United States: This Week At The Ninth: Trade Dress And Forum Non Conveniens

This week, the Court considers trademark protections for furniture and the enforceability of forum-selection clauses.

JASON SCOTT COLLECTION, INC. v. TRENDILY FURNTURE, LLC

The Court affirms the district court's decision holding a defendant liable for trade dress infringement when it copied the image, design, and appearance of plaintiff's furniture products.

The panel: Judges Wardlaw, Bumatay, and Schreier (D.S.D.), with Judge Wardlaw writing the opinion.

Key highlight: "As we have recently reiterated, proof of copying strongly supports an inference of secondary meaning. This is because there is no logical reason for the precise copying save an attempt to realize upon a secondary meaning that is in existence. Trendily admits that it intentionally copied the JSC Pieces, and there is ample additional evidence that it did so. . . . Trendily was familiar with JSC's work, and likely understood JSC's significant market share with these retailers. Then, Malhotra, at the request of the owner of Western Heritage, a potential retail customer, ordered his factory in India to manufacture exact copies of the JSC Pieces based on photographs of them to gain Western Heritage's business. Malhotra proceeded to offer the Trendily Pieces to other retailers. In other words, there is no logical reason for the precise copying of the JSC Pieces other than to capitalize on JSC's good will." (Internal quotation marks, alterations, and citations omitted.)

Background: Appellee Jason Scott Collection, Inc. (JSC) is a high-end furniture manufacturer; its founder, Jason Scott, began the business by creating hand-carved furniture in a small village in Indonesia. Scott's collection has a distinctive look, featuring large-scale pieces with intricate wood carvings and decorative metal. Appellant Trendily is another high-end furniture manufacturer. In 2016, it intentionally copied three unique JSC designs and sold them to retailers. These copies were so convincing that even Jason Scott initially confused the furniture for his own.

One nonparty who noticed the copies was a retailer was a customer of both JSC and Trendily. He told Jason Scott's brother that Trendily was the copying manufacturer, but requested that he not be identified for fear of being labeled a "snitch." During the course of the lawsuit, Jason Scott was compelled to reveal the nonparty's identity to prove certain elements of his case; he consequently lost that retailer's business.

After unsuccessfully sending cease-and-desist letters, JSC sued Trendily for trade dress infringement. The district court held Trendily liable following a bench trial. It awarded JSC three years of estimated lost sales from the nonparty retailer as reasonably foreseeable damages of the infringement.

Result: The Ninth Circuit affirmed. The Lanham Act prohibits infringing on another's trade dress—the "total image, design, and appearance of a product," which includes "features such as size, shape, color, color combinations, texture or graphics." Clicks Billiards, Inc. v. Sixshooters, Inc., 251 F.3d 1252, 1257 (9th Cir. 2001). To show trade dress infringement, a plaintiff must prove: (1) that its claimed trade dress is nonfunctional; (2) that its claimed dress serves a source-identifying role either because it is inherently distinctive or has acquired secondary meaning; and (3) that the defendant's product or service creates a likelihood of consumer confusion.

As to the first requirement, the panel accepted that the claimed trade dress was nonfunctional: the parties had so stipulated in their joint pretrial order, and the issue thus could not be contested on appeal.

As to the second requirement, the panel held the district court did not clearly err in finding JSC established secondary meaning. Secondary meaning is "a mental recognition in buyers' and potential buyers' minds that products connected with the [trade dress] are associated with the same source." Japan Telecom, Inc. v. Japan Telecom America Inc., 287 F.3d 866, 873 (9th Cir. 2002). Proof of copying nonfunctional features supports an inference of secondary meaning, because the only logical reason for that copying is to take advantage of an existing secondary meaning. Here, the evidence amply supported the finding that Trendily copied nonfunctional design elements of the JSC pieces for the purpose of capitalizing on JSC's good will. Other factors also supported secondary meaning, including the JSC pieces' well-known presence in the high-end furniture market and JSC furniture's distinctive and recognizable nature in the minds of retailers and consumers.

