Ninth Circuit Follows TTAB Policy: Questions Remain As to What Kinds of Unlawful Acts Bar Trademark Rights

Here's why. It goes back the old law school refrain, 'bad facts make bad law.' The prior user in this case, CreAgri, was a bad egg ' at least according to the district court and the Ninth Circuit. We start with a trademark registered on the lesser, Supplemental Register. What was it doing there? During trademark prosecution, CreAgri admitted (and later tried to rescind its admission) that OLIVENOL was the German word for 'olive oil.' Since CreAgri also admitted that OLIVENOL contained no olive oil, the PTO found the mark 'deceptively misdescriptive.' A Supplemental Register registration (not a Principal Register registration) issued. That's not the bad act ' that's allowed.

CreAgri began to sell its OLIVENOL brand dietary supplement with labels claiming that each tablet contained 25 mg of what the court called 'an apparently beneficial antioxidant found in olives called hydroxytyrosol.' In fact, OLIVENOL contained only 3 mg of the substance. This violated federal labeling requirements for such dietary supplements. CreAgri, in its defense, claimed that it was technologically infeasible to measure hydroxytyrosol in a substance. Since FDA regulations provide for exemptions in these circumstances, it argued that its sales of OLIVENOL were not actually unlawful. The court pointed out that CreAgri hadn't actually applied for such an exemption, and that such exemptions were not automatically granted to applicants; so no presumption could be made that CreAgri would have received one. CreAgri asserted prior rights in its OLIVENOL mark against the OLIVOL mark of newcomer appellee USANA Health Sciences, Inc. ('USANA') for dietary supplements. The district court granted USANA's motion for summary judgment. The district court found that CreAgri's OLIVENOL mark had been used in commerce a year before the priority date to which USANA's registered OLIVENOL mark was entitled ' but since CreAgri's supplements were mislabeled, its use was unlawful and didn't count. The Ninth Circuit affirmed.

The rationale for the 'lawful use' rule is twofold, said the court. 'First, as a logical matter, to hold otherwise would be to put the government in the 'anomalous position' of extending the benefits of trademark protection to a seller based upon actions the seller took in violation of that government's own laws ' Second, as a policy matter, to give trademark priority to a seller who rushes to market without taking care to carefully comply with the relevant regulations would be to reward the hasty at the expense of the diligent.'

Unanswered Questions

But, in its justifiable determination that CreAgri should not benefit from cheating in its race to the marketplace, the Ninth Circuit has left us with little guidance as to what kind of unlawful acts bar the user from the trademark trophy. Will unlawful use strip away the brand-holder's priority only at initial adoption of the mark? What if the mark were introduced at a time when the trademark owner was in compliance ' but the owner was in violation of the law when the infringer's lawful use commenced? How close must the connection between the trademark and the broken law be in order to disregard the trademark owner's priority? Must both of the 'twofold' rationales ' logic and policy ' be present?

And what does the court mean by 'policy' anyhow? Does it mean 'not-statutory'? Because the statutory provisions do not require 'use in commerce' at all to give a local user of a mark lawful priority in a TTAB opposition or cancellation action under '2(d) of the Lanham (Trademark) Act. First Niagara Ins. Brokers, Inc. v. First Niagara Financial Group, Inc., 476 F.3d 867 (Fed. Cir. 2007).

CreAgri argued that there was an insufficient nexus between its labeling violations and its use of the OLIVENOL mark to take away its trademark protection. The court disagreed, turning to decisions of the TTAB requiring 'some nexus between ' use of [a] mark and [an] alleged violation before it can be said that the unlawfulness of [a] sale or shipment has resulted in [a trademark's] invalidity ' ' (Citations omitted) CreAgri, 474 F.3d at 631.

The court in CreAgri made this startling statement: 'While it may be possible to conceive of a situation in which violation of a law in connection with a trademarked product would have no effect on the rights inuring in that trademark, the nexus between a misbranded product and that product's name, particularly one designed for human consumption, is sufficiently close to justify withholding trademark protection for that name until and unless the misbranding is cured.' Id. (emphasis added). If the standard is that we must challenge our brains to conceive of an exception, we can anticipate considerable litigation in the wake of this case.

Indeed, this encompassing nexus standard embraced by the Ninth Circuit far exceeds the nexus required by the TTAB ' whose policy the Ninth Circuit said it was adopting. The court cited to the concurrence in Satinine: '[W]e should not refuse registration or order the cancellation of a registration because of some purely collateral defect such as the use of a container which did not comply with an ICC regulation or the failure of a party to pay an excise tax ' [But, as] a general proposition ' a registration should be cancelled when it is unlawful to ship the goods in commerce (either because any shipment is forbidden or because required prior approval was not obtained) or when the contents of the labeling [sic] of which the mark is a part, are unlawful.' CreAgri, 474 F.3d at 632 (quoting Satinine Societa in Nome Collettivo v. P.A.B. Produits, 209 U.S.P.Q. 958, 967, 1981 WL 48126 (1981) (Kera, concurring)).

