Bd. of Regents of The Univ. of Wis. v. Phoenix Int'l. Software, Inc.

You can't sue the king ' unless he lets you, even if he didn't mean to. By challenging the Trademark Trial and Appeal Board's (“TTAB” or “the Board”) decision to cancel its trademark registration for “CONDOR,” the state of Wisconsin unintentionally waived its sovereign immunity and opened itself to a suit for trademark infringement by Phoenix International Software, Inc. (“Phoenix”).

On Aug. 5, 2011, on rehearing, the Seventh Circuit issued its unanimous decision in Bd. of Regents of the Univ. Wisconsin v. Phoenix Int'l. Software, Inc., __ F.3d __, 2011 WL 3436879 (7th Cir. 2011) (“Wisconsin II “), reversing its prior decision and holding that Wisconsin waived sovereign immunity when it filed a suit in federal district court challenging the TTAB's decision to cancel Wisconsin's trademark registration for “CONDOR.” As a result, Phoenix's counterclaims for trademark infringement and false designation of origin were not barred under Wisconsin's inherent sovereign immunity.

The TTAB Decision and Subsequent Litigation

Phoenix International Software, Inc. (“Phoenix”) is the owner of U.S. Trademark Reg. No. 2,028,364, for the mark “CONDOR,” used in connection with software for library management on mainframe systems. The Board of Regents of the University of Wisconsin (“Wisconsin”) is the owner of U.S. Trademark Registration No. 2,434,630 for the identical mark “CONDOR,” which it uses in connection with software designed to allow networked computers to use the resources of idle computers on the network.

On Jan. 6, 2004, Phoenix instituted a cancellation proceeding before the TTAB, claiming senior status and that a likelihood of confusion existed between the parties' marks. On Sept. 26, 2007, the TTAB granted Phoenix's petition and canceled Wisconsin's registration. See Phoenix Software Int'l. v. Board of Regents of Wis. Sys., Cancellation No. 92042811 (T.T.A.B. Sept. 26, 2007). The TTAB reasoned that the parties' marks were “identical in every respect,” and that in such cases, the associated goods need not directly compete. Id. at *19.

Thereafter, Wisconsin had the option to appeal the TTAB's decision to the Federal Circuit under 15 U.S.C. ' 1071(a), or challenge the decision in federal district court under 15 U.S.C. ' 1071(b). Wisconsin II at *16. An appeal to the district court allows a party to expand the record and include evidence that was not submitted to the TTAB. See Bd. of Regents of the Univ. of Wis. Sys. v. Phoenix Software Int'l., Inc., Civ. No. 07-665, 2008 WL 4950016, at *8 (W.D. Wis. Nov. 18, 2008). The district court standard of review is also more flexible. Although findings of fact made by the TTAB are reviewed for substantial evidence, the Board's decision is reviewed de novo with regard to any new facts. Id. An appeal to the Federal Circuit, on the other hand, is a standard administrative appeal. The record is closed, and the court only determines whether the decision of the TTAB was supported by substantial evidence. Because Wisconsin sought to expand the record on appeal, it instituted an action against Phoenix in district court.

At the district court, Phoenix not only argued that the TTAB's decision should be affirmed, it also counterclaimed for trademark infringement and false designation of origin. Wisconsin moved to dismiss Phoenix's counterclaims, arguing that it had sovereign immunity to trademark infringement suits under the Eleventh Amendment. Phoenix argued that Congress negated immunity from trademark infringement lawsuits through the Trademark Remedy Clarification Act (“TRCA”) and that Wisconsin had waived immunity by filing a complaint in the district court instead of appealing directly to the Federal Circuit. In granting Wisconsin's motion to dismiss, Judge Barbara B. Crabb reasoned that the TRCA is likely unconstitutional and that Wisconsin's appeal to the district court was involuntary. Bd. of Regents of the Univ. of Wis. Sys. v. Phoenix Software Int'l., Inc., 565 F.Supp.2d 1007, 1010 (W.D. Wis. 2008).

In its initial decision on appeal, the Seventh Circuit affirmed the lower court's determination that the TRCA was unconstitutional and that Wisconsin's appeal was involuntary. See Bd. of Regents of the Univ. of Wis. Sys. v. Phoenix Software Int'l., Inc., Civ. No. 08-4164, slip op. (7th Cir. Dec. 28, 2010) (available at www.ca7.uscourts.gov), withdrawn from publication 630 F.3d 570.

The Seventh Circuit's Decision on Rehearing

On rehearing, the Seventh Circuit analyzed two exceptions to sovereign immunity. First, Congress may authorize lawsuits under federal law as an exercise of its powers under the Fourteenth Amendment. Wisconsin II at *8 (citing College Sav. Bank v. Florida Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 669 (1999) (“College Savings“)). Alternatively, a state can waive sovereign immunity by expressly consenting to federal jurisdiction or “by invoking that jurisdiction through its behavior.” Id. Phoenix argued that the TRCA was a valid exercise of Congress' Fourteenth Amendment powers, negating sovereign immunity, and, in any event, that Wisconsin had voluntarily waived sovereign immunity by filing suit against Phoenix in district court.

