Section 38 damages claim barred by statute of limitations in RITZ Case

United States of America
In The Ritz Hotel Ltd v Shen Manufacturing Co Inc (Case 05-cv-04730, March 9 2009), the US District Court for the Eastern District of Pennsylvania has held that Shen Manufacturing Co Inc’s counterclaim for damages under Section 38 of the Lanham Act (15 USC §1120) was barred by the Pennsylvania statute of limitations. 
 
The case began in 2005 when The Ritz Hotel Ltd filed a declaratory judgment action for non-infringement in the Southern District of New York against Shen, the owner of various RITZ marks in the United States for cleaning clothes, beach towels, tablecloths, aprons and related goods. On August 22 2005 the action was transferred to the Eastern District of Pennsylvania. On September 16 2005 Shen filed its answer and counterclaims against Ritz Hotel. These included a claim for damages under Section 38 of the Lanham Act alleging that Ritz Hotel had obtained its trademark registrations for RITZ for cutlery, RITZ ESCOFFIER for food products and RITZ PARIS for cosmetics through fraud on the US Patent and Trademark Office (USPTO). Shen filed an amended answer on August 16 2006.
 
Section 38 of the act states that any person that procures a registration through fraud on the USPTO may be held civilly liable for damages to any person injured as a result of the registration. In response to Shen’s counterclaims, Ritz Hotel filed a motion for partial summary judgment as to the count for Section 38 damages, arguing that this counterclaim was not timely filed and should be barred by a statute of limitations. Because the act does not have a statute of limitations provision, courts look to analogous state statutes for guidance. In this case, the court looked to state statutes relating to fraud claims.
 
The court addressed four primary issues to determine whether a state statute of limitations barred Shen’s fraud claim:

  • whether the counterclaim was compulsory or permissive;
  • depending on the answer, whether the forum state’s choice of laws was triggered;
  • the date on which the statute of limitations started running; and
  • whether the counterclaim was filed within the applicable statute of limitations.
The court found that Shen’s counterclaim for fraud on the USPTO did not relate back to the original declaratory relief action (non-infringement of Shen’s trademark rights). As a result, the counterclaim was deemed “permissive” and the court applied the law of the state where the counterclaim was filed (Pennsylvania). Since the counterclaim was permissive, it triggered the Pennsylvania conflicts of laws provision and the court could choose between the statute of limitations of Pennsylvania (Shen’s domicile) and that of Virginia, the situs of the USPTO. Both states have a two-year statute of limitations for fraud claims and the court chose Pennsylvania as the governing law.

The court then turned back to the Lanham Act for guidance on when the statute of limitations started running. Specifically, Section 22 of the act states that a trademark registration on the Principal Register acts as constructive notice of the registrant’s ownership of the mark. Therefore, the court held that Shen was on notice of the fraud as of the registration date of each of the marks cited in the counterclaim. Under Pennsylvania law, Shen had two years from the registration date of each mark to file its counterclaim. Shen argued as to one mark that Section 22 should not apply because the registration was based on Section 44 of the act, which does not require a showing of use to register a mark. The court rejected this argument, stating that:
  • Section 22 does not distinguish between registrations procured under Sections 1(b) or 44 of the act; and
  • it was clear that Congress’s intent was to treat the registrations equally.
As a result, the court granted Ritz Hotel’s motion for partial summary judgment as to the Section 38 damages on the grounds that Shen had failed to file its counterclaim within the applicable statute of limitations.
 
Emily S Mechem, Arent Fox LLP, Washington DC

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