No acquiescence defence in Fifth Circuit without significant investment in reliance

In Pennzoil-Quaker State Co v Miller Oil & Gas Operations (Case No 13-20558, February 23 2015) (Higginbotham J), clarifying that undue prejudice is a distinct requirement of the acquiescence defence, the US Court of Appeals for the Fifth Circuit has reversed the district court’s finding of acquiescence where the defendants had failed to show that they had made significant investment decisions in reliance on the trademark owner’s assurances. 

Pennzoil had previously granted a licence to Miller Oil, owner of an oil change facility called Pit Stop USA, to use and display the PENNZOIL marks in exchange for agreeing to purchase certain quantities of Pennzoil products.  The agreement expired in March 2006 and, shortly thereafter, Pennzoil proposed that Pit Stop be “re-imaged” as part of Pennzoil’s corporate re-imaging strategy. Pennzoil paid to renovate Pit Stop to exclusively bear Pennzoil signage and trade dress, installing awnings, signs and fixtures, and painting the exterior yellow and black. Miller Oil, at its own expense, painted the interior to match the exterior. The parties did not sign a contract in connection with the re-imaging, though Miller Oil generally agreed to continue selling Pennzoil products.

Four years later, Pennzoil discovered that Miller Oil was selling bulk oil incorrectly labelled as a Pennzoil product. In response, Pennzoil requested that Miller Oil cease use of its trademarks and trade dress, and when Miller Oil refused, Pennzoil brought the underlying infringement action. After a two-day bench trial, the district court found that Pennzoil’s trademarks and trade dress were valid and enforceable, but that Miller Oil had relied on Pennzoil’s statements permitting their use and successfully asserted the equitable defence of acquiescence.  The court entered a limited injunction, enjoining Miller Oil from using the marks unless it continued to promote Pennzoil’s products. Miller Oil appealed.

The Fifth Circuit reversed, as not all elements of the acquiescence defence were met: assurances by the mark owner, reliance by the defendant and undue prejudice. The district court had made no specific findings of undue prejudice, which the Fifth Circuit had never before defined. Here the court provided an explicit definition:

“[U]ndue prejudice means that the defendant has taken steps such as making significant investment decisions or building the bulk of its business based on the reasonable assumption that it had permission to use the plaintiff’s marks, and that such investment or capital would be lost if the defendant could no longer use the mark.” 

A defendant’s costs in making, using or removing the infringing marks do not alone constitute undue prejudice.

The court rejected Miller Oil’s argument that the disruption caused by the re-imaging amounted to undue prejudice. Pennzoil had largely funded the re-imaging, and the court concluded that Miller Oil’s costs in painting the interior and closing for a weekend were insubstantial. The court also rejected Miller Oil’s argument that it suffered a loss of identity after the re-imaging, as it offered no evidence of any commercial or economic consequences of that change in identity.

Esther E Lin, McDermott Will & Emery LLP, Boston