change their names due to mergers and consolidations.

In a vocal dissent, Judge Kleinfeld said that:

  • the majority's "new" holding that a defendant must show actual "public awareness" of its mark to establish laches prejudice was unprecedented; and
  • the practical effect of the majority's decision was "to eviscerate the [defence] of laches in trademark law".

Although he agreed with the majority that the standard for prejudice under Ninth Circuit precedent was whether a defendant "continued to build a valuable business around its trademark" during the plaintiff's delay, he noted that prior decisions had always deemed a defendant's economic investment in the mark and business growth as sufficient. Kleinfeld said that MDE easily satisfied this test given that it had realized "exponential increases" in business-building expenses (a 438% increase in general business expenses and a 14,931% increase in advertising expenses) and an increase of nearly 11,000 customers during the period of IS West's delay. Also, contrary to the majority's conclusion that MDE barely used the ISPWEST mark, Kleinfeld said MDE's use of the name ISPWest was at the very "heart" of its business model and growth, pointing to the fact MDE had utilized the 'ISPWest.com' domain name and provided all of its customers with '@isp-west' email addresses.

Survey of circuit case law

The laches prejudice issue presented by Internet Specialties (ie, whether a defendant need show an investment of resources in the mark versus showing actual "public awareness" of the mark) has not been squarely dealt with by most courts. Consistent with Kleinfeld's dissenting opinion, however, many courts have (although without extended analysis) found prejudice based solely on a defendant's economic investment in the mark or business expansion during the delay period (eg, Bridgestone/Firestone Research v Auto Club (245 F3d 1359, 1363 (Fed Cir 2001)), finding that "economic prejudice arises from investment in and development of the trademark, and the continued commercial use and economic promotion of a mark over a prolonged period adds weight to the evidence of prejudice"; Pro Football Inc v Harjo (90 USPQ2d 1593 (DC Cir 2009)), holding that "the district court thus acted well within our precedent... in finding economic prejudice on the basis of investments made during the delay period"; Dwinnell-Wright Co v White House Milk Co (132 F2d 822 (2d Cir 1943)), finding prejudice where the plaintiff "merely stood aside and watched [the defendant's] business grow at great cost"; Conan Properties Inc v Conans Pizza Inc (225 USPQ 379 (5th Cir 1985)), finding prejudice where the defendant opened four additional restaurants and experienced a 30-fold increase in sales during the period of the plaintiff's delay; Hubbard Feeds Inc v Animal Feed Supplement Inc (182 F3d 598, 602 (8th Cir 1999)), finding prejudice where the defendant made substantial investments in equipment and had $250,000 in inventory).

While the Tenth and Eleventh Circuits do not appear to have any appellate decisions directly on point, district courts in those circuits take an approach similar to the cases above (eg, Stanfield v Osborne Industries Inc (839 F Supp 1499, 1507 (D Kan 1993)), finding prejudice where the defendant "spent considerable time and expense registering and promoting [its] trademarks...[and] would have saved several hundred thousand dollars if [the] plaintiff had timely pursued his claim"; Freedom Sav and Loan Ass'n v Way, (583 F Supp 544, 552 (MD Fla 1984)), finding prejudice where the defendant "expended considerable time, effort and money in promoting his business and his name... [while the] plaintiff slept on its rights for almost five years").

The Fourth and Sixth Circuits take an even broader view that prejudice basically requires a defendant to show that its potential liability during the delay period has increased, or that potentially helpful evidence has been lost (eg, Nartron Corp v STMicroelectronics Inc (305 F3d 397, 412 (6th Cir 2002)), holding that "any prejudice is sufficient, including an increase in potential damages or a loss of evidence" (emphasis added); Herman Miller Inc v Palazzetti Imps & Exps Inc (270 F3d 298, 322 (6th Cir 2001)), finding prejudice where potential liability for damages increased during the delay period; Brittingham v Jenkins (16 USPQ2d 1121, 1127 (4th Cir 1990)), finding that prejudice was "manifest" where potential liability for damages increased during 15 years of uncontested use). Other courts have specifically rejected the notion that prejudice can arise from a potential increase in liability (eg, adidas Am Inc v Payless Shoesource Inc (546 F Supp 2d 1029, 1074 (D Or 2008)), holding that "potential liability for damages...cannot constitute economic prejudice for the purposes of laches...[because] such a rule would result in material prejudice in every infringement action" (citing cases)).