That is, the TTAB's concurring opinion appears to require a greater nexus between the bad act and the mark than the Ninth Circuit's level, at least as expressed in its 'may be possible to conceive of a situation' language. But the court did not adopt the TTAB examples, and specifically said it expressed no opinion as to whether the examples in the TTAB Satinine case 'establish the appropriate dividing line between collateral and non-collateral defects ” Id. at 632.

The TTAB has jurisdiction only with respect to registrability; it cannot enjoin anyone or award damages or other payment. Yet the Ninth Circuit may now have adopted a more encompassing view of the 'appropriate dividing line,' in a setting where injunctions and damages are possible.

Consider just a few potential nexus situations. Let's say a Fortune 500 company introduces a brand to huge consumer acceptance and almost immediate national recognition. The company is found liable for options backdating. Is there now a risk that the trademark priority evaporates? Would it matter if the brand is one of many ' or the only brand of the company, and thus the symbol of the good will of the entire operation of the company?

What if child labor is used to stitch the branded garments ' and to embroider the logo itself?

What if a product whose brand is extremely valuable is found defective in a tort action for products liability ' any risk of trademark priority loss? What if the jury finds that the product could have been made safe, but was not? Or was inadequately tested?

How about a company or other entity found liable for discrimination? Interestingly, in United States Jaycees v. Philadelphia Jaycees, 639 F. 2d 134 (3d Cir. 1981), the Third Circuit rejected an unclean hands defense on this basis. There, the national Jaycees organization revoked the license of a Philadelphia chapter for admitting women ' which went against the rules of the national organization. The local chapter did not boot out its women members ' or cease use of the Jaycees name. When the chapter was sued for trademark infringement by the national organization, the local chapter argued that an injunction would further enforce the discrimination policy. The district court agreed. The Third Circuit rejected this defense on the basis of an insufficient nexus between the allegedly illegal act of the trademark owner and the remedy. But under CreAgri, might there be a sufficient nexus between the illegal act of discrimination practiced under the only brand name of the organization?

Immaterial Labeling Defect

CreAgri's final argument was that its labeling defect was so minimal that it should be excused as immaterial under General Mills, Inc. v. Health Valley Foods, 24 USPQ 2d 1270 (TTAB 1992). That TTAB case held that a labeling defect is only material when it is 'of such gravity and significance that the usage must be considered unlawful ' so tainted that, as a matter of law, it [can] create no trademark rights.' It is a high standard indeed. In that case, General Mills had sold 18 boxes of mislabeled Fiber One brand cereal, noticed and promptly corrected the error (before applying for trademark registration), and went on to sell more than half a million correctly labeled boxes. In this context, the sale of 18 boxes of mislabeled cereal under the brand was found immaterial, and did not knock out General Mills' trademark registration rights. Because the Ninth Circuit in CreAgri found such dramatic factual differences between the General Mills case and CreAgri's conduct, it said: '[W]e need not decide whether to adopt the General Mills test for materiality.' This leaves practitioners ' at least in the Ninth Circuit ' without a guideline as to 'how bad is too bad?'

Conclusion

The Ninth Circuit, therefore, has specifically adopted the TTAB policy requiring only lawful use as a basis for creating trademark rights. But it has affirmatively not decided whether to adopt the TTAB framework for identifying a nexus between the conduct and the mark or the materiality of the conduct itself. The potential risk to a plaintiff to sacrifice the trademark it asserts in this judicial environment will doubtless lead to some very colorful defenses ' and some very nervous plaintiffs. What counts as a crime? When considering a trademark suit in the Ninth Circuit, well, to quote Bob Dylan, 'watch your parking meters.'

Jane Shay Wald is a partner with Irell & Manella LLP in the Los Angeles office and chairs the firm's Trademark Practice Group. She can be reached at 310-277-1010 and [email protected].

The Ninth Circuit, in a case of first impression in that circuit, recently adopted the long-standing policy of the U.S. Patent and Trademark Office's ('PTO') Trademark Trial and Appeal Board ('TTAB') that 'use in commerce only creates trademark rights when the use is lawful.' CreAgri Inc v USANA Health Sciences Inc., 474 F.3d 626 (9th Cir. 2007). The Ninth Circuit in CreAgri noted that 'at least one [other] circuit has adopted and applied this rule. See United Phosphorous, Ltd. v. Midland Fumigant, Inc ., 205 F.3d 1219, 1225 (10th Cir. 2000).'