The TRCA amended the Lanham Act to declare that a “State ' shall not be immune ' for any violation under this Act.” Pub. L. 102-542 (b). On rehearing, the Seventh Circuit gave short shrift to the TRCA, finding that the Supreme Court had already invalidated it as unconstitutional with respect to false advertising, in College Savings, and that the Supreme Court would likely invalidate the entire statute if given the opportunity. Wisconsin II at *8.

The Seventh Circuit analogized to Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627 647-648 (1999) (“Florida Prepaid“), where the Supreme Court invalidated the TRCA's sister statute, the Patent and Plant Variety Protection Remedy Clarification Act (“PVPRCA”). In Florida Prepaid, the Supreme Court explained that in order for Congress to effectively exercise its Fourteenth Amendment powers to abrogate sovereign immunity, it must “unequivocally express its intent to abrogate the immunity,” and act “pursuant to a valid exercise of power.” Id. at 635. Furthermore, Congress must enact laws that are “appropriate” to remedy an identified state conduct transgressing the Fourteenth Amendment. Florida Prepaid at 639. Congress may only enact laws that attain “a congruence between the means used and the ends to be achieved,” Id. at 662, and there must also be “proportionality between the injury to be prevented or remedied and the means adopted to that end.” Id. at 639 (citations omitted).

In the case of the PVPRCA, the Supreme Court found that although Congress clearly expressed an intent to abrogate sovereign immunity, it failed to identify a serious problem of patent infringement by the states. Id. at 641. Also, the Fourteenth Amendment is not intended to remedy injuries only negligently caused by states, and the PVPRCA made no exception for merely negligent patent infringement. Id. at 645. Finding little difference between the TRCA and the PVPRCA, the Seventh Circuit concluded that the TRCA suffered from the same constitutional failings. Wisconsin II at *8.

Nevertheless, the Seventh Circuit revived Phoenix's counterclaims by finding that Wisconsin had waived sovereign immunity through its litigation conduct. Generally, a waiver of sovereign immunity occurs “if the State voluntarily invokes [federal] jurisdiction.” College Savings at 675-76. In Lapides v. Bd. of Regents of Univ. Sys. of Ga., 535 U.S. 613 (2002), a Georgia State University professor sued the Board of Regents in state court, claiming violations of both state laws and his constitutional rights. In response, Georgia removed the case to federal court only to seek dismissal based on sovereign immunity. Id. There, the Court held that a state “cannot use the Eleventh Amendment as a get-out-of-court-free card when it voluntarily submits to a federal tribunal.” Wisconsin II at *9 (citing Lapides). Central to the analysis was whether the state voluntarily submitted to federal jurisdiction.

Wisconsin stressed that Phoenix initiated the cancellation proceeding before the TTAB, and therefore it did not voluntarily submit to federal jurisdiction. However, the Seventh Circuit countered that the key factor is the state's purpose in “chos[ing] to proceed in the manner that it did and the consequences that its decision carried.” Id. at *16. As noted above, the choice to proceed in district court carried several advantages for Wisconsin, including the ability to introduce new evidence and a more liberal de novo standard of review. Therefore, the Seventh Circuit reasoned that because Wisconsin was using sovereign immunity as a sword instead of a shield, it could not preclude litigation of Phoenix's counterclaims. See Id. at *17.

Finally, the Seventh Circuit rejected Wisconsin's attempt to exclude from the waiver “claims for affirmative relief in excess of or different in kind from that sought by the plaintiff.” Id. at *18. Instead, the court held, along with several other circuits, that state waiver of sovereign immunity by litigation conduct extends to all compulsory counterclaims. Id. (citing Fed. R. Civ. P. 13(a)). States waive immunity with regard to any claim that “arises out of the same transaction or occurrence,” as judged through a “logical relationship test.” Id. at *21. Under this rubric, the Seventh Circuit had no difficulty concluding that Phoenix's counterclaims were compulsory because they turned on the same basic question ' whether Wisconsin's use of the mark CONDOR was likely to cause confusion.

Conclusion

With the Seventh Circuit's decision in Wisconsin II, it has become even more clear that parties should stay attuned to circumstances whereby they can take arms of the state to federal court.

Matthew Siegal is a partner and William Seymour is an associate in the Intellectual Property Practice Group of Stroock & Stroock & Lavan LLC. Siegal is a member of this newsletter's Board of Editors. The views expressed are those of the authors and do not necessarily reflect the views of their firm or any of its clients.

