After two decades of disputes, the US Supreme Court (Supreme Court) unanimously ruled on May 14, 2020, that Lucky Brand Dungarees, Inc. (Lucky Brand) is not precluded from asserting certain defenses against Marcel Fashions Group, Inc. (Marcel) in the parties latest dispute. This ruling overturns the novel ruling by the Second Circuit that claimed Lucky Brand could not assert a defense in the current action because it had failed to do so in previous litigation between the parties under the theory of res judicata. This was the first time the Supreme Court had addressed whether res judicata applied to defensive actions, as well as offensive ones. Lucky Brand Dunagrees, Inc. et. al. v. Marcel Fashions Group, Inc., No. 18-1086 (2020).
Lucky Brand and Marcel are both fashion companies that own trademark rights in certain brands incorporating the literal element, “Lucky.” In 2003, Marcel sued Lucky Brand for trademark infringement alleging Lucky Brand was infringing on Marcel’s “Get Lucky” trademark. The parties entered into a settlement agreement wherein Lucky Brand agreed to refrain from use of the tagline “Get Lucky” in exchange for Marcel releasing all claims against Lucky Brand relating to use of Marcel’s “Get Lucky” mark.
By 2005, the relationship between the parties had soured when Lucky Brand filed suit against Marcel for infringement of various Lucky Brand trademarks. In response to the suit, Marcel asserted counterclaims that Lucky Brand had continued to use the phrase “Get Lucky” in violation of the parties’ settlement agreement. The 2005 action ended when the court permanently enjoined Lucky Brand from using the phrase “Get Lucky” and the parties settled back into a period of coexistence.
However, in 2011, Marcel brought action once more asserting Lucky Brand was yet again infringing on the “Get Lucky” mark. Lucky Brand moved for dismissal of the action claiming Marcel released Lucky Brand for all claims relating to the phrase“Get Lucky” in the 2003 settlement agreement. In response, Marcel argued Lucky Brand should not be able to assert the 2003 release of claims in this current action, as it did not assert the defense during the 2005 action and therefore, was precluded from raising it in this later action.
While the district court ruled that Lucky Brand could assert the defense, the Second Circuit vacated the decision, asserting that Lucky Brand was precluded from asserting the release of claims defense in the 2011 action due to its failure to assert the defense in the 2005 action. The Supreme Court granted certiorari to rule on the novel issue of whether res judicata can be applied to defenses raised in response to a claim, as it has previously been thought to apply only to claims or issues.
The Supreme Court unanimously decided in its May 14 opinion that while res judicata does equally apply to claims as well as defenses, the minimum guidelines for claim preclusion must be present for a court to find a party is precluded from asserting a defense in a later action. In particular for defense claim preclusion, there must be a finding that the party had the opportunity to assert the defense in a similar matter, the similar matter must contain “a common nucleus of operative fact,” and the party failed to do so. (Restatement (Second) of Judgments §24, Comment b, p. 199.Pp. 6–8.0)
In this matter, the Supreme Court found that the facts of the 2005 and the 2011 actions were simply too different for defense preclusion to apply (e.g. the actions dealt with different trademarks and contained unique facts about the parties’ conduct). The Supreme Court remanded the matter back to the district court and confirmed Lucky Brand may raise its defense that Marcel released Lucky Brand of claims relating to the “Get Lucky” mark in the 2003 settlement agreement.
While this ruling stems from a trademark dispute, the ruling is not unique to trademark law and applies to any case where “defense preclusion” is at issue. Justice Sotomayor hints that trademark disputes are unique in that they often revolve around a multi-factor analysis that would make it unlikely that both actions would contain a “common nucleus of operative fact.” Time will tell what lucky trademark defendant will be the one to test the validity of that statement.
If you have questions about how this decision might affect your business, please contact the author or a member of the Trademark and Copyright practice.