By Cheryl Beise, J.D.
Question of whether res judicate encompasses "defense preclusion" has broad implications for all federal litigation.
The U.S. Supreme Court on January 13 heard oral arguments in a long-running trademark dispute between apparel manufacturers over rights in the LUCKY BRAND mark. The Justices are called upon to resolve a circuit split regarding whether federal claim preclusion bars a party from asserting defenses that could have been raised and litigated in a prior action between the parties. While significant time was devoted to sorting through the muddled facts of the multi-layered dispute, several Justices appeared to be skeptical of the Second Circuit’s "new rule" that would require litigants to assert all possible defenses in a first action in order to preserve them for any later action that may arise between the parties.
Dale M. Cendali, of Kirkland & Ellis, presented arguments behalf of petitioner Lucky Brands Dungarees, Inc., while Michael B. Kimberly, of McDermott Will & Emery, argued for respondent Marcel Fashions Group, Inc.
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 other 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 a 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.
Petitioner’s argument. Cendali asked the Court to reverse the Second Circuit’s holding that a defense never previously litigated to judgment can be barred in a case involving new claims. According to Cendali, the proper rule is that "a defendant is free to argue any previously unresolved defense it may have to new claims." This rule is consistent with precedent, is practical and easy to administer, and is fair and protects due process. Cendali acknowledged that issue preclusion could bar a previously resolved defense and that previously unresolved defenses cannpt be raised in the context of a judgment enforcement action or as a claim in an action collaterally attacking a prior judgment. But in this case, Marcel was pursuing new claims as it sought relief for alleged subsequent infringement.
Justice Ginsburg interrupted Cendali to ask why Lucky abandoned the release defense in the first action. Lucky raised the defense, but later dropped it. Cendali suggested that the most logical reason is that it would not have been dispositive because the prior release and the present case involved different marks. Also, the prior action involved only a small dollar amount, whereas the most recent action sought to expand upon the prior judgment by expanding it to Lucky Brand’s own house mark.
Justice Alito asked Cendali whether he agreed with the Restatement Rule that while the failure to raise a defense in a prior action generally does not preclude the raising of the defense in a subsequent action, there is an exception where prevailing on the defense in the second action would nullify the initial judgment or impair rights established in the initial action. Cendali did not dispute this rule, adding that if this case involved a judgment enforcement action or a collateral attack on the prior judgment, it would be barred.
Justice Kagan questioned whether defense preclusion could apply in cases where "subsequent conduct were identical in all ways to the prior conduct." Cendali said that if the court had wanted to address and prevent the current conduct, it could have issued an injunction that pertained to the current conduct. Instead, the injunction it issued was limited to use of "Get Lucky," or colorable imitations thereof. Subsequent infringing conduct is a new claim.
Justice Alito observed that there was a seeming discrepancy between the final judgment and the injunction. The injunction applies only to "Get Lucky," whereas the jury’s verdict and judgment applied to a lot of other marks as well. "Would there be grounds under trademark law for the district court to issue an injunction that is narrower than the jury's verdict?" Justice Alito wondered. The question was not directly answered.
Marcel redirected the Justices to the problems with the new test that the Second Circuit put forth. He listed three reasons why it is problematic: (1) it will create uncertainty; (2) it's going to lead to new litigation; and (3) it’s fundamentally unfair because it allows a plaintiff to bring new claims, but it prohibits a defendant from raising all the defenses that it may have to those claim.
Justice Gorsuch asked whether there was a way to remedy the "asymmetry" by barring new claims as well as defenses, while Justice Kagan asked Cendali to confirm that the action involved two different sets of claims involving two different trademarks. Cendali said that it did. He likened subsequent acts of trademark infringement to patent and copyright infringement, where new acts create new claims for accrual purposes.
Justice Sotomayor asked Cendali to explain the meaning of the 2003 settlement agreement. Cendali replied that the district court clarified that the 2003 settlement means "that in exchange for $650,000, my client, Lucky, agreed not to use Get Lucky anymore, but that for any trademarks that it had registered or used prior to the date of the settlement agreement, which would include ‘Lucky Brand,’ the name of our store, and other ... trademarks that used the word ‘Lucky’ prior to that date, all future claims would be extinguished." Cendali said that Marcel effectively got a partial windfall in the 2005 action. Most of that case was about the "Get Lucky" mark, but some small portion of the award involved the released marks. The injunction issued by the court said nothing about the released marks, but now Marcel is trying to get a bigger windfall by asserting new claims.
