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How I Used a Consent Agreement To Win a Trademark Infringement Lawsuit

December 12, 2017Litigation

How a Consent Agreement Won Me a Case

In my last blog post, I discussed how the U.S. Patent and Trademark Office ("USPTO") has been dealing with trademark consent agreements. This post views consent agreements from a different perspective, a litigant's perspective. It's important to differentiate between these two different contexts. Remember, a trademark consent agreement is just a private contract. And while the USPTO may not be bound by that private contract when making likelihood of confusion determinations, the parties to that private contract are bound by it. To exemplify this difference, I am going to recount a case that I litigated for about two years, including a Ninth Circuit appeal, that was ultimately won based on a consent agreement that was assigned to my client. Once upon a time ...

The Backstory

Back in the day, there was a gentlemen's club in Las Vegas called Crazy Horse Too. After the U.S. Government brought criminal charges against the owner of the Crazy Horse Too club, the club closed in July 2007 and the real property on which the club was located was forfeited to the U.S. Government, which tried to sell the property. One of the interested groups of purchasers formed a Nevada company called Crazy Horse Too A Gentlemen's Club ("CHTAGC").

CHTAGC & Carl Reid

On September 14, 2007, in anticipation of purchasing the old Crazy Horse Too club from the U.S. Government, CHTAGC filed federal U.S. trademark application Serial No. 77/280,405 for a design mark containing the words CRAZY HORSE TOO GENTLEMEN'S CLUB.

The CHTAGC Logo

However, on December 20, 2007, the USPTO issued an office action refusing registration of the CHTAGC logo based on a likelihood of confusion U.S. trademark Registration No. 3,044,028 for CRAZY HORSE and 3,055,283 for PURE GOLD'S CRAZY HORSE both for exotic dancing and both owned by an individual named Carl Reid. Although CHTAGC argued against the likelihood of confusion refusal, the USPTO maintained the refusal.

After reaching out to Carl Reid without response, CHTAGC filed petitions to cancel both of his registrations, which were instituted by the Trademark Trial and Appeal Board ("TTAB") as Cancellation Nos. 92051211 and 92051225. In fact, as you can see on the TTAB's docket for each cancellation proceeding, Mr. Reid actually failed to respond and a notice of default was entered against him in each proceeding. After the notices of default were entered, Mr. Reid reached out to CHTAGC to settle the dispute and agreed to enter into a consent agreement with CHTAGC, which would allow CHTAGC to register its CHTAGC logo. In exchange, CHTAGC agree to withdraw its petitions for cancellation, despite the fact that the notices of default had alread been entered.

The Consent Agreement

On October 28, 2009 (two years after filing its application), CHTAGC submitted the consent agreement to the USPTO, which withdrew the likelihood of confusion refusal based on Carl Reid's trademark registrations and approved the CHTAGC logo application for publication.

CHTAGC & Frank Spencer

And then a new character entered the fray: Frank Spencer.

On April 23, 2010, Frank Spencer filed a notice of opposition against CHTAGC's U.S. application Serial No. 77/280,405, which the TTAB instituted as Opposition No. 91194602. At that time, Mr. Spencer did not own a registered trademark for CRAZY HORSE, just a pending application, namely, U.S. application Serial No. 77/557,722.

However, by April 2010, CHTAGC knew that it would no longer be purchasing the former Crazy Horse Too club from the U.S. Government in Las Vegas. So there was no reason to litigate the opposition proceeding, and CHTAGC chose not to respond. As a result, Frank Spencer prevailed by way of a default and the CHTAGC application went abandoned.

But what about the consent agreement ... oh, we'll get back to that later ... let's continue on ...

Frank Spencer & Carl Reid

There was a reason Frank Spencer didn't have a trademark registration for CRAZY HORSE: Carl Reid. Just as CHTAGC's application had been refused based on Carl Reid's two trademark registration, so had Frank Spencer's application. Like CHTAGC, Spencer negotiated directly with Carl Reid to resolve the issue.

First, on December 10, 2010, Spencer negotiated to purchase Carl Reid's federal trademark registration for CRAZY HORSE, which was assigned to an entity called Crazy Horse Consulting, Inc ("CHC"). Apparently, Spencer had set up this new company, which he declared he owned 100% and, therefore, there was unity of control between himself and CHC. Given the self-admitted unity of control, my references to Reid refer to Reid and CHC collectively.

Second, on January 26, 2012, Spencer negotiated a consent agreement with Carl Reid allowing his (and CHC's) CRAZY HORSE marks to co-exist with Carl Reid's federally registered PURE GOLD'S CRAZY HORSE mark, which Reid retained.

