'Naked' use: the Fed Circuit’s interpretation of standing

The case, Australian Therapeutic Supplies v Naked (2020), analyses the requirements for establishing “standing” to challenge a mark—in this case a registration—in an action before the US Patent and Trademark Office (USPTO).

Both the challenger, an Australian contraceptive wholesaler who sold ‘Naked’ branded condoms into the US market, and US company Naked, began use of the identical mark for the same goods within months of each other.

The Australian company started shipping its ‘Naked’ condoms into the US in April 2003. The US company filed a US application to register the Naked mark for condoms a couple of months later—in August 2003.

The facts were complicated by various negotiations between the parties over the marks which did not result in a signed agreement. The US company claimed that these discussions had resulted in a binding agreement resulting in the Australian having contracted away its right to use and register its mark in the US. The Australian company claimed there was no such agreement.

The USPTO Trademark Trial and Appeal Board (TTAB) required that the Australian company establish proprietary rights in its unregistered mark to demonstrate standing to challenge the US company’s registration. Standing is defined as a real interest in the proceeding and a belief of damage under section 1064 of the Lanham Act.

A narrow interpretation of standing

The board’s ruling followed a trial in which it ruled that the Australian had contracted away its right to use and register its mark despite the absence of a written contract. Based on this finding, the board concluded that the Australian was unable to established proprietary rights sufficient to demonstrate standing to challenge the US company’s registration.

This is notable because this type of finding comes down to a complicated contractual interpretation issue, of the type generally reserved for state and federal courts, not the TTAB.

But in July 2020, the US Court of Appeals for the Federal Circuit held that the board’s ruling reflected an unduly narrow and incorrect interpretation of “standing” under Section 1064 of the Lanham Act.  In reversing the Board’s ruling, the Federal Circuit emphasized that ownership of proprietary rights in a mark is not, and should not be, a prerequisite to demonstrate standing to challenge a mark’s registrability at the USPTO.

Logically, the imposition of a “proprietary interest” requirement would eliminate the ability to challenge a mark’s registrability on grounds such as descriptiveness, genericness, fraud, or otherwise—all situations where a challenger may not, or cannot as a matter of law, demonstrate a “proprietary interest” in the challenged mark but believes it will be damaged by a registration.

The Federal Circuit concluded that the board’s finding that Australian had contracted away its right to use and register the ‘Naked’ mark should not preclude Australian’s right to challenge the US company’s registration, because while such agreements could preclude Australian’s ability to show proof of actual damages (an issue for federal court, not a USPTO proceeding), Section 1064 of the Act requires only a “belief” of damage.

Here, Australian twice filed an application to register the mark, received refusals, and ultimately abandoned its efforts. The Federal Circuit concluded that even though Australian’s earlier registration efforts were abandoned, its earlier pursuit of registration coupled with its common law rights were enough to demonstrate a real interest in the mark and a reasonable belief of damage to support a finding of standing. Its rationale is an important one, unique to US practice.

In the US, abandonment of an application or expiration of a registration is not the same as abandonment of rights in the underlying mark. Trademark rights in the US derive from use, not registration.

Abandonment, namely, a loss of property rights (albeit rights in intangible property) requires a showing of non-use of a mark for at least three consecutive years coupled with an intent not to resume use. US law places great value in property ownership and requires a substantial showing to justify loss of rights.

This distinction is an important one because the requirements for finding an abandonment of rights, in contrast to an abandonment of pending applications, didn’t apply to Australian. Because while Australian may have walked away from its earlier efforts to register the mark by abandoning its earlier applications, it did not walk away from its continued use of and interest in the ‘Naked’ mark.

The Federal Circuit found that Australian’s ongoing, even if intermittent, advertising and sales in the US were sufficient to demonstrate its real interest in the mark and a reasonable belief in damage stemming from the US company’s competing registration, regardless of what had happened with Australian’s earlier registration efforts.

The other point of note is that Naked had questioned the sufficiency of Australian’s commercial activity, claiming that its sales were “sporadic” and “nominal” and therefore de minimus and insufficient to support a finding of “standing”. The Federal Circuit disagreed, noting that Section 1064 does not impose a minimum threshold of commercial activity to demonstrate a “real interest” in a mark or proceeding for standing purposes.

Real interest requirement

The “real interest” requirement is meant to prevent litigation where there is no real controversy between the parties—“where a plaintiff, petitioner, or opposer is no more than a intermeddler”.

The Federal Circuit found that Australian’s advertising and sales of the products in the US coupled with its previous efforts to register the mark in the US were enough to demonstrate a real interest in the mark and a reasonable belief of damage stemming from its rival’s registration.

By denying certiorari in October, the Supreme Court allowed the Federal Circuit’s interpretation to stand. I think the Federal Circuit’s decision is consistent with Supreme Court precedent and well-reasoned—so it makes sense that the Supreme Court decided further review was unnecessary.

As a trademark practitioner, the one issue that really jumps out at me is the Federal Circuit’s analysis of the de minimus issue—particularly in the face of the line of cases on the concept of “token use”.

The Trademark Law Revision Act of 1988 (TLRA), revised the definition of “use in commerce” to mean “the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark”. Subsequent case law has clarified that factors to consider when determining compliance with the statutory requirement for a “bona fide use of a mark in the ordinary course of trade” include: the amount of use; the nature or quality of the transaction; and what is typical use within a particular industry.

In Adidas AG v Christian Faith Fellowship Church (TTAB, 2015), the USPTO rejected the petitioner’s efforts to register the mark ‘Adizero’ on grounds of likelihood of confusion with registrant’s ‘Add a zero’ mark, both for clothing.

The cancellation petition alleged that respondent, which filed its trademark application alleging use of the mark in commerce, had not actually made use of its mark at the time of filing its application. The respondent produced evidence that it had sold a total of two hats bearing the mark to a resident in another state prior to filing its application—a use which the TTAB held was “de minimus and insufficient to show use that affects interstate commerce”.

The Federal Circuit reversed on appeal, citing a string of cases finding that federal authority under the Commerce Clause extends to de minimus interstate transactions. This decision that had many trademark practitioners up-in-arms; concerned that in ruling as it did, the Federal Circuit essentially approved and revived the concept of “token use”.

The Federal Circuit’s recent ruling in the Naked case is consistent with its analysis in Adidas.  I think this is one of the most interesting aspects of the decision and likely to be the subject of conversation among trademark practitioners going forward.

In conclusion, I think the Federal Circuit’s finding on the question of standing in the Naked case is clearly correct. I’m not sure how much impact the standing aspect of the case will have on day-to-day practice, but it represents an interesting development in trademark case law.

Julia Anne Matheson is a partner at Potomac Law in Washington, DC. She can be contacted at:  jmatheson@potomaclaw.com