Sounds logical and fair, doesn't it? Why reward someone in a priority fight over a brand when the first one to use the brand got to the consumer so quickly by side-stepping that time-consuming process of legal compliance inherent in making the product or offering the service. To rule otherwise would be like giving the trophy to the New York marathoner who took the subway to get to the head of the pack. So, why is this case so controversial?

Bad Facts Make Bad Law

Here's why. It goes back the old law school refrain, 'bad facts make bad law.' The prior user in this case, CreAgri, was a bad egg ' at least according to the district court and the Ninth Circuit. We start with a trademark registered on the lesser, Supplemental Register. What was it doing there? During trademark prosecution, CreAgri admitted (and later tried to rescind its admission) that OLIVENOL was the German word for 'olive oil.' Since CreAgri also admitted that OLIVENOL contained no olive oil, the PTO found the mark 'deceptively misdescriptive.' A Supplemental Register registration (not a Principal Register registration) issued. That's not the bad act ' that's allowed.

CreAgri began to sell its OLIVENOL brand dietary supplement with labels claiming that each tablet contained 25 mg of what the court called 'an apparently beneficial antioxidant found in olives called hydroxytyrosol.' In fact, OLIVENOL contained only 3 mg of the substance. This violated federal labeling requirements for such dietary supplements. CreAgri, in its defense, claimed that it was technologically infeasible to measure hydroxytyrosol in a substance. Since FDA regulations provide for exemptions in these circumstances, it argued that its sales of OLIVENOL were not actually unlawful. The court pointed out that CreAgri hadn't actually applied for such an exemption, and that such exemptions were not automatically granted to applicants; so no presumption could be made that CreAgri would have received one. CreAgri asserted prior rights in its OLIVENOL mark against the OLIVOL mark of newcomer appellee USANA Health Sciences, Inc. ('USANA') for dietary supplements. The district court granted USANA's motion for summary judgment. The district court found that CreAgri's OLIVENOL mark had been used in commerce a year before the priority date to which USANA's registered OLIVENOL mark was entitled ' but since CreAgri's supplements were mislabeled, its use was unlawful and didn't count. The Ninth Circuit affirmed.

The rationale for the 'lawful use' rule is twofold, said the court. 'First, as a logical matter, to hold otherwise would be to put the government in the 'anomalous position' of extending the benefits of trademark protection to a seller based upon actions the seller took in violation of that government's own laws ' Second, as a policy matter, to give trademark priority to a seller who rushes to market without taking care to carefully comply with the relevant regulations would be to reward the hasty at the expense of the diligent.'

Unanswered Questions

But, in its justifiable determination that CreAgri should not benefit from cheating in its race to the marketplace, the Ninth Circuit has left us with little guidance as to what kind of unlawful acts bar the user from the trademark trophy. Will unlawful use strip away the brand-holder's priority only at initial adoption of the mark? What if the mark were introduced at a time when the trademark owner was in compliance ' but the owner was in violation of the law when the infringer's lawful use commenced? How close must the connection between the trademark and the broken law be in order to disregard the trademark owner's priority? Must both of the 'twofold' rationales ' logic and policy ' be present?

And what does the court mean by 'policy' anyhow? Does it mean 'not-statutory'? Because the statutory provisions do not require 'use in commerce' at all to give a local user of a mark lawful priority in a TTAB opposition or cancellation action under '2(d) of the Lanham (Trademark) Act. First Niagara Ins. Brokers, Inc. v. First Niagara Financial Group, Inc. , 476 F.3d 867 (Fed. Cir. 2007).

CreAgri argued that there was an insufficient nexus between its labeling violations and its use of the OLIVENOL mark to take away its trademark protection. The court disagreed, turning to decisions of the TTAB requiring 'some nexus between ' use of [a] mark and [an] alleged violation before it can be said that the unlawfulness of [a] sale or shipment has resulted in [a trademark's] invalidity ' ' (Citations omitted) CreAgri, 474 F.3d at 631.

The court in CreAgri made this startling statement: 'While it may be possible to conceive of a situation in which violation of a law in connection with a trademarked product would have no effect on the rights inuring in that trademark, the nexus between a misbranded product and that product's name, particularly one designed for human consumption, is sufficiently close to justify withholding trademark protection for that name until and unless the misbranding is cured.' Id. (emphasis added). If the standard is that we must challenge our brains to conceive of an exception, we can anticipate considerable litigation in the wake of this case.

