I. Cybersquatters May No Longer Hide Behind the Bankruptcy Laws

In a victory for trademark owners, cybersquatters may no longer be able to hide behind the bankruptcy laws. The United States Bankruptcy Court of the Central District of California held in In re Wright that a violation of the Anti-cybersquatting Consumer Protection Act (ACPA) would categorically deny the discharge of ACPA-incurred debts under section 523(a)(6) of the Bankruptcy Code by precluding litigation over the issue of "willful and malicious injury ... to the property of another." Section 523(a)(6) excepts from discharge debts resulting from "willful malicious injury by the debtor to another entity or to the property of another entity." court reasoned that a finding of "bad faith intent to profit from [a protected] mark," a necessary element of a cybersquatting claim under the ACPA, "constituted a categorically harmful activity which necessarily caused injury to [plaintiff] within the scope of § 523(a)(6)." Further, the court found that plaintiff's "bad faith" evidence supported the inference that defendant had "actual knowledge" that his actions would cause injury to the plaintiff Choice Hotels International ("Choice"), and thus acted "willfully," and that by intending to necessarily cause injury to Choice without evidence of a just cause or excuse, he also acted with malice.1 As a result, Choice prevailed on summary judgment and was able to avoid the discharge of Wright's ACPA-related debts without having to fully litigate these issues.

The decision is unique in intellectual property law because in an adversary proceeding against a discharge of debt based on section 523(a)(6), a bankruptcy court will typically not preclude the litigation of "willfulness" and "maliciousness" upon a district court's mere finding of trademark, copyright, or patent infringement. In most instances, the plaintiff is forced to subsequently litigate the issues of "willfulness" and "maliciousness" in the bankruptcy court to avoid the discharge of any monetary awards ordered by a district court. Under In re Wright, however, a plaintiff who has prevailed on an ACPA claim would not have to litigate these issues in the bankruptcy court because they would have already been litigated by proving the "bad faith intent to profit" prong of the ACPA.

This decision should have several beneficial results for trademark owners. By foreclosing the benefit of filing for bankruptcy in an attempt to discharge debts incurred from ACPA statutory awards, it should be easier for trademark owners to collect from cybersquatters. This decision should also make less effective cybersquatters' threats of obtaining bankruptcy protection to dissuade trademark owners from bringing suit in the first place.

II. The District Court Trademark Litigation

The underlying litigation, Choice Hotels Int'l, Inc. v. Wright, involved the registered trademarks of Choice, one of the largest hotel franchisors in the world. Choice's franchised marks include COMFORT, COMFORT INN, and COMFORT SUITES. Defendant Wright, doing business as Dreamco, manufactured and sold footwear under the name "Happy Feet-The World's Most Comfortable Shoe." In 1990, Wright acquired the toll-free phone number "1-800-COMFORT" to promote his shoe business. After receiving hundreds of phone calls seeking Choice's hotel franchisees, however, Wright decided to expand into the travel-services industry and offered to partner with Choice. Choice refused and asked Wright to stop using the "1-800-COMFORT" phone number for travel-related services. Wright not only refused to stop using the phone number, he also registered the domain names "comfortcallcenter.com," "1-800-comfort.com," "1-888-comfort.com," "comfortgoldcard.com," "comfortsilvercard.com," "comfortbronzecard.com," and "comfortowners.com," and used them to host websites that displayed the "1-800-COMFORT" phone number and promoted his hotel/motel-reservation service.

