Res judicata does not bar claims arising after prior litigation

In TechnoMarine SA v Giftports Inc (Case No 12-4174, July 15 2014), addressing whether a prior litigation between the parties resolving claims of unfair competition bars subsequent suit over similar conduct occurring after settlement of the earlier litigation, the US Court of Appeals for the Second Circuit has found error in the district court’s dismissal of the claims based on res judicata, but affirmed the court’s alternate holding that the plaintiff had failed to plausibly plead its claim.

TechnoMarine manufactures and distributes watches, and expressly prohibits its authorised dealers from selling its watches to unauthorised third‐party retailers. TechnoMarine holds various trademarks and copyrights for its word mark, logo and watch dial. Giftports, an unauthorised retailer, purchased, advertised and sold watches bearing the TECHNOMARINE marks on its website. In 2009 TechnoMarine, alleging that Giftports used photographs of TechnoMarine brand watches without authorisation, intended purchasers to believe it was an authorised source and was selling the watches without the benefit of the warranty and after-sales service provided by TechnoMarine, sued Giftports for copyright infringement, unfair competition under the Lanham Act and interference with contractual relations.

The parties resolved the case through a settlement agreement without admitting any liability or wrongdoing, and a stipulation of dismissal with prejudice was entered. Although Giftports denied any intentional infringement, it agreed to cease use of the copyrighted work and pay TechnoMarine $5,000. The agreement did not provide any licences to use the copyrighted work. The agreement released the parties of liability for any causes of action that the parties may assert in the future relating to the claims alleged in the case or arising from the facts alleged in the complaint. 

In 2012 TechnoMarine sued Giftports again based on conduct similar to that alleged in the prior action, asserting similar claims, but this time also including claims for trademark infringement. The complaint failed to mention the prior action or distinguish between conduct prior and subsequent to the previous litigation. Giftports moved to dismiss the complaint. TechnoMarine opposed and sought leave to amend the complaint if its allegations were found insufficient to sustain the claims. The district court granted Giftports’ motion and denied TechnoMarine leave to amend its complaint as futile, in view of the court’s res judicata holding. TechnoMarine appealed.

The Second Circuit concluded that TechnoMarine’s trademark infringement claim was not barred by claim preclusion because Giftports allegedly committed new instances of trademark infringement after the settlement, so that the claim based on the new acts of infringement could not have been litigated and were not released in the earlier proceeding. The court cited Storey to emphasise that a claim arising subsequent to a prior action is not barred by res judicata even if the new claim is premised on facts representing a continuance of the same course of conduct. According to the Second Circuit, the district court had misread its decision in Waldman as holding that claims based on conduct occurring after an earlier litigation are barred by res judicata simply because the conduct is similar to prior acts that took place before the earlier litigation. The court stressed that its precedent makes it clear that, if the later conduct can support a cause of action on its own, it is the basis of a new cause of action not precluded by the earlier judgment.

Rather, as the Second Circuit explained, the prior settlement did not preclude the present suit because a settlement does not ordinarily bar claims that have not yet accrued, and the settlement agreement did not extinguish future claims.

The Second Circuit however agreed with the district court that TechnoMarine’s complaint failed to plausibly plead its claim because the complaint was insufficient to draw a reasonable inference that the defendant is liable for the misconduct alleged, citing the Supreme Court in Iqbal and Twombly. The Second Circuit also affirmed the district court’s denial of TechnoMarine’s request to further amend the complaint because TechnoMarine had failed to resolve its pleading deficiencies in a first amended complaint and had not specified how an opportunity to amend would cure its pleading deficiencies.

Sarika Singh, McDermott Will & Emery LLP, New York