By Peter Reap, J.D., LL.M.
Litigation defenses, just as are claims, are subject to preclusion under the doctrine of res judicata, the U.S. Court of Appeals in New York City has ruled. Therefore, res judicata (specifically, defense preclusion) barred apparel maker Lucky Dog Dungarees from asserting a release agreement between the parties as a defense to trademark infringement claims brought by plaintiff competitor Marcel Fashions Group. Dismissal of the action by the federal district court in New York City on the grounds that Marcel had released its claims through the settlement agreement was, accordingly, vacated, and the dispute remanded for further proceedings (Marcel Fashions Group., Inc. v. Lucky Brand Dungarees, Inc., August 2, 2018, Winter, R.).
The 2001 Action. In 2001, Marcel sued Lucky Brand for allegedly infringing Marcel’s "Get Lucky" mark (the 2001 action). The settlement agreement at issue in this case resolved the 2001 action, providing that Lucky Brand would "desist henceforth from use of ‘Get Lucky,’" and, pertinent to this appeal, Marcel agreed to release certain claims it might have in the future arising out of its trademarks (the Release).
Later, the parties disagreed as to the scope of the Release, the court noted. Marcel contended that it only released claims as to infringement that occurred prior to the 2003 execution of the agreement. Lucky Brand contended that the Release is far broader, releasing any claim Marcel may have in the future in relation to any trademark registered prior to the execution of the agreement.
The 2005 Action. In 2005, Lucky Brand sued Marcel over Marcel’s issuance of a license for use of the "Get Lucky" mark and Marcel counterclaimed with infringement claims of its own while also contending that Lucky Brand’s use of "Get Lucky" violated the 2003 settlement agreement (the "2005 Action").
Lucky Brand argued that, because the marks at issue were registered prior to the settlement agreement, Marcel released any claim alleging infringement of those marks. Lucky Brand moved to dismiss on this theory, arguing that Marcel’s infringement counterclaims were barred by the terms of the Release. The district court denied the motion in relevant part, effectively concluding that it was premature to determine which claims in that action, if any, were subject to the Release. However, the court also stated that Lucky Brand was free to raise the issue again, after the litigation developed further.
Despite relying on the release argument as part of its motion to dismiss and in its answer, however, Lucky Brand never again asserted a release defense in the 2005 Action. Without any argument to the jury by Lucky Brand that the Release barred Marcel’s counterclaims as to infringement of its "Get Lucky" mark, the jury found in favor of Marcel on its counterclaim that Lucky Brand infringed that mark. The district court enjoined Lucky Brand’s use of the "Get Lucky" mark, and entered a declaration that the "Lucky Brand Parties infringed Marcel’s Fashion’s GET LUCKY trademark . . . by using GET LUCKY, the BRAND trademarks, and any other trademarks including the word ‘Lucky’ after May 2003."
The instant action. In 2011, relying on the broad language of the court’s injunction in the 2005 Action, Marcel filed the instant suit, seeking relief for Lucky Brand’s alleged continued use of the "Lucky Brand" mark following that injunction. However, Lucky Brand did not assert a release defense in the early stages of the instant action. Lucky Brand did not plead the Release as an affirmative defense in its answer to the initial complaint, nor raise the Release as a basis for dismissal when it moved for summary judgment.
Rather, Lucky Brand moved for summary judgment on the basis that Marcel’s claims were precluded by res judicata (specifically, claim preclusion) in light of the final disposition in the 2005 Action. The district court agreed, but, in Marcel I, the Second Circuit reversed. Relying on TechnoMarine SA v. Giftports, Inc., 758 F.3d 493 (2d Cir. 2014), the appellate court concluded that Marcel’s claims were not barred by res judicata because Marcel alleged infringements that occurred subsequent to the judgment in the 2005 Action, claims which "could not possibly have been sued upon in the previous case."
On remand, Marcel filed a second amended complaint and Lucky Brand moved to dismiss, this time raising as its only argument that the Release bars Marcel’s claims. The district court agreed and granted the motion, concluding that Marcel’s claims "are plainly foreclosed by the Settlement Agreement." Marcel appealed.
Res judicata. In Marcel I, the court identified the contours of res judicata and discussed in detail the two doctrines that it encompasses: claim preclusion and issue preclusion. At issue here was claim preclusion, a doctrine which, in the usual situation, bars a plaintiff from relitigating claims against a defendant that it lost in a previous action against the same defendant and claims that the plaintiff could have brought in that earlier action but did not, the court noted. A party seeking to invoke claim preclusion must generally make three showings: (1) an earlier action resulted in an adjudication on the merits; (2) that earlier action involved the same counterparty or those in privity with them; and (3) the claim sought to be precluded was raised, or could have been raised, in that earlier action.
