Spirit Clothing Company v. Jerry Leigh of California, Inc.

NOTICE OF MOTION AND MOTION to Dismiss First Amended Counterclaim

C.D. Cal.May 22, 2017

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Willmore F. Holbrow, III (SB# 169688) bill_holbrow@bstz.com James W. Ahn (SB#243335) James_ahn@bstz.com BLAKELY, SOKOLOFF, TAYLOR & ZAFMAN, LLP 12400 Wilshire Boulevard, Seventh Floor Los Angeles, California 90025 Tel: (310) 207-3800 Fax: (310) 820-5988 Attorneys for Plaintiff SPIRIT CLOTHING COMPANY UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION SPIRIT CLOTHING COMPANY, a California corporation Plaintiff, v. JERRY LEIGH OF CALIFORNIA, INC., a California corporation Defendant. Case No: 16-CV-08637-RGK-JPRx Hon. R. Gary Klausner NOTICE OF MOTION OF PLAINTIFF SPIRIT CLOTHING COMPANY'S MOTION TO DISMISS DEFENDANT JERRY LEIGH OF CALIFORNIA, INC.'S FIRST AMENDED COUNTERCLAIM Hearing Date: June 26, 2017 Courtroom: 850 - 8th Floor Time: 9:00 a.m. Case 2:16-cv-08637-RGK-JPR Document 27 Filed 05/22/17 Page 1 of 2 Page ID #:159 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 PLEASE TAKE NOTICE that Plaintiff Spirit Clothing Company hereby moves to dismiss Defendant Jerry Leigh of California, Inc.'s First Amended Counterclaim (Dkt. #25) pursuant to Federal Rule of Civil Procedure 12. This motion shall be heard on June 26, 2017, at 9:00 a.m., or as soon thereafter as this matter may be heard in the above entitled Court before the Honorable R. Gary Klausner, located at Roybal Federal Building and U.S. Courthouse, 255 East Temple Street, Los Angeles, CA 90012, Courtroom 850, 8th Floor. This motion is made pursuant to the Federal Rules of Civil Procedure and the local rules of practice of this Court, and is supported by the accompanying memorandum, declaration, the pleadings and records on file in this action, and such additional argument and evidence that may be introduced prior to or in connection with the hearing on this motion. This motion is made following the conference of counsel pursuant to L.R. 7-3, which initially took place on April 20, 2017 and continued through May 10, 2017. Dated: May 22, 2017 /s/ Willmore F. Holbrow, III Willmore F. Holbrow, III BLAKELY, SOKOLOFF, TAYLOR & ZAFMAN, LLP Attorneys for Plaintiff SPIRIT CLOTHING COMPANY Case 2:16-cv-08637-RGK-JPR Document 27 Filed 05/22/17 Page 2 of 2 Page ID #:160 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Willmore F. Holbrow, III (SB# 169688) bill_holbrow@bstz.com James W. Ahn (SB#243335) James_ahn@bstz.com BLAKELY, SOKOLOFF, TAYLOR & ZAFMAN, LLP 12400 Wilshire Boulevard, Seventh Floor Los Angeles, California 90025 Tel: (310) 207-3800 Fax: (310) 820-5988 Attorneys for Plaintiff SPIRIT CLOTHING COMPANY UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION SPIRIT CLOTHING COMPANY, a California corporation Plaintiff, v. JERRY LEIGH OF CALIFORNIA, INC., a California corporation Defendant. Case No: 16-CV-08637-RGK-JPRx Hon. R. Gary Klausner PLAINTIFF SPIRIT CLOTHING COMPANY'S MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF ITS MOTION TO DISMISS DEFENDANT JERRY LEIGH OF CALIFORNIA, INC.'S FIRST AMENDED COUNTERCLAIM Hearing Date: June 26, 2017 Courtroom: 850 - 8th Floor Time: 9:00 a.m. Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 1 of 10 Page ID #:161 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 2 of 10 Page ID #:162 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 MEMORANDUM OF POINTS AND AUTHORITIES Plaintiff/Counter-defendant, Spirit Clothing Company ("Spirit"), submits the following Memorandum of Points and Authorities in support of its Motion to Dismiss Defendant/Counterclaimant Jerry Leigh of California, Inc.'s ("JLC") First Amended Counterclaim. I. INTRODUCTION In its Complaint, Spirit has alleged that a product, offered and sold by JLC, directly infringes its trademark rights (Dkt. #1, Complaint, ¶¶14-17), including those reflected in a trademark registered by the United States Patent Office ("PTO"). In response, JLC filed a Counterclaim asserting the following causes of action: (1) Damages for Fraudulent Procurement of Trademark Registration (15 U.S.C. § 