As to the third requirement, the panel held that the district court did not err in finding likelihood of confusion. To determine whether a product creates a likelihood of confusion, courts look to the strength of the mark; the proximity of the goods; the similarity of the marks; evidence of actual confusion; marketing channels used; the type of goods and the degree of care likely to be exercised by the purchaser; the defendant's intent in selecting the mark; and the likelihood of expansion of the product lines. See AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 348-49 (9th Cir. 1979). Several of these factors were satisfied here: there was "a nearly exact match between the two lines of products"; several retailers could not distinguish between the pieces; and the products were sold in the same market.

Turning to remedies, the panel held the district court did not abuse its discretion in awarding damages based on the nonparty retailer's lost business. It explained that damaged business relationships are a foreseeable consequence of infringement. And here, it was Trendily's ignoring JSC's cease-and-desist letters that caused JSC to file this lawsuit, which, in turn, required JSC to reveal the retailer's identity in order to prove its case. Finally, the panel held that the district court did not abuse its discretion in awarding JSC attorney's fees in light of Trendily's willful and brazen infringement.

The en banc Court affirms the district court's decision dismissing the plaintiff stockholder's derivative Exchange Act action on forum non conveniens grounds.

En banc panel: Chief Judge Murguia and Judges S.R. Thomas, Ikuta, Nguyen, Friedland, Nelson, Bade, Bress, Forrest, Bumatay, and Mendoza, with Judge Ikuta writing the majority opinion and Judge S.R. Thomas dissenting.

Key highlight: "[B]ecause Lee's action to enforce the substantive obligations imposed by § 14(a) and Rule 14a-9 can be brought as a direct action, there is no basis for her argument that Gap's forum-selection clause (which, by its terms, has no impact on direct actions) effects a functional waiver of compliance with the substantive obligations imposed by § 14(a) and Rule 14a-9."

Background: Noelle Lee, a Gap stockholder, sued Gap's directors derivatively on behalf of Gap. Lee alleged that Gap's directors violated § 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 by filing proxy statements that misrepresented Gap's commitment to diversity. Lee filed suit in a California district court.

The district court granted Gap's motion to dismiss based on a forum-selection clause in Gap's bylaws providing that "the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of" Gap. Because § 27(a) of the Exchange Act provides federal courts exclusive jurisdiction over actions brought under the Act, the district court's decision effectively precluded Lee's derivative action.

A three-judge panel affirmed the district court. The Court granted rehearing en banc.

Result: The en banc panel affirmed, rejecting Lee's three arguments that Gap's forum-selection clause was unenforceable.

Lee's first argument was that the forum-selection clause was void under the Exchange Act's anti-waiver provision. Section 29(a) of the Act renders void "[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder." Lee argued that Gap's forum-selection clause "functionally waive[d] compliance with § 14(a) and Rule 14a-9" because it required her to file her derivative claims in a court that could not adjudicate them.

The Court rejected that argument. It explained that § 29(a) only prohibits "waiver of the substantive obligations imposed by the Exchange Act." Shearson/Am. Exp., Inc. v. McMahon, 482 U.S. 220, 228 (1987). It concluded that the forum-selection clause did not waive Gap's substantive obligations under the Exchange Act because it did not prevent Lee from asserting her claims in a direct action brought on her own behalf, rather than a derivative action on behalf of Gap. Section 29(a) did not guarantee Lee's right to bring a derivative action rather than a direct action because it does not guarantee plaintiffs the right to employ a particular procedure to enforce the Exchange Act. Similarly, § 29(a) did not prohibit waiver of § 27(a), "which gives federal courts exclusive jurisdiction over § 14(a) claims." The Supreme Court had previously held that § 27(a)'s provision of exclusive federal jurisdiction was not a substantive obligation. Id. at 228.

Lee's second argument was that enforcing Gap's forum-selection clause would violate a strong public policy of the federal forum. Although valid forum-selection clauses should generally be enforced, there is a narrow exception for cases where "extraordinary circumstances . . . clearly disfavor a transfer." Atl. Marine Const. Co. v. U.S. Dist. Ct. for W. Dist. of Texas, 571 U.S. 49, 60 (2013). One such extraordinary circumstance is when "enforcement would contravene a strong public policy of the forum in which suit is brought." M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972). Lee argued that a strong public policy of allowing shareholders to bring derivative § 14(a) actions was evidenced by the Exchange Act's anti-waiver provision, § 27(a)'s provision of exclusive federal jurisdiction, and the Supreme Court's decision in J.I. Case Co. v. Borak, 377 U.S. 426 (1964), which recognized a private right of action allowing shareholders to bring direct or derivative actions enforcing § 14(a).