In response, Choice sued Wright for cybersquatting under the ACPA, trademark infringement, dilution, and other claims. The district court, ruling on Choice's unopposed motion for summary judgment, granted summary judgment to Choice on all of its claims. Regarding cybersquatting, the court found that Wright registered and used domain names that were identical or confusingly similar to or dilutive of Choice's famous marks and that Wright had bad-faith intent to profit from the marks, the two necessary elements of an ACPA claim.2 The court easily found that Wright's domain names were identical or confusingly similar to Choice's marks because they incorporated the entire COMFORT mark as their dominant term.3 In weighing the statutorily mandated "bad faith" factors, the court found that Wright adopted Choice's marks with "the purpose of trading on the association with the COMFORT marks,"4 which satisfied the "bad-faith intent to profit" element of ACPA. Specifically, the district court determined that:

  • Wright's late registration of the domain names, without any prior bona fide use, demonstrated a bad-faith intent to profit "parasitically" from Choice's advertisement and reputation;
  • Wright had no federal, state, or common law trademark rights in the infringing domain names;
  • none of the infringing domain names were previously used by Wright as a business name;
  • Choice's rights in the COMFORT marks dated back to 1981, while the infringing domain names were registered in 2001;
  • the infringing domain names provided access to commercial hotel/motel services;
  • there was no evidence of any bona fide noncommercial use by Wright;
  • and Wright created the infringing domain names with the intent to divert consumer traffic from Choice's authorized websites.5

Having found for Choice on both ACPA elements, the court held Wright liable for cybersquatting. The court also held for Choice on its infringement and dilution claims, but did not make any specific findings that Wright's infringement or dilution was either willful or intentional. In terms of remedies, the court enjoined Wright from using the COMFORT mark to advertise its telephone number, in any business related to hotel reservations or accommodations, and in conjunction with any website. It also awarded Choice $45,720 in royalty fees for trademark infringement under a theory of unjust enrichment and $525,000 in statutory damages under the ACPA.

III. The Bankruptcy Court Litigation

Following the adverse trademark decision, Wright filed for Chapter 7 bankruptcy and sought to discharge the debt incurred from the trademark case. Choice responded by bringing an adversary proceeding in the bankruptcy case, asserting that the district court's monetary judgment against Wright should be excepted from discharge under section 523(a)(6) of the Bankruptcy Code because Wright had committed a "willful and malicious injury ... to [Choice's] property," and Choice moved for summary judgment on this issue.6 Wright responded by arguing that the issues of "willfulness" and "maliciousness" were not "raised, actually litigated or necessary" in the district court action, and thus could not be precluded as a matter of law. Wright also argued that his actions were not motivated by a specific intent to harm Choice as required under section 523(a)(6), but rather by a desire to benefit both parties through a joint venture, and thus his use of the COMFORT marks was neither willful or malicious.

In considering Choice's motion for summary judgment, the bankruptcy court first noted that section 523(a)(6) requires a finding of a "deliberate or intentional injury" and "separate findings on the issues of 'willful' and 'malicious.'" "Willfulness" requires a finding that the debtor either had a subjective motive to cause injury or knew that it was substantially certain to occur. "Maliciousness" requires that the debtor intentionally committed a wrongful act that necessarily caused injury without "just cause or excuse."

The bankruptcy court then analyzed the district court's findings of trademark infringement, unfair competition, dilution, and unjust enrichment to determine if "willfulness" and "maliciousness" were sufficiently litigated under these claims to preclude these issues from the bankruptcy proceeding. First, despite Wright's admission that he "adopted the [i]nfringing marks for the purpose of trading on the association with the COMFORT(R) marks," the district court made no specific finding that Wright's infringement of, and trading on the good will of, the COMFORT marks was either willful or intentional. Second, even though Wright admitted that he knew the COMFORT marks were "well-known and famous throughout California [and the United States]" when he used the marks in the phone number and domain names, and that Choice had established considerable consumer association with its COMFORT marks, once again, the district court made no specific finding that Wright's actions were either willful or intentional as to Choice's dilution claim because they are not necessary elements of a claim under the Federal Trademark Dilution Act.7 Finally, regarding Choice's unjust enrichment claim, the district court found only that Choice "restrict[ed] the use of the COMFORT MARKS(R) by others and require[d] a licensing fee [of $47,500] to be paid for such use ... . Restitution was awarded to compensate Choice Hotels for the benefit received by Wright at its expense, i.e., Wright's unauthorized use of the COMFORT(R) marks."8 A finding of restitution, however, did not necessarily require a finding of a deliberate and intentional injury. Thus, with all of these claims, because actual knowledge and wrongful intent are not essential elements in finding liability, whether Wright acted willfully or with malice "were issues that were neither actually litigated nor necessary to the district court's summary judgment," and thus could not have preclusive effect in the instant action.9 Accordingly, these issues would have to be fully litigated by Choice in the bankruptcy case to avoid the discharge of any debts that were incurred as a result of these findings.