1120) and (2) Cancellation of Trademark Registration (15 U.S.C. § 1119) based on fraud (Dkt. #16). Spirit moved to dismiss the Counterclaim for failing to meet the pleading requirements of Fed. R. Civ. P. 8 and 9. JLC subsequently filed its First Amended Counterclaim (“FAC”) (Dkt. #25). The FAC includes the following causes of action: (1) Cancellation of Trademark Registration Due to Functionality (15 U.S.C. § 1119); (2) Cancellation of Trademark Registration Due to Lack of Inherent Distinctiveness or Secondary Meaning (15 U.S.C. § 1119); (3) Cancellation of Trademark Registration Due to Prior Rights (15 U.S.C. § 1119); (4) Cancellation of Trademark Registration Due to Fraudulent Procurement (15 U.S.C. § 1119); and (5) Damages for Fraudulent Procurement of Trademark (15 U.S.C. § 1120). Although the first three causes of action lack merit, the focus of this Motion to Dismiss is on the fraud based causes of action, namely causes of action (4) and (5) above. As discussed below, JLC's FAC falls well short of the general pleading requirements and completely misses the mark in terms of satisfying the heightened pleading requirement of Fed. R. Civ. P. Rule 9(b) for fraud-based claims. Therefore, both claims should be dismissed without leave to amend. Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 3 of 10 Page ID #:163 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 II. LEGAL STANDARD "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). Plausibility requires pleading facts, as opposed to conclusory allegations or the "formulaic recitation of the elements of a cause of action," Twombly, 550 U.S. at 555, and must rise above the mere conceivability or possibility of unlawful conduct that entitles the pleader to relief. Iqbal, 556 U.S. at 678-79. The court need not accept as true allegations that are conclusory, legal conclusions, unwarranted deductions of fact or unreasonable inferences. See Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001); Twombly, 550 U.S. at 561. "Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. "Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief." Iqbal, 556 U.S. at 678 (citation and quotes omitted); accord Lacey v. Maricopa Cnty., 693 F.3d 896, 911 (9th Cir. 2012) (en banc). "Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557). In the Ninth Circuit, it is well settled that a plaintiff asserting allegations of fraud must allege the "who, what, where, when, and how" of the fraudulent conduct. Vess v. Ciba-Geigy Corp., 317 F.3d 1097, 1106 (9th Cir. 2003). Fraud allegations must state "the time, place and specific content of the false representations as well as the identities of the parties to the misrepresentation." Bassett v. Ruggles, 2009 U.S. Dist. LEXIS 83349, at *62 (E.D. Cal., Sept. 14, 2009) (citing Schreiber Distrib. V. Serv-Well Furniture Co., 806 F.2d 1393, 1401 Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 4 of 10 Page ID #:164 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 (9th Cir. 1986). "[W]hen averments of fraud are made, the circumstances constituting the alleged fraud [must] 'be specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong." Vess, 317 F.3d at 1107. "Fraud in procurement of a trademark registration may be raised as a ground for cancellation in civil litigation, in which case it may function as a 'defense' to a claim of trademark infringement." AirWair Int'l Ltd. v. Schultz, 84 F. Supp. 3d 943, 951 (N.D. Cal. Mar. 23, 2015). Such fraud "occurs when an applicant knowingly makes false, material representations of fact in connection with an application." AirWair, 84 F. Supp. 3d at 951-952 (citing Quiksilver, Inc. v. Kymsta Corp., 466 F.3d 749, 755 (9th Cir. 2006)). To allege a claim of cancellation based on fraud in the procurement, a party must allege: "(1) a false representation regarding a material fact; (2) the registrant's knowledge or belief that the representation is false; (3) the registrant's intent to induce reliance upon the misrepresentation; (4) actual, reasonable reliance on the misrepresentation; and (5) damages proximately caused by that reliance." AirWair, 