ABSTRACT

In evaluating the validity of a party's mark, the Ninth Circuit held that the district court did not err in finding that a third party's registration of an identical mark for identical services constituted evidence of the mark's distinctiveness. However, even though the Ninth Circuit affirmed the district court's finding that the registrant of the disputed domain name had acted with a "bad faith intent to profit" from use of the disputed mark, because the district court had additionally relied upon erroneous standards in evaluating the validity of the disputed mark, the Ninth Circuit vacated the judgment to the extent that the district court determined that the mark was distinctive, and remanded the matter for further consideration.

CASE SUMMARY

FACTS

Defendant-Appellee Vericheck, Inc. ("Vericheck") offered check-verification and other
financial-transaction-processing services under the mark VERICHECK, but was unable to federally register its mark due to the existence of a third-party federal registration for the identical mark covering check-verification services. Plaintiff-Appellant David Lahoti ("Lahoti"), an adjudicated cybersquatter, had registered hundreds of domain names incorporating or resembling others' trademarks, including the domain name "vericheck.com" (the "Domain Name"). The website at the Domain Name directed Internet users to a third-party search engine website that paid Lahoti based on the amount of traffic that he generated to the website.

In 2004, Vericheck contacted Lahoti and offered to purchase the Domain Name. Lahoti offered to sell the Domain Name for $72,500 in 2004 and, subsequently, $48,000 in 2005 and $100,000 in 2006. Instead of purchasing the Domain Name, however, Vericheck filed a complaint under the Uniform Domain Name Dispute Resolution Policy ("UDRP"), and the arbitrator ultimately ordered Lahoti to transfer the Domain Name to Vericheck. Lahoti then filed an action for declaratory judgment that he did not violate the Anti-Cybersquatting Consumer Protection Act ("ACPA") or any other provision of the Lanham Act, and sought cancellation of the UDRP panel's order to transfer the Domain Name. In response, Vericheck filed counterclaims for violations of the ACPA, trademark infringement, and unfair competition, among other claims.

On the parties' motions for summary judgment, the district court granted summary judgment to Vericheck, but only on the issue of whether Lahoti had acted in bad faith. The district court concluded that Lahoti had "acted in a bad faith attempt to profit" from his use of the Domain Name because he did not use it to sell goods or services for a legitimate commercial use, and because it linked to websites of several of Vericheck's competitors.

After a bench trial on the remaining issues, the district court determined that the VERICHECK mark was inherently distinctive, and that Lahoti's registration of the Domain Name violated the ACPA and constituted trademark infringement. Lahoti appealed the district court's decision to the Ninth Circuit.

ANALYSIS

To prevail on claims under the ACPA or for trademark infringement, a plaintiff must prove that its mark functions as a trademark by either showing that it is inherently distinctive or has acquired distinctiveness through secondary meaning. A suggestive mark is protectable, but a mark that is merely descriptive and lacks secondary meaning is not distinctive and therefore does not receive trademark protection. In determining whether a mark is suggestive or merely descriptive, the Ninth Circuit cited past precedent and stated that a mark is suggestive "if 'imagination' or a 'mental leap' is required in order to reach a conclusion as to the nature of the product being referenced," whereas a mark is descriptive if it "define[s] a particular characteristic of the product in a way that does not require any exercise of the imagination."

On appeal, Lahoti challenged the district court's finding that the mark VERICHECK was distinctive, arguing that it was instead merely descriptive of Vericheck's check-verification services. The district court had found that the mark VERICHECK was suggestive in part because the PTO had granted a federal trademark registration for the identical mark to a third party for check-verification services. Applying a clear-error standard of review, the Ninth Circuit found that the district court had not erred in finding the VERICHECK mark to be suggestive based upon the PTO's registration of the third-party VERICHECK mark. The Ninth Circuit stated that "nearly identical marks used for similar products may be viewed in a common light when the PTO has found one of them to be suggestive." The Ninth Circuit noted that the TTAB has cautioned that a third-party registration is not "determinative" of distinctiveness if "circumstances have materially changed since the third-party registration or if the registration is distinguishable because it combines one part of the disputed mark . . . with nondescriptive terms." In this case, however, the Ninth Circuit determined that Vericheck's mark was identical to the third-party VERICHECK mark, that both were used in connection with check-verification services, and that neither party had introduced evidence that technological changes had impacted whether the term "Vericheck" should be considered to describe, or rather only to suggest, "check verification."

The Ninth Circuit found, however, that the district court had incorrectly stated other principles of federal trademark law in finding that the VERICHECK mark was suggestive. First, the district court erred to the extent that it required that the VERICHECK mark describe all of Vericheck's services to qualify as "descriptive," instead of merely determining whether the mark as seen in connection with the services immediately conveys information about their nature. Second, the district court erred to the extent that it reasoned that the VERICHECK mark could have been descriptive of services that are unrelated to those actually being offered by Vericheck, because evaluation of a mark must be done in the context of the marketplace rather than in the abstract. Finally, the district court erred in finding that Lahoti improperly broke down the VERICHECK mark into two component parts ("veri" and "check") in order to argue that consumers will immediately presume that the VERICHECK mark covers "check verification" services. The Ninth Circuit stated that courts may analyze all components of the mark in determining whether those parts, taken together, merely describe the services offered. Accordingly, the Ninth Circuit determined that the district court could have broken the mark into "veri" and "check" to separately review the component parts as a preliminary step to evaluating the commercial impression of the mark as a whole.

Ultimately, because the district court found the VERICHECK mark to be suggestive based in part on the erroneous application of the law, the Ninth Circuit vacated the judgment to the extent that the district court found the mark to be distinctive, and remanded the matter for further consideration.

The Ninth Circuit affirmed, however, the district court's finding on summary judgment that Lahoti had acted with a "bad faith intent to profit" from use of the VERICHECK mark because he did not use the Domain Name to sell goods or services for a legitimate commercial use, he had asked for as much as $100,000 to sell the Domain Name to Vericheck even though Lahoti had no interests associated with the VERICHECK name, and because it was undisputed that Lahoti was a repeat cybersquatter.

CONCLUSION

Lahoti shows that a third party's registration of an identical trademark for similar goods or services may evidence that the disputed mark is inherently distinctive and therefore protectable as a trademark. Lahoti also shows that it is essential to evaluate the validity of a mark before the owner commences an ACPA or other trademark action. Without first establishing rights in a mark (i.e., that a mark is inherently distinctive or has acquired distinctiveness through secondary meaning), a plaintiff cannot prevail on claims under the ACPA or for trademark infringement—despite being able to prove that a defendant has registered and/or used a domain name with a bad-faith intent to profit.

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