Supreme Court Reverses Second Circuit on So-Called "Defense Preclusion" Doctrine in Trademark Infringement Case

On May 14, 2020, the U.S. Supreme Court ruled in Lucky Brand Dungarees Inc., et al. v. Marcel Fashions Group, Inc. that Lucky Brand was not precluded from raising a defense that it could have raised in a previous trademark action between the same parties because the earlier action was simply too different for any preclusion to apply. The decision recognizes the changing marketplace realities that apply to trademark claims and avoids the rather harsh result of forcing defendants to have to pursue any and all defenses, no matter how weak, to avoid preclusion down the road.

Background

The case involved Lucky Brand Dungarees ("Lucky Brand") and Marcel Fashions Group, Inc. ("Marcel"), both of which use the word "Lucky" in connection with jeans and other apparel. In 2001, Marcel sued Lucky Brand alleging that Lucky Brand's use of the phrase "Get Lucky" in advertisements infringed Marcel's GET LUCKY trademark. The action resulted in a 2003 settlement agreement in which Lucky Brand agreed to stop using the phrase "Get Lucky" and Marcel agreed to release any claims regarding Lucky Brand's use of its own trademarks.

Lucky Brand then sued Marcel in 2005, accusing Marcel and its licensee of copying Lucky Brand designs and logos in a new clothing line. Marcel counterclaimed, alleging that Lucky Brand continued to use the phrase "Get Lucky" in violation of the 2003 settlement agreement. In both a motion to dismiss and an answer to the counterclaims, Lucky Brand argued that the counterclaims were barred by the 2003 settlement, but it did not raise that defense later in the proceedings. The court ultimately found that Lucky Brand violated the settlement agreement, and permanently enjoined Lucky Brand from copying or imitating Marcel's GET LUCKY mark.

Again, in 2011, Marcel sued Lucky Brand, alleging that Lucky Brand was impermissibly using the word "Lucky" in other marks. Lucky Brand moved to dismiss, arguing, for the first time since early in the 2005 action, that Marcel had released any claims regarding Lucky Brand's use of its own trademarks. In response, Marcel argued that Lucky Brand could not invoke the release defense because it could have pursued that defense in the 2005 action (but did not). The district court granted Lucky Brand's motion to dismiss. However, the Second Circuit vacated and remanded, holding that a doctrine it called "defense preclusion" prohibited Lucky Brand from raising the settlement release as a defense. The Supreme Court granted certiorari.

The Supreme Court's Decision

In a unanimous decision written by Justice Sonia Sotomayor, the Supreme Court started by explaining the "two distinct doctrines" regarding the preclusive effect of prior litigation. The first is "issue preclusion" (sometimes called collateral estoppel), which precludes a party from relitigating an issue actually decided in a prior case and necessary to the judgment. The second is "claim preclusion" (sometimes called res judicata), which prevents parties from raising issues that could have been raised and decided in a prior action even if they were not actually litigated. The Supreme Court then immediately rejected the Second Circuit's so-called "defense preclusion" doctrine, stating "this Court has never explicitly recognized defense preclusion' as a standalone category of res judicata, unmoored from the two guideposts of issue preclusion and claim preclusion. Instead, our case law indicates that any such preclusion of defenses must, at a minimum, satisfy the strictures of issue preclusion or claim preclusion." The Supreme Court noted that where, as here, issue preclusion does not apply, a defense can be barred only if the "'causes of action are the same' in the two suits—that is, where they share a 'common nucleus of operative fact[s].'"

The Supreme Court went on to conclude that the 2005 and 2011 causes of action were not the same. First, the Supreme Court noted that the 2005 claims were based on Lucky Brand's alleged use of "Get Lucky" while the claims in the 2011 action were based on Lucky Brand's use of other marks containing the word "Lucky." Second, the Supreme Court noted that the alleged conduct in the 2011 action occurred after the conclusion of the 2005 action, and claim preclusion generally does not apply to activities that occur after the filing of the initial complaint. "At bottom, the 2011 Action involved different marks, different legal theories, and different conduct—occurring at different times. Because the two suits thus lacked a 'common nucleus of operative facts,' claim preclusion did not and could not bar Lucky Brand from asserting its settlement agreement defense in the 2011 Action." The Supreme Court reversed the judgment of the Second Circuit and remanded the case for further proceedings.

Although this ruling applies to res judicata in any legal context, the Supreme Court made a point to mention that its holding was especially important in trademark disputes. "This principle takes on particular force in the trademark context, where the enforceability of a mark and likelihood of confusion between marks often turns on extrinsic facts that change over time. As Lucky Brand points out, liability for trademark infringement turns on marketplace realities that can change dramatically from year to year." Thus, the Supreme Court's decision thwarted a new approach to preclusion that could have led to inconsistent and unfair results for trademark litigants.