Spencer submitted the documents to the USPTO in response to the office action, and the USPTO eventually withdrew the refusals, allowing Spencer's U.S. application Serial No. 77/557,722 for CRAZY HORSE to issue as U.S. Registration No. 4,549,588 on June 17, 2014.

The Pre-Litigation Tussle and Some Nifty Maneuvering

Frank Spencer Threatens CH3

Although Spencer's use of the CRAZY HORSE trademark for gentlemen's club had always been limited to parts of Ohio, Spencer started feeling himself and, having orchestrated the assignment of Reid's CRAZY HORSE registration to himself, Spencer decided to enter the trademark licensing shakedown game, contacting various third parties allegedly using the CRAZY HORSE name to try to extract licensing fees. One of those third parties was Russell Road, who owned the CRAZY HORSE III gentlemen's club in Las Vegas (herein after "CH3").

In February 2012—well before Spencer's own federal trademark application for CRAZY HORSE regsitered but after he had obtained an assignment of Reid's federal trademark registration for CRAZY HORSE, Spencer contacted CH3, alleged that CH3 was infringing on his trademark rights, and demanded that CH3 license the mark from him. The parties were unable to resolve their disagreement, and Spencer remained adamant about his claims of infringement and need for a license.

Remember That CHTAGC-Reid Consent Agreement?

I do. Or I should say I did. I went back and took another look at it. Some interesting things popped out.

First, the consent that Reid had provided CHTAGC was broad. It covered "any mark that includes the phrase CRAZY HORSE provided the mark does not contain the phrase PURE GOLD'S, the terms PURE or GOLD'S, or any phrase or term confusingly similar to PURE GOLD'S." Well, this language would cover CH3's CRAZY HORSE III mark.

Second, there was no termination provision terminating the consent that Reid had provided in the consent agreement.

Third, there was no prohibition on assignment of the consent agreement. And there was no requirement to get approval in writing from the other party prior to assigning the consent agreement.

That left just a few questions in my head. Can a trademark consent agreement be assigned to a third party? Is a consent agreement binding on the assignee of a trademark registration that is the subject of the consent agreement? There wasn't a lot of law that spoke to these issues, but what I did find indicated that consent agreements could be assigned like any other contract and consent agreements were binding on trademark assignees.

I think you know what happened next. On August 23, 2012, CH3 purchased the consent agreement from CHTAGC, which assigned its rights in the consent agreement to CH3.

In a minor subplot, I also structured the assignment to only assign CHTAGC's rights to CH3, not CHTAGC'S obligations. Although this can be done in many private contracts, it was not exactly clear whether it could be done in a trademark consent agreement. Here's the provision I put in the agreement:

The idea was to obtain Reid's consent without having to obligate CH3 to consent to Reid or his assignee Spencer. Although referenced in the briefing of the District Court case and subsequent Ninth Circuit appeal, neither court ruled on the validity or interpretation of this provision.

One thing to keep in mind here is that Spencer had never used the CRAZY HORSE trademark in Las Vegas or Nevada. He hadn't even used it outside of Ohio. Therefore, any claim to any alleged trademark rights in Nevada would have to be based on a federal trademark registration and the only registration he owned was the one that he had gotten from Reid, which was subject to the consent agreement with CHTAGC, who assigned its rights to CH3.

After obtaining the consent agreement, CH3 gave Spencer an opportunity to back off his claims of infringement and demand for a license. But, of course, Spencer and his counsel didn't.

And a Trademark Lawsuit Is Filed ⚖

The Parties' Pleadings

On August 24, 2012, rather than sit back and do nothing, CH3 attacked the situation head on. We filed a Complaint for declaratory judgment of non-infringement (among other claims) in the United States District Court for the District of Nevada. Here's a copy of the Complaint and exhibits if you're interested.

On November 6, 2012, Spencer filed an Answer, but also counterclaimed for trademark infringment. Here's a copy of his Answer and Counterclaims.

Spencer's Motion for Preliminary Injunction

On the same day he filed his Answer and Counterclaims, Spencer filed a Motion for Preliminary Injunction in a misguided attempt to gain some leverage in the lawsuit. The Motion was supported by two declarations and supporting exhibits.

When we filed our opposition to Spencer's Motion for Preliminary Injunction, we focused on the lack of irreparable harm and the fact that Spencer could not demonstrate a likelihood of success on the merits. The first point that we focused on under the likelihood of success on the merits was the consent agreement. However, the Court never reached that point.

