By Thomas Long, J.D.
When issue preclusion did not apply, a defense was barred by claim preclusion principles only when the prior lawsuit and the current lawsuit shared a "common nucleus of operative facts," which was not the case here.
Apparel maker Lucky Brand Dungarees, Inc., was not precluded from raising new defenses in a trademark dispute with competitor Marcel Fashions Group, Inc., that were not raised in an earlier lawsuit between the parties, because Marcel’s current actions challenged different conduct and raised different claims from the previous action, the U.S. Supreme Court has held in a unanimous opinion authored by Justice Sotomayor. The Court reversed a decision of the U.S. Court of Appeals in New York City, holding that Lucky was barred by the doctrine of "defense preclusion" from asserting a release agreement between the parties as a defense because Lucky failed to litigate it fully in the prior action. The High Court noted that the two suits involved different marks and different conduct occurring at different times, so they did not share a "common nucleus of operative facts" necessary for claim preclusion to apply. Even if treatises and the Court’s own decisions supported recognition of the doctrine of "defense preclusion," the Court expressed doubt that those authorities stood for anything beyond the idea that traditional claim or issue preclusion principles may bar defenses raised in a later action, which did not apply to this case (Lucky Brand Dungarees, Inc. v. Marcel Fashions Group, Inc., May 14, 2020, Sotomayor, S.).
Litigation history. In 2001, Marcel sued Lucky Brand for allegedly infringing Marcel’s "Get Lucky" mark (the 2001 action). The parties settled the 2001 action, agreeing that Lucky Brand would cease using "Get Lucky" and Marcel would release certain claims it might have in the future arising out of its trademarks (the release). In 2005, Lucky Brand sued Marcel over Marcel’s issuance of a license for use of the "Get Lucky" mark, and Marcel counterclaimed for infringement and violation of the settlement in the 2001 action. The district court denied Lucky’s motion to dismiss based on the Release, but Lucky neglected to raise the defense later in the case. A jury in the 2005 case found in favor of Marcel on its counterclaim that Lucky Brand infringed the "Get Lucky" mark by using that mark and another similar mark. The district court entered an injunction barring Lucky Brand’s use of the "Get Lucky" mark.
In 2011, Marcel filed another suit, seeking relief for Lucky Brand’s use of its own "Lucky Brand" house mark. 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 of the 2001 action. The district court agreed, but in 2013, the Second Circuit reversed. On remand, Lucky Brand moved to dismiss, this time raising as its only argument that the prior release in the 2001 action barred Marcel’s claims. Marcel argued that Marcel was precluded from raising that defense because it failed to litigate it fully in the 2005 action. The district court granted Lucky’s motion, rejecting Marcel’s claim preclusion argument on the ground that the doctrine was not available to preclude a "defense," as opposed to a "claim." The Second Circuit again reversed, holding that defense preclusion barred Lucky’s release defense. The Second Circuit held that 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.
Petition for review. Lucky Brand filed a petition for certiorari, asking "Whether, when a plaintiff asserts new claims, federal preclusion principles can bar a defendant from raising defenses that were not actually litigated and resolved in any prior case between the parties." Lucky’s petition pointed out that the Supreme Court and three circuit courts (the Federal Circuit, Eleventh Circuit, and Ninth Circuit) had all held that in a subsequent case between the same parties involving different claims from those litigated in the earlier case, the defendant is free to raise defenses that were not litigated in the earlier case, even though they could have been. The Court agreed to review the Second Circuit’s decision.
Claim preclusion as applied to defenses. The Court said that it had never explicitly recognized "defense preclusion" as a standalone category of res judicata, separate from the doctrines of issue preclusion and claim preclusion. "Instead," the Court explained, "our case law indicates that any such preclusion of defenses must, at a minimum, satisfy the strictures of issue preclusion or claim preclusion." It was undisputed that issue preclusion did not apply to this case, and the parties agreed that claim preclusion barred a defense only if the "causes of action are the same" in the two suits; that is, they must share a "common nucleus of operative facts."