Justice Kavaugh asked Cendali to respond to Marcel’s argument likening this case to a judgment enforcement action. He said what this action is about is that Marcel wants to enforce a broader injunction and prevent Lucky from using any marks the English word "Lucky" in it.
Respondent’s argument. Kimberly began by stating that "in any subsequent lawsuit between the same parties, just as the plaintiff is precluded from raising any claims springing from the same cause of action if those claims were available to it in the prior suit, so too the defendant is precluded from raising any defenses to that cause of action if those defenses were available to it in the prior suit." Kimberly contended that this rule is "fair and symmetrical," preserving judicial resources by discouraging repeat lawsuits, and fostering reliance on final judgments. According to Kimberly, both lawsuits at issue in this case involved the same cause of action and the exact same legal rights. Kimberly also said that because this case involved a motion to dismiss, the Court should look no further that the four corners of the Marcel’s complaint.
Chief Justice Roberts pointed out "that perhaps the most serious difficulty with your case that cries out for an answer before getting to the judgment is that it does require counsel to put forth in the first case every conceivable defense that he or she might have ... And it's a particular problem in this area of the law because you're often dealing with ongoing disputes between two parties."
Justice Ginsburg agreed that this case involves two different claims—so there is no question of claim preclusion—but what is new is the idea of defense preclusion, she added. Kimberly said that the reason that claim preclusion does not apply in this case and that Marcel may prosecute its post-judgment claims is not because they arise from a different nucleus of operative fact, but rather because these claims previously were unavailable to it.
Justice Kagan also challenged Kimberly, noting that this case involves a different transaction or occurrence, a different nucleus of operative fact ... because Lucky has stopped using "Get Lucky" and is only using "Lucky Brand." Kimber replied that the case involved "a continuing course of conduct." The litigation in 2005 covered a period of time up to the final judgment in May 2010, whereas liability in this case is alleged to commence in June 2010.
Interrupting, Justice Gorsuch took issue with Kimberly’s reasoning, pointing out "that if it were identical, you would just go enforce the judgment. And I think you've actually, candidly, acknowledged that this is a different claim and it isn't precluded by claim preclusion, it's got to be something else."
Kimberly attempted to distinguish two categories of claims in this case. There were claims concerning Lucky's use of "Get Lucky" and there were claims concerning the likelihood of confusion between the "Lucky Brand" marks and Marcel's "Get Lucky" mark. The claims regarding Lucky’s use of "Get Lucky" were resolved interlocutorily by the court in a sanctions order. That order granted partial summary judgment And the focus of the trial was then whether the Get Lucky marks and the Lucky Brand marks were confusingly similar. "The permanent injunction concerned only the use of Get Lucky, which is why, Justice Gorsuch, we could not have brought this as a judgment enforcement action," he said.
Justice Breyer said he was confused about what they were being asked to decide. "I thought that the case was about the Second Circuit trying to have a new rule. I haven't heard anyone defending the Second Circuit," he remarked.
Justice Alito wanted to know if this fact pattern is similar to "a series of lawsuits about exactly the same thing, let's say failure to pay under an installment contract or failure to pay rent and it comes up month after month, the failure to raise the defense in one of those prior actions can bar the raising of a defense in the later actions." Kimberly said that it was similar.
Petitioner’s reply. In his reply, Cendali said that Marcel failed to offer a defense of the basic principle that that while a plaintiff can file new claims, a defendant is barred from asserting previously unlitigated, unresolved defenses.
Justice Sotomayor asked why Lucky Brand should not be precluded from asserting its defense "because you had a full and fair opportunity to raise the settlement agreement as your right to use the Lucky Brands. You didn't."
"Well, you would defend it because the case sought subsequent relief for subsequent infringements where you would be allowed to present new defenses to that different period of time," Cendali said. "In the absence of a forward-looking injunction, it's a new case. Future facts could not have been before the court. And that's the answer."
The case is No. 18-1086.
Attorneys: Dale M. Cendali (Kirkland & Ellis LLP) for Lucky Brand Dungarees, Inc. Michael B. Kimberly (McDermott Will & Emery) for Marcel Fashions Group, Inc.
Companies: Lucky Brand Dungarees, Inc.; Marcel Fashions Group, Inc.
MainStory: TopStory Trademark
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