Rather than addressing the elements of claim preclusion, the district court dismissed Marcel’s argument for a threshold reason: the doctrine is simply not available here where Marcel seeks to preclude a defense, and not a "claim." This was error, according to the Second Circuit. The district court overlooked the principle that defenses are also subject to preclusion under res judicata.
The Second Circuit’s most expansive decision on the issue of whether claim preclusion may bar a litigation defense is Clarke v. Frank, 960 F.2d 1146 (2d Cir. 1992). There, the court identified the governing principle as follows: "[c]laim preclusion prevents a party from litigating any issue or defense that could have been raised or decided in a previous suit, even if the issue or defense was not actually raised or decided." Clarke, 960 F.2d at 1150 10 (emphases added). However, the Second Circuit, until this opinion, never discussed the issue further or framed its parameters.
There was guidance on this issue from claim preclusion’s sister res judicata component, issue preclusion, the court observed. In Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979), the Supreme Court resolved the open question of whether a plaintiff could invoke issue preclusion when it rejected any per se prohibition on a plaintiff’s use of issue preclusion. Although issue preclusion is different from claim preclusion in several important respects, an analysis similar to that of the Supreme Court’s in Parklane informed the assessment of defense preclusion. The principles animating the claim preclusion doctrine do not disappear when that which is sought to be precluded is a defense. Rather, the efficiency concerns were equally pressing when the matter subject to preclusion is a defense rather than a claim, the court reasoned.
The following efficiencies were readily apparent. First, defense preclusion incentivizes defendants to litigate all their relevant defenses in an initial action. Second, absent defense preclusion, plaintiffs might be hesitant to rely on judicial victories for fear that a hidden defense will later emerge to alter their judicially established rights. Third, and relatedly, defense preclusion prevents wasteful follow-on actions that would not have been filed had the defense been asserted. This case therefore plainly demonstrated the inefficiencies that would have to be tolerated if defense preclusion was prohibited because the past several years of litigation would have been avoided had Lucky Brand successfully litigated and not cast aside its release defense in the 2005 Action, the court said.
Defense preclusion raises a number of similar concerns. It might be unfair to bar a defendant from raising a defense that it elected not to bring in an earlier action because that action was of a significantly smaller scope, or the defense was somehow tangential to the matter. Further, a defendant should be given some room to make tactical choices to attempt to end the suit against them with as little cost as possible without facing the unforeseen consequences of forever abandoning a defense. And, the fairness of defense preclusion could depend on the nature of the action. Despite these fairness considerations, however, consistent with Parklane, the Second Circuit held that "the preferable approach for dealing with these problems in the federal courts is not to preclude the use of [defense preclusion], but to grant trial courts broad discretion to determine when it should be applied." 439 U.S. at 331. District court discretion should be bound by the twin concerns discussed above: judicial efficiency and fairness.
In sum, defense preclusion bars a party from raising a defense where: (1) a previous action involved an adjudication on the merits; (2) the previous action involved the same parties or those in privity with them; (3) the defense was either asserted or could have been asserted, in the prior action; and (4) the district court, in its discretion, concludes that preclusion of the defense is appropriate because efficiency concerns outweigh any unfairness to the party whose defense would be precluded.
Here, all of these factors were easily met, the court explained. Lucky Brand did not (and could not) dispute the first three, and it would have been an abuse of discretion for the district court to have concluded anything other than that any unfairness to Lucky Brand was substantially outweighed by the efficiency concerns identified above. There was no conceivable justification for Lucky Brand, a sophisticated party engaged in litigation pertaining to its ability to use some of its core trademarks, not to have fully litigated the release defense in the 2005 Action.
This case is No. 17-0361.
Attorneys: Robert L. Greener (Law Office of Robert L. Greener) for Marcel Fashions Group, Inc. Dale Cendali (Kirkland & Ellis LLP) for Lucky Brand Dungarees, Inc., Lucky Brand Dungarees Stores, Inc., Lucky Brand LLC, Lucky Brand Dungarees Stores, LLC and Kate Spade & Co.
Companies: Marcel Fashions Group, Inc.; Lucky Brand Dungarees, Inc.; Lucky Brand Dungarees Stores, Inc.; Lucky Brand LLC; Lucky Brand Dungarees Stores, LLC; Kate Spade & Co.
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