Indeed, this encompassing nexus standard embraced by the Ninth Circuit far exceeds the nexus required by the TTAB ' whose policy the Ninth Circuit said it was adopting. The court cited to the concurrence in Satinine: '[W]e should not refuse registration or order the cancellation of a registration because of some purely collateral defect such as the use of a container which did not comply with an ICC regulation or the failure of a party to pay an excise tax ' [But, as] a general proposition ' a registration should be cancelled when it is unlawful to ship the goods in commerce (either because any shipment is forbidden or because required prior approval was not obtained) or when the contents of the labeling [sic] of which the mark is a part, are unlawful.' CreAgri , 474 F.3d at 632 (quoting Satinine Societa in Nome Collettivo v. P.A.B. Produits , 209 U.S.P.Q. 958, 967, 1981 WL 48126 (1981) (Kera, concurring)).

That is, the TTAB's concurring opinion appears to require a greater nexus between the bad act and the mark than the Ninth Circuit's level, at least as expressed in its 'may be possible to conceive of a situation' language. But the court did not adopt the TTAB examples, and specifically said it expressed no opinion as to whether the examples in the TTAB Satinine case 'establish the appropriate dividing line between collateral and non-collateral defects ” Id. at 632.

The TTAB has jurisdiction only with respect to registrability; it cannot enjoin anyone or award damages or other payment. Yet the Ninth Circuit may now have adopted a more encompassing view of the 'appropriate dividing line,' in a setting where injunctions and damages are possible.

Consider just a few potential nexus situations. Let's say a Fortune 500 company introduces a brand to huge consumer acceptance and almost immediate national recognition. The company is found liable for options backdating. Is there now a risk that the trademark priority evaporates? Would it matter if the brand is one of many ' or the only brand of the company, and thus the symbol of the good will of the entire operation of the company?

What if child labor is used to stitch the branded garments ' and to embroider the logo itself?

What if a product whose brand is extremely valuable is found defective in a tort action for products liability ' any risk of trademark priority loss? What if the jury finds that the product could have been made safe, but was not? Or was inadequately tested?

How about a company or other entity found liable for discrimination? Interestingly, in United States Jaycees v. Philadelphia Jaycees , 639 F. 2d 134 (3d Cir. 1981), the Third Circuit rejected an unclean hands defense on this basis. There, the national Jaycees organization revoked the license of a Philadelphia chapter for admitting women ' which went against the rules of the national organization. The local chapter did not boot out its women members ' or cease use of the Jaycees name. When the chapter was sued for trademark infringement by the national organization, the local chapter argued that an injunction would further enforce the discrimination policy. The district court agreed. The Third Circuit rejected this defense on the basis of an insufficient nexus between the allegedly illegal act of the trademark owner and the remedy. But under CreAgri, might there be a sufficient nexus between the illegal act of discrimination practiced under the only brand name of the organization?

Immaterial Labeling Defect

CreAgri's final argument was that its labeling defect was so minimal that it should be excused as immaterial under General Mills, Inc. v. Health Valley Foods , 24 USPQ 2d 1270 (TTAB 1992). That TTAB case held that a labeling defect is only material when it is 'of such gravity and significance that the usage must be considered unlawful ' so tainted that, as a matter of law, it [can] create no trademark rights.' It is a high standard indeed. In that case, General Mills had sold 18 boxes of mislabeled Fiber One brand cereal, noticed and promptly corrected the error (before applying for trademark registration), and went on to sell more than half a million correctly labeled boxes. In this context, the sale of 18 boxes of mislabeled cereal under the brand was found immaterial, and did not knock out General Mills' trademark registration rights. Because the Ninth Circuit in CreAgri found such dramatic factual differences between the General Mills case and CreAgri's conduct, it said: '[W]e need not decide whether to adopt the General Mills test for materiality.' This leaves practitioners ' at least in the Ninth Circuit ' without a guideline as to 'how bad is too bad?'

Conclusion

The Ninth Circuit, therefore, has specifically adopted the TTAB policy requiring only lawful use as a basis for creating trademark rights. But it has affirmatively not decided whether to adopt the TTAB framework for identifying a nexus between the conduct and the mark or the materiality of the conduct itself. The potential risk to a plaintiff to sacrifice the trademark it asserts in this judicial environment will doubtless lead to some very colorful defenses ' and some very nervous plaintiffs. What counts as a crime? When considering a trademark suit in the Ninth Circuit, well, to quote Bob Dylan, 'watch your parking meters.'

Jane Shay Wald is a partner with Irell & Manella LLP in the Los Angeles office and chairs the firm's Trademark Practice Group. She can be reached at 310-277-1010 and [email protected].