You can't sue the king ' unless he lets you, even if he didn't mean to. By challenging the Trademark Trial and Appeal Board's (“TTAB” or “the Board”) decision to cancel its trademark registration for “CONDOR,” the state of Wisconsin unintentionally waived its sovereign immunity and opened itself to a suit for trademark infringement by Phoenix International Software, Inc. (“Phoenix”).

On Aug. 5, 2011, on rehearing, the Seventh Circuit issued its unanimous decision in Bd. of Regents of the Univ. Wisconsin v. Phoenix Int'l. Software, Inc. , __ F.3d __, 2011 WL 3436879 (7th Cir. 2011) (“ Wisconsin II “), reversing its prior decision and holding that Wisconsin waived sovereign immunity when it filed a suit in federal district court challenging the TTAB's decision to cancel Wisconsin's trademark registration for “CONDOR.” As a result, Phoenix's counterclaims for trademark infringement and false designation of origin were not barred under Wisconsin's inherent sovereign immunity.

The TTAB Decision and Subsequent Litigation

Phoenix International Software, Inc. (“Phoenix”) is the owner of U.S. Trademark Reg. No. 2,028,364, for the mark “CONDOR,” used in connection with software for library management on mainframe systems. The Board of Regents of the University of Wisconsin (“Wisconsin”) is the owner of U.S. Trademark Registration No. 2,434,630 for the identical mark “CONDOR,” which it uses in connection with software designed to allow networked computers to use the resources of idle computers on the network.

On Jan. 6, 2004, Phoenix instituted a cancellation proceeding before the TTAB, claiming senior status and that a likelihood of confusion existed between the parties' marks. On Sept. 26, 2007, the TTAB granted Phoenix's petition and canceled Wisconsin's registration. See Phoenix Software Int'l. v. Board of Regents of Wis. Sys., Cancellation No. 92042811 (T.T.A.B. Sept. 26, 2007). The TTAB reasoned that the parties' marks were “identical in every respect,” and that in such cases, the associated goods need not directly compete. Id. at *19.

Thereafter, Wisconsin had the option to appeal the TTAB's decision to the Federal Circuit under 15 U.S.C. ' 1071(a), or challenge the decision in federal district court under 15 U.S.C. ' 1071(b). Wisconsin II at *16. An appeal to the district court allows a party to expand the record and include evidence that was not submitted to the TTAB. See Bd. of Regents of the Univ. of Wis. Sys. v. Phoenix Software Int'l., Inc., Civ. No. 07-665, 2008 WL 4950016, at *8 (W.D. Wis. Nov. 18, 2008). The district court standard of review is also more flexible. Although findings of fact made by the TTAB are reviewed for substantial evidence, the Board's decision is reviewed de novo with regard to any new facts. Id. An appeal to the Federal Circuit, on the other hand, is a standard administrative appeal. The record is closed, and the court only determines whether the decision of the TTAB was supported by substantial evidence. Because Wisconsin sought to expand the record on appeal, it instituted an action against Phoenix in district court.

At the district court, Phoenix not only argued that the TTAB's decision should be affirmed, it also counterclaimed for trademark infringement and false designation of origin. Wisconsin moved to dismiss Phoenix's counterclaims, arguing that it had sovereign immunity to trademark infringement suits under the Eleventh Amendment. Phoenix argued that Congress negated immunity from trademark infringement lawsuits through the Trademark Remedy Clarification Act (“TRCA”) and that Wisconsin had waived immunity by filing a complaint in the district court instead of appealing directly to the Federal Circuit. In granting Wisconsin's motion to dismiss, Judge Barbara B. Crabb reasoned that the TRCA is likely unconstitutional and that Wisconsin's appeal to the district court was involuntary. Bd. of Regents of the Univ. of Wis. Sys. v. Phoenix Software Int'l., Inc. , 565 F.Supp.2d 1007, 1010 (W.D. Wis. 2008).

In its initial decision on appeal, the Seventh Circuit affirmed the lower court's determination that the TRCA was unconstitutional and that Wisconsin's appeal was involuntary. See Bd. of Regents of the Univ. of Wis. Sys. v. Phoenix Software Int'l., Inc., Civ. No. 08-4164, slip op. (7th Cir. Dec. 28, 2010) (available at www.ca7.uscourts.gov), withdrawn from publication 630 F.3d 570.

The Seventh Circuit's Decision on Rehearing

On rehearing, the Seventh Circuit analyzed two exceptions to sovereign immunity. First, Congress may authorize lawsuits under federal law as an exercise of its powers under the Fourteenth Amendment. Wisconsin II at *8 (citing College Sav. Bank v. Florida Prepaid Postsecondary Educ. Expense Bd. , 527 U.S. 666, 669 (1999) (“ College Savings “)). Alternatively, a state can waive sovereign immunity by expressly consenting to federal jurisdiction or “by invoking that jurisdiction through its behavior.” Id. Phoenix argued that the TRCA was a valid exercise of Congress' Fourteenth Amendment powers, negating sovereign immunity, and, in any event, that Wisconsin had voluntarily waived sovereign immunity by filing suit against Phoenix in district court.