The two lawsuits at issue here were grounded on different conduct—they involved different marks and allegedly infringements occurring at different times—so they did not share a common nucleus of operative facts, the Court said. The 2011 action did not "imperil" the rights or interests established by the 2005 action because the 2011 action did not involve any alleged use of the "Get Lucky" phrase at issue in the 2005 action. Moreover, the complained-of conduct in the 2011 action occurred after the conclusion of the 2005 action. The Court noted that claim preclusion generally did not bar claims predicated on events that postdated the filing of the earlier lawsuit.
"This principle takes on particular force in the trademark context, where the enforceability of a mark and likelihood of confusion between marks often turns on extrinsic facts that change over time," said the Court. "As Lucky Brand points out, liability for trademark infringement turns on marketplace realities that can change dramatically from year to year." Accordingly, claim preclusion did not bar Lucky Brand from asserting its release defense in the 2011 action.
Separate "defense preclusion" doctrine. Marcel argued that treatises and the Court’s caselaw supported recognition of a version of the defense preclusion doctrine that extended to the facts of this case, but the Court did not agree. "As an initial matter, regardless of what those authorities might imply about ‘defense preclusion,’ none of them describe scenarios applicable here," the Court said. "Moreover, we doubt that these authorities stand for anything more than that traditional claim- or issue-preclusion principles may bar defenses raised in a subsequent suit—principles that, as explained above, do not bar Lucky Brand’s release defense here."
The Court reversed the decision of the Second Circuit and remanded the case for further proceedings.
Practitioner commentary.Josh Reisberg, partner in Axinn’s Intellectual Property group, commented that defenses that "could have been asserted" in a prior action can still be precluded in a later action. "But the hook is that either issue preclusion or claim preclusion must apply," Reisberg said. "The specific holding in this case, however, is limited to claim preclusion because the parties agreed that issue preclusion does not apply. That said, the Supreme Court went out of its way to make clear that its precedent has never recognized the doctrine of ‘defense preclusion’ outside of the bounds of issue preclusion and claim preclusion."
Also commenting on the Court’s decision, Brian Michalek, partner at Saul Ewing Arnstein & Lehr, said, "Generally speaking, the Supreme Court is adverse to bright-line rules in intellectual property cases. Here, the message is clear, however, that courts should be hesitant to consider ‘defense preclusion’ as a standalone and unmoored category of res judicata. For those wishing to raise ‘defense preclusion,’ it will be better to do so within the well-established traditional guideposts of claim preclusion and issue preclusion."
With respect to the question of whether a separate doctrine of "defense preclusion could apply in future cases, John Lu, partner at Milbank, said, "It is clear from the opinion, as a whole, that the Court was not leaving a door open to allow any form of defense preclusion that was not strictly limited to existing res judicata principles. There was no hedging on this point. Indeed, the only hedge cut the other way: in footnote 2 of the opinion, the Court hedged on whether defenses can be subject to claim preclusion at all. The Court held that it need not address that issue in this opinion."
Regarding the scope of the holding in this case and its applicability to legal subjects beyond IP, Reisberg commented, "At its core, the decision addresses an issue of procedure, which can be broadly applied to any number of factual scenarios. Here, the Court found that Lucky was not precluded from raising a defense based on a settlement agreement in the later 2011 action where that defense was available in the earlier 2005 action because the two actions did not involve the ‘same nucleus of operative fact’—i.e., because the actions involved different marks and different conduct occurring at different times. The decision is by no means limited to actions and conduct relating to trademark infringement or other areas of IP."