84 F. Supp. 3d at 952 (citing Hokto Kinoko Co. v. Concord Farms, Inc., 738 F.3d 1085, 1097 (9th Cir. 2013). "A false representation in the original trademark application . . . may be grounds for cancellation if all five requirements are met." AirWair, 84 F. Supp. 3d at 952. "Because a charge of fraud in the procurement of a trademark registration is a disfavored defense, the party alleging fraud bears a 'heavy' burden of proof." eCash Techs., Inc. v. Guagliardo, 210 F. Supp. 2d 1138, 1149 (C.D. Cal. 2000) "Fraud arises only when the party making a false statement of fact knows that the fact is false. . ." Id. (citing J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 31:66 at 31-117 and 31-118 (2000)). "There are limits on what a trademark applicant must disclose to the PTO." AirWair, 84 F. Supp. 3d at 952. "First, an applicant is not "obligate[d] . . . to Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 5 of 10 Page ID #:165 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 investigate and report all other possible users of an identical or confusingly similar mark." Id. (citing Rosso & Mastracco, Inc. v. Giant Food Inc., 720 F.2d 1263, 1266 (Fed. Cir. 1983)). "Rather, an applicant must only disclose 'conflicting rights' of another user 'which are clearly established, for example, by a court decree, by the terms of a settlement agreement, or by a registration.'" Id. (citing Rosso, 720 F.2d at 1266) (emphasis original). "Second, the 'statement of an applicant that no other person 'to the best of his knowledge' has the right to use the mark does not require the applicant to disclose those persons whom he may have heard are using the mark if he feels that the rights of such others are not superior to his.'" Id. at 952-953 (citing Quiksilver 466 F.3d at 755) (emphasis original); eCash, 210 F. Supp. 2d at 1149 ("In general, an applicant is only required to have a 'good faith' belief that it is the senior user." (citing McCarthy § 31:77 at 31-132 (with a good faith belief, "the oath cannot be fraudulent")). Therefore, "[i]n most cases, the registration applicant has no obligation to report other users." AirWair, 84 F. Supp. 3d at 953 (citing eCash, 210 F. Supp. 2d at 1149). "With these restrictions on the use of fraud allegations to cancel a trademark registration, it is perhaps not surprising that 'charges of fraud and non- disclosure [that rely on an applicant's alleged duty to disclose uses of the same mark by others] have uniformly been rejected.'" eCash, 210 F. Supp. 2d at 1149 (citing McCarthy § 31:76 at 31-129 ("litigants continue to pursue [these claims] vigorously, perhaps because of an erroneous view that patent law disclosure standards apply in the trademark context."). Where "the complaint [cannot] be saved by amendment" it should be dismissed without leave to amend. Gadda v. State Bar of Cal., 511 F.3d 933, 939 (9th Cir. 2007). Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 6 of 10 Page ID #:166 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 III. ARGUMENT A. FRAUDULENT PROCUREMENT AND DAMAGES CLAIMS MUST BE DISMISSED JLC’s fraudulent procurement and damages claims are based on sparse allegations that Spirit somehow knew that its mark was (1) functional, (2) was not inherently distinctive and had not acquired secondary meaning, and (3) had been previously used by other garment manufacturers, and intended to deceive the PTO by withholding information. Dkt. #25, FAC, ¶33. The FAC fails to provide the "who, what, where, when, and how" of the alleged fraudulent procurement and fails to provide facts to support any of the required elements to be established including: (1) a false representation regarding a material fact; (2) the registrant's knowledge or belief that the representation is false; (3) the registrant's intent to induce reliance upon the misrepresentation; (4) actual, reasonable reliance on the misrepresentation; and (5) damages proximately caused by that reliance. AirWair, 84 F. Supp. 3d at 952. JLC's fraud claim constitutes nothing more than a formulaic recitation of the elements of a cause of action without any substance. Dkt. #25, FAC, ¶¶32-40; Twombly, 550 U.S. at 555; Iqbal, 556 U.S. at 678-79. 