Federal Circuit bars cancellation action filed after district court judgment

In Nasalok Coating Corporation v Nylok Corporation (Case 2007-1432, April 14 2008), in a precedential ruling, the US Court of Appeals for the Federal Circuit has refused to allow a cancellation action to move forward, construing the cancellation action as a collateral attack on a district court judgment which had been entered five months earlier.
Both Nylok Corporation and Nasalok Coating Corporation offered and sold fasteners in the United States. Nylok owned, among other federal trademark registrations, a registration for the colour blue for “metal externally threaded fasteners”. Nylok sued Nasalok for trademark infringement in the Northern District of Illinois for using the colour blue on self-locking fasteners in violation of its trademark registrations. Although properly served, Nasalok, a Korean corporation, chose not to respond to the infringement complaint, allowing judgment to be entered against it by the district court. The district court’s default judgment prohibited Nasalok from selling or advertising any self-locking fastener having a nylon locking element using the colour blue or a colour confusingly similar to the colour blue. 
Without appealing the district court judgment, Nasalok sought to cancel one of Nylok's trademark registration for the colour blue. In its cancellation petition, Nasalok alleged that the registered mark should be cancelled on the grounds that it was functional, descriptive, generic, ornamental, not distinctive, constituted a phantom mark and had been procured by fraud. 
In response, Nylok moved for summary judgment before the Trademark Trial and Appeals Board (TTAB). The TTAB granted Nylok’s motion for summary judgment, finding that the cancellation claims asserted by Nasalok were precluded by res judicata. In an attempt to overturn this adverse determination, Nasalok appealed the TTAB’s decision to the Federal Circuit. While affirming the ruling that the cancellation was barred, the Federal Circuit grounded its ruling on an entirely different analysis. It dismissed the cancellation proceeding with prejudice, holding that the cancellation action amounted to a collateral attack on a district court judgment.
The Federal Circuit refused to apply res judicata principles to bar the cancellation because the issues in the district court litigation were not actually litigated - a default judgment was entered. In rejecting the application of res judicata, the Federal Circuit set out a three-part test for applying res judicata to a cancellation proceeding. It held that: 
  • there had to be identity of parties (or privity of parties);  
  • there had to be an earlier final judgment on the merits of the claim; and  
  • the second action had to be based on the same set of transactional facts. 
As to the cancellation proceeding at issue, the Federal Circuit found that the third prong of the test could not be met, as the district court and the TTAB did not review the same transactional facts. The TTAB held that the claim of invalidity of the trademark registration did not constitute a compulsory counterclaim. Invalidity could have been raised as an affirmative defence in the litigation, but did not have to be.
Nonetheless, the Federal Circuit barred the cancellation proceeding, turning instead to the doctrine of collateral attack. In short, the Federal Circuit held that Nasalok’s cancellation petition attempted to overrule the district court’s injunction. Applying principles of patent invalidity to trademark law, the Federal Circuit ruled that the cancellation of the Nylok registration would require modification of the district court’s injunction to permit Nasalok to use the colour blue. Thus, the cancellation proceeding amounted to an improper collateral attack on the district court's judgment.
Judge Pauline Newman, in her concurring opinion, agreed with the affirmance of the TTAB’s decision, but did not adopt the analysis of the majority opinion. She criticized the majority opinion, holding that the district court had found the mark at issue valid and enforceable and, on that basis, had entered its injunction against Nasalok. Thus, the TTAB had properly barred the cancellation proceeding on res judicata grounds. More importantly, Newman properly noted the policy differences underlying trademarks and patents, stating that:
The purpose of trademark law is not the advancement of science and technology, and the purpose of patent law is not to protect reputation and guard against consumer confusion.” 
Thus, Newman held that the majority opinion’s discussion of patent law in the context of the trademark cancellation proceeding at issue should be rejected.
Whatever the grounds, summary judgment should have been entered barring the belated cancellation proceeding. As a practical matter, parties must understand the implications of allowing for entry of a default judgment. Default judgments have consequences that cannot be easily overcome once a judgment is entered.
Rochelle D Alpert, Morgan Lewis, San Francisco

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