Instead, when the Judge ruled in our favor and denied Spencer's Motion for Preliminary Injunction, he focused on the Dawn Donut rule to deny the Motion. Spencer wasn't in the Las Vegas market and, therefore, simply wasn't entitled to a preliminary injunction. (Because this post isn't about the Dawn Donut rule, I'm not gonna get into it.) The Order is worth a read, as humor is sprinkled throughout: Order Denying Preliminary Injunction. Notably, in a footnote, the Court noted the consent agreement argument but stated that the Court didn't need to reach that issue to rule on Spencer's Motion for Preliminary Injunction.

CH3's Motion for Summary Judgment

Now, if you're paying attention, you're probably thinking that I'm all set up for a Motion for Summary Judgment based on the Dawn Donut rule. From the Order on the Motion for Preliminary Injunction, it sure looked like a slam dunk. But I kept that in my back pocket. Why? Because it was potentially a band-aid. In other words, it would not prevent Spencer from subsequently filing a new trademark infringment lawsuit at a later time when he actually got around to entering the Las Vegas market with the CRAZY HORSE mark (which he claimed to be working towards).

Instead, I wanted a final, determinative ruling. If I could get the Court to grant summary judgment based on the consent agreement, it would not matter whether Spencer entered the Las Vegas market or not. There would be a final ruling on the validity of the consent agreement and its assignment from CHTAGC to CH3. If for some strange reason the Motion for Summary Judgment on the consent agreement got denied, I could always follow up with a second Motion for Summary Judgment on the Dawn Donut rule.

So I went ahead and filed CH3's Motion for Summary Judgment on the consent agreement issue. If you're interested, here's a copy of the Motion for Summary Judgment. The argument in the Motion was straightforward: the consent agreement permitted the use of the CRAZY HORSE III mark by CHTAGC, CHTAGC assigned its rights under the consent agreement to CH3, and Spencer, as the assignee of Reid's CRAZY HORSE trademark registration, is bound by the consent agreement. Though the argument was straigthforward, there wasn't much law on the assignability of consent agreements and whether trademark assignees are bound by consent agreements entered into by predecessors in interest. What law there was, you can find in the Motion for Summary Judgment.

I won't go into all the details of the arguments raised in Spencer's opposition to the Motion or CH3's reply in support of the Motion. If you're interested, just click on the links and read the briefs.

The District of Nevada issued an Order granting CH3's Motion for Summary Judgment. In its Order, the Court found, among other things, that the consent agreement was properly assigned to CH3 and that Spencer, as a trademark assignee, was bound by the consent agreement.

The Ninth Circuit Affirms Summary Judgment

Nevertheless, Spencer appealed the District of Nevada's ruling to the Ninth Circuit Court of Appeals. Spencer filed his Opening Appeal Brief and CH3 filed an Answering Brief.

The Ninth Circuit set oral argument for May 12, 2016. Then just two days before the scheduled hearing, the Ninth Circuit vacated the oral argument and then issued its Opinion affirming the ruling of the District of Nevada.

The Opinion is a published opinion of the Ninth Circuit Court of Appeals. It holds that consent agreements are enforceable, consent agreements are assignable, and trademark assignees are bound by consent agreements previously entered into by the trademark assignor. The Ninth Circuit Opinion is one of the more important legal decisions relating to trademark consent agreements, especially given the clarity of the language in the opinion.

The Last Word

CH3 was able to successfully defend against Spencer's claims of trademark infringement by identifying a pre-existing consent agreement entered into by two completely different parties, CHTAGC and Carl Reid, and negotiating to have CHTAGC assign its rights in the consent agreement to CH3.

There are important takeaways from this case. First, when drafting or entering into a consent agreement, the parties should address the assignability of the agreement. Parties must realize that, in the absence of a restriction on assignment, the consent agreement is freely assignable. This reality may warrant including provisions that the agreement is not assignable or that it cannot be assigned without the written permission of the other party. Second, the parties should address when and how a consent agreement terminates. In the case discussed in this post, CHTAGC no longer had a pending trademark application and was not otherwise using its CHTAGC logo or any other CRAZY HORSE mark, but the consent agreement was still valid and operative. Accordingly, parties may want to include provisions that speak to when a consent agreement should terminate, such as when a party abandons a trademark. Third, parties who are acquiring trademark rights should do their due diligence on all existing consent agreements because, once they acquire such rights by assignment, they will be bound by the terms of any existing consent agreements.

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