1. The Subject Mark is Not Functional and JLC's Pleadings are Insufficient JLC alleges that Spirit knew that its trade dress was functional and intentionally withheld this information from the USPTO with intent to deceive. JLC's allegation here is legally deficient. "Functionality is not a material fact per se which can be withheld from the PTO." Northwestern Corp. v. Gabriel Mfg. Co., 1996 U.S. Dist. LEXIS 6137, at *15 (N.D. Ill. May 7, 1996) ("Rather, it is a traditional affirmative defense to an action for trademark infringement on which the defendant bears the burden of proof. Defendants have already pled functionality as an affirmative defense to this suit. It cannot also form the basis of fraud.") (internal citations omitted). It is implausible that a trademark applicant "knew" that its trade Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 7 of 10 Page ID #:167 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 dress was functional and withheld its functionality from the USPTO. Spirit submitted the drawing of its mark to the PTO and the PTO understood what was submitted. The PTO allowed the mark to register. JLC fails to allege any fact or provide any evidence that Spirit actually believed its Spirit Jersey Design was functional or that it intended to deceive the PTO. JLC’s allegations here fall far short of the heightened pleading requirements of Rule 9. 2. Fraud Claim Based on Lack of Secondary Meaning Falls Well Short JLC fails to allege any fact or provide any evidence that raises an inference that Spirit intended to deceive the PTO with respect to issues of acquired distinctiveness and/or secondary meaning. “Registration of a mark on the supplemental register shall not constitute an admission that the mark has not acquired distinctiveness.” 15 U.S.C. §1095. In other words, the Supplemental Register is specifically reserved for marks that are not inherently distinctive but may demonstrate acquired distinctiveness, if necessary, during litigation. Moreover, JLC again provides no facts to support the elements of a fraud-based claim (e.g., knowingly making a false representation with the intent to induce reliance thereon, etc.). Accordingly, JLC fails to satisfy the pleading requirements here, as well. 3. Alleged Prior Use by Other Garment Manufacturers Fails to Satisfy Pleading Requirements JLC's allegations of fraudulent procurement based on prior use by other garment manufacturers are also clearly deficient. JLC fails to provide the "who, what, where, when, and how," as required by Rule 9, of other garment manufacturers who allegedly used the Spirit Jersey Design prior to Spirit. For example, JLC fails to allege any facts identifying any specific garment manufacturer or garment. JLC provides no dates of such prior use. JLC provides no facts supporting an inference that Spirit was aware of such prior use nor any Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 8 of 10 Page ID #:168 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8 facts showing that Spirit withheld such information from the PTO with the intent to deceive it. AirWair is persuasive here. In AirWair, the counterclaimant alleged that the registrant's declarations were fraudulent because "[u]pon information and belief, Plaintiff and Griggs were aware of the various third parties that used the Purported Marks . . . at the time the above declaration was signed, and knowingly concealed this information in an effort to get the [PTO] to grant it a trademark registration." AirWair, 84 F. Supp. 3d at 953. The counterclaimant also alleged that these "various third parties that used the Purported Marks" were "hundreds of manufacturers and/or retailers [that] openly offered for sale and sold" products containing the Marks, "including, but not limited to Vans, Hot Topic, Forever 21, Wet Seal, Sketchers USA, and H&M." Id. The AirWair Court held that such allegations were deficient for two reasons. First, "a trademark applicant must only disclose 'conflicting rights' of another user 'which are clearly