The remaining circuits either do not have appellate decisions directly on point, or take the more restrictive view that economic investment in the mark is, by itself, insufficient to establish prejudice. This more restrictive view appears to have its origins in the Seventh Circuit's Tisch Hotels decision, cited by the Internet Specialties majority. While various district courts in the First, Third and Ninth Circuits have previously followed Tisch Hotels in this regard (eg, adidas Am Inc v Payless Shoesource Inc, holding that "prejudice is not simply a matter of expending resources promoting a potentially infringing design" but requires a showing "that the expenditures were made promoting the design as its trademark, or as part of its business identity"); Copy Cop Inc v Task Printing Inc (908 F Supp 37 (D Mass 1995)); Estate of Presley v Russen (513 F Supp 1339, 1353 (DNJ 1981)); Alfred Dunhill of London Inc v Kasser Distillers Products Corp (350 F Supp 1341, 1368 (ED Pa 1972)), holding that "the defendant has suffered no prejudice where nothing more is shown than that it has continued to sell the infringing product for the period in question"), it appears that the Ninth Circuit is the first court of appeals to do so directly.

As Kleinfeld's dissent points out, however, the holding of Tisch Hotels (ie, that economic investment alone is not sufficient to show prejudice) is arguably limited to that case's particular set of facts, which involved a plaintiff delaying less than one year and there being evidence of "deliberate" infringement by the defendant. Additionally, it is worth noting that subsequent Seventh Circuit decisions, while not expressly overruling Tisch, have found laches prejudice based solely on the defendant's financial investment in the mark (eg, Chattanoga Mfg Inc v Nike Inc (301 F3d 789, 795 (7th Cir 2002)), finding prejudice where the defendant spent substantial sums of money promoting the mark; Hot Wax Inc v Turtle Wax Inc (191 F3d 813, 824 (7th Cir 1999)), finding prejudice where the defendant "invested significant amounts of time and money in product development and advertising").

In sum, Internet Specialties increases the burden for defendants asserting laches when compared to the weight of prior authority finding financial investment or business expansion alone sufficient to establish laches prejudice. Responding to the dissent's concern that the decision "defies circuit precedent", the majority opinion noted that the brand awareness requirement is consistent with prior Ninth Circuit decisions. For instance, the majority noted that in Grupo Gigante SA de CV v Dallo & Co (391 F3d 1088 (9th Cir 2004)), the Ninth Circuit found prejudice based on the defendant's prominent display of its name for four years at the entrances of two grocery stores. As a grocery store's "very identity rests in its name", the majority offered that such public display was sufficient to show brand awareness. In contrast, it noted here, "MDE failed to show... that its identity had much at all to do with the mark ISPWest".

The majority opinion made no mention of MDE using the ISPWest domain name or email addresses, or any impact such use may have had on public awareness of the ISPWest mark. Kleinfeld seized that opportunity in the dissent to note the majority "seems to be saying the brand name of a grocery store means more than the domain name of an internet provider". Of course, depending on the context of their use, domain names can serve an important branding function. By not directly addressing MDE's use of ISPWest in its domain name and email addresses, and given existing Ninth Circuit precedent recognizing the important source-identification role domain names play on the Internet, such issue will likely work its way into future fact consideration (eg, Brookfield Communs Inc v West Coast Entm't Corp (174 F3d 1036, 1055 (9th Cir 1999)), holding that "the domain name is more than a mere address: like trademarks, second-level domain names communicate information as to source"; Panavision Int'l LP v Toeppen (141 F3d 1316, 1327 (9th Cir 1998)), holding: "We reject [the] premise that a domain name is nothing more than an address. A significant purpose of a domain name is to identify the entity that owns the website").

Final analysis

In the end, courts can look at both the economic investment a defendant has made in the mark, as well as the brand awareness the mark has achieved, to determine whether the defendant has been prejudiced by the plaintiff's delay. No legal or policy reason exists to consider one to the exclusion of the other. In the past, most courts have not distinguished between these two inquiries, presumably concluding that economic investment in the mark leads to at least some degree of brand recognition by the public.

In considering MDE's use of ISPWest only in pay-per-click advertisements and not in its domain name, the Ninth Circuit left on the table the potential goodwill trademark owners may build up in their domain names. Given the branding power of domain names on the Internet today, look for that issue to appear in future laches prejudice determinations.

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