'cello.com' dispute plays on despite earlier dismissal

In Storey v Cello Holdings LLC, the Court of Appeal for the Second Circuit has ruled that a trademark owner retains the right to challenge the use of a domain name that is identical or similar to its mark, even where a previous judgment found that the domain name registrant had neither diluted the mark nor violated the Anti-cybersquatting Consumer Protection Act (ACPA), if there is evidence that infringing behaviour may have occurred since the first ruling.

Lawrence Storey registered the domain name 'cello.com' in 1997. Cello Holdings LLC, owner of the federally registered CELLO trademark for audio equipment, sued Storey in the Southern District of New York initially for trademark dilution. In 2000 it amended the complaint to add an ACPA claim after the ACPA became effective.

The district court entered judgment for Storey in August 2000, dismissing the case with prejudice based on information that the parties had entered into a settlement, although it appears that the settlement never came to fruition. Neither party, however, challenged the district court's judgment.

Some time later, Storey's counsel sent a letter to a licensee of the CELLO mark, offering to sell 'cello.com'. The letter prompted Cello Holdings to commence proceedings under the Uniform Domain Name Dispute Resolution Policy (UDRP) in October 2000. Contrary to the district court, the World Intellectual Property Organization panel ruling on the issue ordered the transfer of the disputed domain name to Cello Holdings.

Subsequently, Storey filed a declaratory judgment action in the Southern District of New York against Cello Holdings, seeking a declaration that (i) his ownership of 'cello.com' was lawful, and (ii) the first action in the district court served as res judicata of his right to the domain name.

Agreeing with Storey, the district court held that the UDRP proceedings were improper and that Storey owned 'cello.com' (182 F Supp 2d 355, 362 (SDNY 2002)).

On appeal the Second Circuit disagreed, holding that the UDRP claims were not identical to those in the initial trademark litigation. Finding that the letter seeking to sell the disputed domain name served to raise the question of whether Storey's ongoing use of the domain name was "with a 'bad-faith intent to profit' from the CELLO mark", the court refused to bar the claim based on res judicata. Relying on Lawlor v National Screen Services Corp (349 US 327-28 (1955)), among other cases, the court noted that "[w]here the facts that have accumulated after the first action are enough on their own to sustain the second action, the new facts clearly constitute a new claim". The letter that Storey's counsel had sent, offering to sell the domain name, served to distinguish the two actions and prevented the second action from being barred on the grounds of res judicata.

The Second Circuit also recognized that "[u]nlike traditional binding arbitration proceedings, UDRP proceedings are structured specifically to permit [...] two bites at the apple". UDRP proceedings do not preclude vindication of rights in court under the ACPA or trademark law. Under UDRP provisions, a court action is independent. It does not involve appellate review of, or deference to, the underlying UDRP proceeding. The Second Circuit held that the UDRP decision merely served as the trigger that allowed the domain name registrant to proceed with a declaratory judgment action. On these grounds, the Second Circuit also vacated the district court's award of sanctions against Cello Holdings pursuant to Rule 11 of the Federal Rules of Civil Procedure.

Finally, the court concluded that the status of a domain name does not become permanently fixed by a court or UDRP challenge. Rather, use of the domain name at any time with a bad-faith intent to profit may alter the rights of the domain name holder.

The Second Circuit, however, specifically left open the question of whether Storey's letter seeking to sell 'cello.com' alone established use of the domain name with a bad-faith intent to profit. This issue remains for the district court to determine on remand.

Rochelle D Alpert, Morgan Lewis & Bockius LLP, San Francisco

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