The Bankruptcy Court ultimately agreed with Choice, however, in holding that a finding of "bad-faith intent to profit," a necessary element under the ACPA, "constituted a categorically harmful activity which necessarily caused injury to [plaintiff] within the scope of § 523(a)(6)."10 It thus granted summary judgment on Choice's motion and held that the statutory award under the ACPA would be accepted from any subsequent bankruptcy discharge.

In doing so, the court initially found that statutory damages could by definition establish a "willful and malicious injury" even where no actual damages were alleged so that section 523(a)(6) would apply.11 The court then determined whether the evidence proffered by Choice in satisfying the "bad faith intent" statutory factors of the ACPA was sufficient for the court to preclude the issues of "willfulness" and "maliciousness" in the bankruptcy proceeding. Nothing that it "may infer subjective intent or substantial certainty from the facts and circumstances surrounding the defendant's conduct, "it found that when the district court specifically found that "Wright ... devised a plan to "parasitically" profit from the COMFORT(R) marks without the consent of Choice Hotels ... . [and] admit[ted] acquiring the [i]nfringing domain names with the specific intent to divert COMFORT(R) customers and consumer traffic from the Choice Hotels' authorized websites and to profit there from" that "he had actual knowledge that harm to Choice Hotels was substantially certain to occur." 12Further, the court found that it "can imply malice ... . [because] Wright's violation of the ACPA ... was wrongful, done intentionally, necessarily caused injury to Choice Hotels, and was done without just cause or excuse." 13Thus, in finding a "bad faith intent to profit from Choice's marks," the district court made sufficient findings to preclude the litigation of issues of "willfulness" and "maliciousness" in the bankruptcy action to except the discharge of the ACPA award-related debt.

The decision in In re Wright thus is significant because it reaches a different result for cybersquatting than bankruptcy courts have typically reached for other types of trademark violations. As the court in In re Wright held, even though Wright was found liable for trademark infringement, dilution, unfair competition, and unjust enrichment, because bad faith and intent are not essential elements of those claims, the issues of "willfulness" and "maliciousness" were not raised and litigated in the district court action, and thus not precluded for future litigation. Accordingly, damages for these other claims could not necessarily be expected from discharge.14 This result is consistent with previous bankruptcy case law in California and other districts. Typically, courts will preclude the issues of "willfulness" and "maliciousness" under section 523(a)(6), and except the discharge of damages incurred from trademark infringement only if the defendant deliberately violated an unambiguous court order or injunction, but not for the infringement itself. One court precluded litigation over these issues only because a jury awarded punitive damages, and thus specifically found willfulness and malice.