The Court held that there was no strong public policy in favor of allowing shareholders to bring derivative § 14(a) actions. "The linchpin of Lee's argument" was Borak's creation of a private right of action to enforce § 14(a). But the Court believed that Borak's statement that a shareholder could bring a derivative § 14(a) action was dicta because that case involved a direct action. The Court found this dicta unpersuasive because it was "not well-explained or well-reasoned." Subsequent decisions requiring federal courts to look to state law to fill the gaps in federal securities statutes and "adopt[ing] a far more cautious course before finding implied causes of action," Ziglar v. Abbasi, 582 U.S. 120, 132 (2017), also cast doubt on "Borak's statement about derivative § 14(a) actions." The Court therefore concluded that Borak did not establish a strong public policy in favor of allowing shareholders to bring derivative § 14(a) actions.

The Court also rejected Lee's argument that § 27(a) established such a policy. To the extent Congress enacted § 27(a) for any particular purpose, it was merely to ensure uniform construction and application of the Exchange Act. That purpose was not implicated here because the Delaware court could not adjudicate Lee's claims at all. And, as the Court had already explained, there was no danger that the forum-selection clause would wholly displace federal law because the substantive obligations Lee sought to enforce could be vindicated in a direct action.

Lee's third argument was that Gap's forum-selection clause was invalid under § 115 of the Delaware General Corporation Law. Section 115 provides that a corporation's "bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State." Lee argued that Gap's forum-selection clause was not "consistent with applicable jurisdictional requirements" because it foreclosed federal jurisdiction over her claim. She contended that her position was supported by both § 115's synopsis, which states that § 115 is "not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction," and Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934, 962 (Del. Ch. 2013), which § 115 was intended to codify and which specifically suggested that defendants "would have trouble" enforcing a forum-selection clause like Gap's

The Court disagreed. After exercising its discretion to review this potentially dispositive issue (which the three-judge panel had found waived), it concluded that § 115 was inapplicable. Section 115 only applies to "internal corporate claims," a phrase the Delaware Supreme Court has interpreted to reach only Delaware corporate law, not federal, claims. Salzberg v. Sciabacucchi, 227 A.3d 102, 120 n.79 (Del. 2020). The Court held that § 115 was a permissive rule—it specifically authorized certain forum-selection clauses, but did not "set[] the outer limit of allowable forum-selection clauses." The Court therefore could "not interpret its silence on the issue of federal claims as prohibiting the application of forum-selection clauses to such claims." The Court noted that Boilermakers expressly declined to decide whether a forum-selection clause like Gap's would be valid.

The Court acknowledged that this result contradicted the Seventh Circuit's decision in Seafarers Pension Plan v. Bradway, 23 F.4th 714 (2022). Although the Court did not split from the Seventh Circuit lightly, it concluded that Seafarers both misread the Delaware Supreme Court's decision in Salzberg and erroneously failed to recognize the significance of the availability of a direct § 14(a) action.

Judge S.R. Thomas, joined by Chief Judge Murguia and Judges Nguyen, Friedland, and Mendoza, dissented. In his view, Gap's forum-selection clause was void under the Exchange Act's anti-waiver provision because it effectively barred any derivative § 14(a) action. Judge Thomas rejected the majority's position that the availability of a direct § 14(a) action cured this problem. He explained that the anti-waiver provision contained no exception for situations where alternative remedies are available, and that in all events direct and derivative actions protect distinct interests and provide for different remedies. Judge Thomas rejected Gap's contention that the judge-made policy in favor of enforcing forum-selection clauses could overcome explicit statutory language to the contrary. Judge Thomas also concluded that the Exchange Act's anti-waiver and exclusive jurisdiction provisions "reflect[] a strong public policy of ensuring federal control over Exchange Act claims." Enforcing Gap's forum-selection clause was contrary to that policy because it "ensure[d] that no federal court could ever adjudicate the merits of a derivative Section 14(a) claim brought against a company whose bylaws include such a clause."

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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