The U.S. Court of Appeals for the Federal Circuit recently explored the applicability of claim preclusion when a cancellation proceeding is brought by the unsuccessful defendant in a federal district court infringement suit. The Court upheld dismissal of such a cancellation petition on the grounds of claim preclusion. Nasalok Coating Corp. v. Nylok Corp., Case No. 07-1432, 2008 U.S. App. LEXIS 8376 (Fed. Cir., April 14, 2008) (Dyk, J.; Newman, J., concurring).
Nylok filed a trademark infringement case in the U.S. District Court for the Northern District of Illinois, claiming infringement of, inter alia, its federal trademark registration for use of the color blue for a component of self-locking fasteners. Nasalok, a Korean corporation, did not file an appearance in the case, and the district court entered default judgment. The court also entered a permanent injunction against Nasalok and found that Nylok's trademark registration was valid and enforceable. Nasalok then filed a petition to cancel Nylok's registration before the Trademark Trial and Appeal Board (the Board), on grounds that included unregisterability and fraud. The Board granted summary judgment for defendant Nylok, applying the Jet test to holding that Nasalok's petition was barred by claim preclusion. Nasalok appealed.
The Federal Circuit's Jet test finds claim preclusion if "(1) there is identity of parties (or their privies); (2) there has been an earlier final judgment on the merits of a claim; and (3) the second claim is based on the same set of transactional facts as the first." The Court said the Jet test was designed for the situation in which a plaintiff in an unsuccessful infringement suit filed a cancellation petition against the defendant in the suit. The Board had erroneously applied this test, which differs slightly from the test properly applied when the second claim (or defense) is raised by the defendant in the first suit (defendant preclusion), which requires that the defendant's claim or defense was a compulsory counterclaim in the original suit or represents a collateral attack on the first judgment.
Noting that it was an issue of first impression among the circuit courts, the Court held that a counterclaim of registration invalidity is not compulsory in a trademark infringement suit under Fed. R. Civ. P. 13(a)(1). The critical question when determining whether two claims arise from the same "transaction or occurrence" under Rule 13(a) is "the extent of factual overlap between what the plaintiff must establish to prove its claim and what the defendant must establish to prove its counterclaim" (emphasis in original). The Court reasoned that the facts alleged by Nylok to support its infringement claim (i.e., Nylok's ownership of a registered mark and Nasalok's allegedly infringing behavior) do not form the basis for Nasalok's cancellation petition, which asserts unregisterability of Nylok's mark and fraud by Nylok in obtaining the registration. Therefore, the two claims do not arise out of the same occurrence under 13(a). The Court added that treating challenges to trademark registration as compulsory counterclaims would be contrary to the Lear policy of freely allowing challenges to the validity of intellectual property.
However, the Court found that allowing Nasalok to petition to cancel Nylok's trademark registration would amount to a collateral attack on the judgment in the first action, because it would effectively undo the relief granted by the district court. Nylok could have, but did not, advance the issue of registration invalidity in the first suit and was thus precluded from attacking the judgment in that suit by raising the issue in a cancellation petition. The Court did not accept Nasalok's argument that preclusion should not apply because the injunction was the result of a default judgment, finding that the default judgment satisfied due process and thus could give rise to claim preclusion. The Board's entry of summary judgment was affirmed.
Judge Newman concurred in the judgment, but disagreed with the majority panel's reasoning. Judge Newman found the discussion regarding compulsory counterclaims was irrelevant given that the validity of the trademark had been before the district court. She also was troubled by the invocation of Lear, stating that trademark law serves a different purpose from patent law and the public policy supporting challenges to patents does not apply to trademark law.
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