IV. Section 523(a)(6) in Other Types of IP Cases

Bankruptcy courts have been similarly careful to decide whether the elements of willfulness and malice were sufficiently litigated in underlying copyright and patent infringement cases. In a leading case from the Ninth Circuit, the appeals court held that even though the district court found willful copyright infringement, necessary for its award of maximum statutory damages, because it did not specify whether its decision was based on "willful" or "reckless" conduct, the elements of willfulness and malice for purposes of bankruptcy exception could not be precluded on that finding alone. Because "reckless" conduct cannot be "willful" and "malicious," but can support a finding of willful copyright infringement, the district court had not specifically found the subjective intent necessary to preclude the discharge of the debt.15 Other bankruptcy courts have also required a finding of subjective intent to harm beyond a mere finding of copyright infringement before precluding these issues,16 usually in the form of a contempt for a court order or injunction,17 or a finding that defendant knowingly failed to obtain licenses and played musical works over the air anyway.18 One court found a defendant's actions willful and malicious only after he received an unambiguous letter from the copyright owner declaring that his license was terminated and yet continued to play the owner's songs over the radio.19 In the period before receiving the letter, however, the court held that although infringing, defendant's conduct was not categorically willful and malicious.

In the leading bankruptcy decision addressing the issue of excepting the discharge of patent-infringement debt, the Bankruptcy Appellate Panel for the Sixth Circuit held that a finding of patent infringement precluded litigation of the issues of willfulness and maliciousness in the bankruptcy proceeding based on the district court's finding that defendant specifically admitted that he willfully infringed plaintiff's patent and concealed his name to avoid payment to the patent owner. These admissions, and not the mere fact of infringement, showed that the defendant must have known that it would injure the plaintiff for section 523(a)(6) purposes, likening its conduct to an intentional tort.

V. Conclusion

The court's decision in In re Wright is significant. The ACPA was enacted to deter cybersquatters from unfairly capitalising on the goodwill created by trademark owners and on the confusion of Internet users. One of the ACPA's primary deterrents is the threat of large statutory damage awards. If potential cybersquatters know that they can discharge those awards in bankruptcy court, or use the threat of bankruptcy to discourage trademark owners from pursuing litigation to obtain and collect statutory damages, they will be less deterred from continuing their cybersquatting activities. Without In re Wright, trademark owners would have to litigate two cases:

  • the ACPA case to obtain the statutory damages award, and
  • a bankruptcy proceeding to prove that the cybersquatter intentionally and maliciously harmed their intellectual property to except that debt from discharge.

Thanks to In re Wright, however, trademark owners need only litigate the ACPA case. This new weapon in the arsenal of trademark owners will hopefully deter cybersquatting while at the same time making it easier for trademark owners to collect on statutory damage awards under the ACPA.

Footnotes

1 Id. at 213.

2 15 U.S.C.A. § 1125(d).

3 In re Wright, 355 B.R. at 211.

4 Id. at 206.

5 Id. at 211.

6 In re Wright, 355 B.R. at 202.

7 Id. at 208.

8 Id. at 209.

9 Id. at 207.

10 Id. at 212.

11 Id.

12 Id. at 212-13.

13 Id. at 213

14 Id. at 207.

15 In re Albarran, 347 B.R. at 385.

16 See In re May, 2006 Bankr. LEXIS 3239 (Bankr. N.D. Ga. Sept. 29, 2006); In re Marshall, 144 B.R. 930 (Bankr. M.D. Fla. 1992); In re Watson, 117 B.R. 291 (Bankr. W.D. Mo. 1990); In re Massier, 51 B.R. 229 (Bankr. D. Colo. 1985).

17 See In re Akhtar, 368 B.R. 120 (Bankr. E.D.N.Y. 2007); In re Lynch, 16 U.S.P.Q.2d 1971 (Bankr. W.D. Okla. 1990).

18 See In re Pineau, 149 B.R. 239 (D. Me. 1993); In re Elms, 112 B.R. 148 (Bankr. E.D. La. 1990); In re Gabaldon, 55 B.R. 431 (Bankr. D.N.M. 1985).

19 In re Remick, 96 B.R. 935 (Bankr. W.D. Mo. 1987).

20 In re Trantham, 304 B.R. 298 (6th Cir. BAP 2004). See also In re Wood, 309 B.R. 745 (Bankr. W.D. Tenn. 2004) (relying on holding of In re Trantham to reach similar holding).

21 In re Trantham, 304 B.R. at 307.

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