established' by, for instance, 'a court decree, by the terms of a settlement, or by a registration." Id. Not only did AirWair hold that the counterclaimant failed to allege any third party rights under this standard, it held that the registrant "was not obligated 'to investigate and report all other possible users of an identical or confusingly similar mark.'" Id. Second, AirWair held that the counterclaimant failed "to allege that other purported users of the Marks had rights that were 'superior to' those of the Griggs Group." Id. (citing Quiksilver, Inc., 466 F.3d at 755 (trademark applicant need not disclose other uses of the mark "if he feels that the rights of such others are not superior to his.")). Moreover, it would not be enough for JLC to simply allege that some other garment manufacturer had used all the features of the mark prior to Spirit (which JLC hasn't even done). eCash, 210 F. Supp. 2d at 1150 ("It is not enough that Defendants simply be able to show some common law rights to use the mark; they must be able to show that their rights were so 'clearly established' that Plaintiff's Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 9 of 10 Page ID #:169 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 failure to disclose Defendants' rights to the PTO would have to constitute fraud."). "For so long as no other user's rights have been 'clearly established' (by court decree, settlement, or a competing registration), the applicant can adduce a 'good faith' belief that he or she is the senior user." Id. "It is only when another's rights, not just use, are 'clearly established,' that 'good faith' is eliminated." Id. JLC has failed to allege any specific third-party use, never mind Spirit's awareness of such "clearly established" rights of others that are superior to those of Spirit's or Spirit's intent to deceive. IV. CONCLUSION For the foregoing reasons, Spirit respectfully requests that JLC's Fourth and Fifth causes of action be dismissed without leave to amend. Dated: May 22, 2017 /s/ Willmore F. Holbrow, III Willmore F. Holbrow, III BLAKELY, SOKOLOFF, TAYLOR & ZAFMAN, LLP Attorneys for Plaintiff SPIRIT CLOTHING COMPANY Case 2:16-cv-08637-RGK-JPR Document 27-1 Filed 05/22/17 Page 10 of 10 Page ID #:170 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Willmore F. Holbrow, III (SB# 169688) bill_holbrow@bstz.com James W. Ahn (SB#243335) James_ahn@bstz.com BLAKELY, SOKOLOFF, TAYLOR & ZAFMAN, LLP 12400 Wilshire Boulevard, Seventh Floor Los Angeles, California 90025 Tel: (310) 207-3800 Fax: (310) 820-5988 Attorneys for Plaintiff SPIRIT CLOTHING COMPANY UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION SPIRIT CLOTHING COMPANY, a California corporation Plaintiff, v. JERRY LEIGH OF CALIFORNIA, INC., a California corporation Defendant. Case No: 16-CV-08637-RGK-JPRx Hon. R. Gary Klausner [PROPOSED] ORDER GRANTING PLAINTIFF SPIRIT CLOTHING COMPANY’S MOTION TO DISMISS DEFENDANT JERRY LEIGH OF CALIFORNIA, INC.’S FIRST AMENDED COUNTERCLAIM Case 2:16-cv-08637-RGK-JPR Document 27-2 Filed 05/22/17 Page 1 of 2 Page ID #:171 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 [PROPOSED] ORDER Plaintiff Spirit Clothing Company's Motion to Dismiss Defendant Jerry Leigh of California, Inc.'s First Amended Counterclaim (Dkt. #25) came on for hearing before the Court on June 26, 2017. The Court, having considered the parties' memoranda of points and authorities, supporting evidence, and any argument made at the hearing, and finding good cause therefor: GRANTS the Motion and hereby dismisses the fourth and fifth causes of action in Defendant’s Counterclaim, without leave to amend. Defendant shall file a Second Amended Counterclaim without these causes of action, within 5 days of this Order. IT IS SO ORDERED. Date: Honorable R. Gary Klausner United States District Judge Presented by: Willmore F. Holbrow, III James W. Ahn BLAKELY, SOKOLOFF, TAYLOR & ZAFMAN, LLP 12400 Wilshire Boulevard, Seventh Floor Los Angeles, California 90025 Attorneys for Plaintiff SPIRIT CLOTHING COMPANY Case 2:16-cv-08637-RGK-JPR Document 27-2 Filed 05/22/17 Page 2 of 2 Page ID #:172