Michalek explained, "The Court holding is going to apply to any situation that has a unique set of facts and issues. This is especially pronounced in trademark cases where the factual layout, extrinsic market factors, the use of the trademarks and likelihood of confusion, the amounts in controversy, and the parties’ financial positions is almost always going to be different. It, therefore, follows that a defense that is strong in one case, might only be peripheral in another. Trademark law is not any more of an outlier than other areas of the law which often have their own specific and nuanced fact patterns. Thus, it is reasonable that the Court’s holding with respect to ‘defense preclusion’ would apply similarly in those situations as well."
According to Lu, "Notably missing from the Court’s opinion is guidance for when (if ever) post-lawsuit conduct can trigger claim preclusion. The Court’s opinion states that post-lawsuit conduct ‘generally’ will not trigger claim preclusion because such ‘[e]vents…often give rise to new "material operative facts."’ The Court’s opinion, at least, leaves open the door for arguing that post-lawsuit conduct can still trigger claim preclusion if that conduct does not raise new material operative facts. It is likely that future fights concerning claim preclusion will be whether newly raised facts are material or not material."
In response to a question from Wolters Kluwer as to the impact the Court’s decision will have on trademark litigation strategies, Reisberg answered, "To the extent a plaintiff is involved in multiple litigations arising from a core set of conduct, the plaintiff will want to analyze longstanding principles of claim preclusion and issue preclusion to determine whether the accused infringer has waived any defenses (not just those relating to a prior settlement agreement) that the accused infringer should have raised in the earlier litigation. Notably, the Supreme Court acknowledged that Lucky raised the settlement agreement defense in both a motion to dismiss and its Answer responding to Marcel’s complaint in the 2005 action, but that Lucky failed to invoke that defense later in the proceedings. A plaintiff may therefore be able to take advantage of a defendant who preserves a defense (by raising them in a pleading) but fails to carry that defense through to termination of the earlier action.
"From the defendant’s perspective," Reisberg added, "it is not enough to raise a defense in a pleading and not carry it through. Such conduct can give rise to a waiver where a later action is based on the "same nucleus of operative fact." That said, in the context of trademark litigation, the probability of a later litigation involving the same facts and the same claims is fairly low. Indeed, as the Supreme Court recognized here, "the 2011 Action involved different marks, different legal theories, and different conduct." (Op. at 10.) This decision should not act as a mandate to defendants to preserve defenses in a pleadings and then continue to pursue those defenses in litigation to the extent it is not strategically advantageous to do so simply to preclude waiver in a follow-on lawsuit that may give rise to issue or claim preclusion. At the same time, if you have a valid defense to infringement, invoke it."
In Michalek’s view, "This holding helps reset the status quo. The Second Circuit’s ruling seemed to support this notion that if you have a defense, then you better raise it, or waive it. The Supreme Court has allayed those concerns. From a defendant’s perspective, this holdings helps provide flexibility to pursue specific, targeted, and well-thought defenses as applied to the facts at issue with less fear of waiving any of them down the road. As a plaintiff, you might want to take extra care to draft settlement agreements broadly enough to forestall future successive litigations."
According to Lu, "The Court’s holding resolved a circuit split, so there will likely be less venue shopping by either plaintiff or defendant when defense preclusion is likely going to come up in the litigation. Following the Court’s holding, plaintiffs would benefit more from broadly asserting all infringement theories available, because that is going to increase the likelihood that if there is a subsequent action, preclusion against defenses will be broader. Defendants seeking to avoid claim preclusion should highlight any new operative facts and explain how these facts are material to the claims at issue."
This case is No. 18-1086.
Attorneys: Dale M. Cendali (Kirkland & Ellis LLP) for Lucky Brand Dungarees, Inc. Olivera Medenica (Dunnington Bartholow & Miller LLP) for Marcel Fashions Group, Inc. Joshua S. Reisberg (Axinn, Veltrop & Harkrider LLP). Brian R. Michalek (Saul Ewing Arnstein & Lehr LLP). Y. John Lu (Milbank LLP).
Companies: Lucky Brand Dungarees, Inc.; Marcel Fashions Group, Inc.
MainStory: TopStory Trademark GCNNews
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