In a case with potential implications for all types of litigation, and trademark infringement lawsuits in particular, on May 14th, the Supreme Court issued a unanimous decision in Lucky Brand Dungarees v. Marcel Fashions Group Inc. (17-0361-cv). The case concerned a controversial Second Circuit ruling on the application of “defense preclusion” in a longstanding trademark dispute between two apparel companies.
Lucky Brand Dungarees and Marcel Fashions Group have been involved in a trademark battle for many years concerning the parties’ respective rights in the word LUCKY. In the latest of the trilogy of cases between the brands, Marcel sued Lucky Brands in 2011 for infringement of Marcel’s GET LUCKY trademark. In defense of that action, Lucky Brand attempted to raise as an affirmative defense that Marcel’s claim was barred by a 2003 settlement between the parties from an earlier case that released Lucky Brands from any claims regarding Lucky Brand’s use of its own trademarks. The district court ruled in Lucky Brand’s favor and dismissed the action based on the release in the 2003 settlement. The Second Circuit reversed, finding that Lucky Brand was barred from raising the defense because it could have raised it in the intervening lawsuit between the parties in 2005.
The Supreme Court reversed the Second Circuit, holding that “defense preclusion” did not apply in this particular case because the 2011 litigation challenged different conduct and involved different claims than the 2005 litigation where the settlement was not raised as a defense, and as a result, has remanded the case back to the lower court.
In the Court’s unanimous opinion, Justice Sotomayor explained that in order for “defense preclusion” to apply, the facts must meet the requirements of the standard concepts of issue preclusion or claim preclusion. Issue preclusion generally prevents the parties from relitigating an issue when the issue has actually been litigated and decided. Claim preclusion, on the other hand, generally prevents the same parties from raising claims that could have been raised and decided in a prior action between the parties, even if they were not actually litigated. An important requirement to apply claim preclusion is that the prior claims and the new claims must share a “common nucleus of operative facts.”
In this case, the Court found that issue preclusion did not apply because the 2005 litigation did not involve a determination of the application of the 2003 settlement agreement. Turning to claim preclusion, the Court found that the facts did not satisfy the requirements for claim preclusion because the 2011 and the 2005 actions involved different marks and different conduct occurring at different times. Specifically, the 2005 claims involved Lucky Brand’s alleged use of the phrase “Get Lucky” (which Marcel claims trademark rights to). The 2011 action, however, involved later conduct concerning Lucky Brand’s use of other marks containing the word “Lucky” and not any use of “Get Lucky” itself. As a result, claim preclusion did not apply.
The Court noted that the principle that new facts generally create new claims “takes on particular force in the trademark context.” Specifically, the enforceability of a mark and likelihood of confusion between marks “often turns on extrinsic facts that change over time,” including “marketplace realities that can change dramatically from year to year.”
In summary, the Court found that the 2011 action and 2005 action involved different marks and different conduct—occurring at different times. Therefore, they lacked a “common nucleus of operative facts,” and Lucky Brand could not be barred from asserting its settlement agreement defense in the 2011 action.
Interestingly, the Court made it clear it was not deciding one way or the other whether defense preclusion could never apply. In a footnote, the Court acknowledged that there may be strategic reasons why a defendant may raise or pursue different defenses in successive claims against the same plaintiff. It emphasized that in this decision, the Court did not need to “determine when (if ever) applying claim preclusion to defenses may be appropriate,” because, here, a necessary predicate—identity of claims—is lacking.
Ultimately, the Court’s decision avoids the harsh litigation consequences of the Second Circuit’s decision. Litigants can breathe a sigh of relief because they will not have to pursue all defenses, even weak ones, for fear of losing such defenses in the future. This was a legitimate concern that could have affected not just dueling apparel companies or trademark cases going forward, but could have implicated all litigation, if the Second Circuit’s decision was affirmed.
This is the second decision in less than a month related to trademark matters and the fashion industry. Just a few weeks ago, the Court issued an important ruling in Romag Fasteners, Inc. v. Fossil, Inc., rejecting a categorical rule that trademark infringement must be “willful” to issue an award of an infringer’s profits (read our Foley Client Alert Here).