The TRCA amended the Lanham Act to declare that a “State ' shall not be immune ' for any violation under this Act.” Pub. L. 102-542 (b). On rehearing, the Seventh Circuit gave short shrift to the TRCA, finding that the Supreme Court had already invalidated it as unconstitutional with respect to false advertising, in College Savings, and that the Supreme Court would likely invalidate the entire statute if given the opportunity. Wisconsin II at *8.

The Seventh Circuit analogized to Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank , 527 U.S. 627 647-648 (1999) (“ Florida Prepaid “), where the Supreme Court invalidated the TRCA's sister statute, the Patent and Plant Variety Protection Remedy Clarification Act (“PVPRCA”). In Florida Prepaid, the Supreme Court explained that in order for Congress to effectively exercise its Fourteenth Amendment powers to abrogate sovereign immunity, it must “unequivocally express its intent to abrogate the immunity,” and act “pursuant to a valid exercise of power.” Id. at 635. Furthermore, Congress must enact laws that are “appropriate” to remedy an identified state conduct transgressing the Fourteenth Amendment. Florida Prepaid at 639. Congress may only enact laws that attain “a congruence between the means used and the ends to be achieved,” Id. at 662, and there must also be “proportionality between the injury to be prevented or remedied and the means adopted to that end.” Id. at 639 (citations omitted).

In the case of the PVPRCA, the Supreme Court found that although Congress clearly expressed an intent to abrogate sovereign immunity, it failed to identify a serious problem of patent infringement by the states. Id. at 641. Also, the Fourteenth Amendment is not intended to remedy injuries only negligently caused by states, and the PVPRCA made no exception for merely negligent patent infringement. Id. at 645. Finding little difference between the TRCA and the PVPRCA, the Seventh Circuit concluded that the TRCA suffered from the same constitutional failings. Wisconsin II at *8.

Nevertheless, the Seventh Circuit revived Phoenix's counterclaims by finding that Wisconsin had waived sovereign immunity through its litigation conduct. Generally, a waiver of sovereign immunity occurs “if the State voluntarily invokes [federal] jurisdiction.” College Savings at 675-76. In Lapides v. Bd. of Regents of Univ. Sys. of Ga. , 535 U.S. 613 (2002), a Georgia State University professor sued the Board of Regents in state court, claiming violations of both state laws and his constitutional rights. In response, Georgia removed the case to federal court only to seek dismissal based on sovereign immunity. Id. There, the Court held that a state “cannot use the Eleventh Amendment as a get-out-of-court-free card when it voluntarily submits to a federal tribunal.” Wisconsin II at *9 (citing Lapides). Central to the analysis was whether the state voluntarily submitted to federal jurisdiction.

Wisconsin stressed that Phoenix initiated the cancellation proceeding before the TTAB, and therefore it did not voluntarily submit to federal jurisdiction. However, the Seventh Circuit countered that the key factor is the state's purpose in “chos[ing] to proceed in the manner that it did and the consequences that its decision carried.” Id. at *16. As noted above, the choice to proceed in district court carried several advantages for Wisconsin, including the ability to introduce new evidence and a more liberal de novo standard of review. Therefore, the Seventh Circuit reasoned that because Wisconsin was using sovereign immunity as a sword instead of a shield, it could not preclude litigation of Phoenix's counterclaims. See Id. at *17.

Finally, the Seventh Circuit rejected Wisconsin's attempt to exclude from the waiver “claims for affirmative relief in excess of or different in kind from that sought by the plaintiff.” Id. at *18. Instead, the court held, along with several other circuits, that state waiver of sovereign immunity by litigation conduct extends to all compulsory counterclaims. Id. (citing Fed. R. Civ. P. 13(a)). States waive immunity with regard to any claim that “arises out of the same transaction or occurrence,” as judged through a “logical relationship test.” Id. at *21. Under this rubric, the Seventh Circuit had no difficulty concluding that Phoenix's counterclaims were compulsory because they turned on the same basic question ' whether Wisconsin's use of the mark CONDOR was likely to cause confusion.

Conclusion

With the Seventh Circuit's decision in Wisconsin II, it has become even more clear that parties should stay attuned to circumstances whereby they can take arms of the state to federal court.

Matthew Siegal is a partner and William Seymour is an associate in the Intellectual Property Practice Group of Stroock & Stroock & Lavan LLC. Siegal is a member of this newsletter's Board of Editors. The views expressed are those of the authors and do not necessarily reflect the views of their firm or any of its clients.