Is Discovery That Section 8 Affidavits Were Not Filed by the Owner of the Registration Grounds for Cancellation? N.D.Cal Rules “No.”

By Theodore Davis Jr., Stephen Feingold, and Calla Yee
(JD Supra)

United Tactical Systems, LLC v. Real Action Paintball, Inc., 2017 WL 713135 (N.D. Cal. 2017)

CASE SUMMARY

Every trademark lawyer knows that between the fifth and sixth year after registration the trademark owner must file an affidavit of use. If the mark has been in continuous use, the owner may also file an affidavit of incontestability. However, regardless of whether a Section 15 Affidavit has been filed, once a registration reaches its fifth anniversary, the grounds for cancellation are very limited.

A recent case from the Northern District of California illustrates how “simple” errors in a registration’s chain of title can exponentially increase the cost and time necessary to enforce a trademark owner’s rights. While ultimately these mistakes were not fatal, the case provides an excellent opportunity to explore the finer details of prosecution and due diligence. United Tactical Sys., LLC v. Real Action Paintball, Inc., No. 14-cv-04050-MEJ, 2017 WL 713135 (N.D. Cal. Feb. 23, 2017).

THE TAKE AWAY

While we provide a detailed analysis of the case below, the critical issues to take away are:

1. Make sure that you identify the correct owner of the mark when you file the initial application and any subsequent papers. While the TMEP provides that you may correct technical errors, you may not make changes that have legal significance. For instance, if you file an application in the name of ABC, Inc. of New Jersey when the applicant’s legal name is ABC, Inc. of New York, and there is an existing related company with the name ABC, Inc. of New Jersey, you will not be able to correct that mistake because that would alter the identity of the owner. However, if ABC, Inc. of New Jersey did not exist, then you could correct the error because it would not change the rights of an existing entity. TMEP § 1604.07 provides examples of acceptable and unacceptable changes.
2. Due diligence will not eliminate any of the risks the trademark owner faced in this case. But a thorough due diligence, including tracing back the chain of title to the mark’s creation, will enable the trademark owner to identify the magnitude of the risk. Even though UTS eventually won the legal argument, it undoubtedly spent hundreds of thousands of dollars to do so. A savvy deal attorney will recognize the leverage this risk offers to obtain more favorable terms.
3. Exercise extreme caution before acquiring a trademark at a foreclosure sale. Even if the sale is overseen by a bankruptcy court, the buyer receives nothing more than quitclaim title to the mark.
4. If you are charged with recording a security interest, we suggest you take a few moments and learn more about the process. Here is link to an International Trademark Association (INTA) PowerPoint that is a good place to start.

Facts

PepperBall® projectiles are small plastic spheres that can be used in the same way as pepper spray. The PepperBall mark was originally filed by Jaycor, Inc., which then assigned the mark to Jaycor Technical Systems, Inc. (“Jaycor”). After the registration issued in May of 2003, Jaycor recorded a name change to PepperBall Technologies, Inc., a Delaware corporation (“PTI-DEL”). This assignment was recorded twice at the Trademark Office in 2002 and 2003.

In 2005, a security interest was recorded against this registration. The Cover Sheet states that the party granting the security interest was PTI-DEL. The underlying document on file with the Trademark Office, however, states that the security interest was granted by Pepperball Technologies, Inc., a California corporation. This security interest was eventually acquired by a predecessor to the named plaintiff, United Tactical Systems (“UTS”).

In 2008, PTI-DEL acquired Securities With Advanced Technologies, Inc. (“SWAT”). Driven by various corporate concerns, the acquisition had an unusual structure. PTI-DEL merged into PTI Acquisitions Corp. to become Pepperball Technologies – CA, Inc. (“PTI-CA”). SWAT then changed its name to PepperBall Technologies, Inc., a Colorado corporation (“PTI-CO”), which became PTI-CA’s parent company. Both PTI-CA and PTI-CO did business under the simple name of Pepperball Technologies, Inc. (“PTI”). To the public, it seemed as if there was only one company known as PTI and that it was the same entity that had existed for many years.

Based on these facts, the actual owner of the PepperBall mark was PTI-CA since it was the successor to PTI-DEL. The fact that PTI-CO is the parent company for PTI-CA in no way vested it with direct ownership of the mark. Furthermore, the security interest in the PepperBall mark granted by Pepperball Technology, a California corporation, would appear to be of no legal significance since that entity did not own the mark at the time the security interest was granted.

When the combined Affidavit of Use and Incontestability for the PepperBall registration was filed in 2009, the entity making that filing was not PTI-CA, the successor in interest to PTI-DEL, but Jaycor. Pepperball Technologies was listed as the proposed owner, but the Affidavit listed Jaycor as the current owner, which was consistent with the name change previously recorded in 2002 and 2003. Jaycor did not explain that the company then bearing that name was a new Colorado corporation and not the Delaware Corporation which was the successor to Jaycor and which had merged into PTI-CA.

The TMEP explains the Section 8 Affidavit must be filed by the owner and provides that if it is filed by the wrong party and the time for filing has elapsed, then the registration will be cancelled. See TMEP Section 1604.07(f). However, since there was no obvious deficiency, the Trademark Office accepted the Section 8 Affidavit.

Apparently, PTI-CO assumed the loan obligations underlying the security interest wrongfully recorded against the PepperBall registration. At some point, the lender obtained but never recorded a security interest in the PTI-CA trademark. When PTI defaulted on the loan, UTS’s predecessor foreclosed on the collateral and held an auction under the UCC. Notably, UCC sales are quitclaim sales with no representations or warranties about the property being sold. UTS’s predecessor eventually acquired the PepperBall mark through this sale. But if the foreclosure was based on a perfected security interest granted by an entity that did not own the mark, what exactly was acquired?

In 2013, UTS’s predecessor renewed the PEPPERBALL registration after explaining to the Trademark Office it had acquired the mark through the foreclosure sale of “PTI’s” trademark. Of course, this explanation was not completely accurate because the foreclosure was on PTI’s interest while the mark was still owned by PTI-CA. Nevertheless, the Trademark Office accepted the renewal of the mark with the owner now listed as UTS’s predecessor.

In 2012, one year after the registration was renewed, UTS’s predecessor brought a suit against Real Action alleging trademark infringement.

All of these issues only surfaced after extensive discovery leading, ultimately, to a decision five years after the first complaint was filed on whether UTS was in fact the owner of the PepperBall trademark. One year after UTS initiated its first complaint in Indiana, it obtained injunctive relief. The Seventh Circuit subsequently vacated that injunction finding that Real Action was not subject to personal jurisdiction. Real Action then commenced its own litigation initiative leading to counterclaims by UTS that were consolidated before the Northern District of California. In 2014, UTS again obtained a preliminary injunction. Real Action moved for summary judgment claiming that UTS was not the owner of the rights being enforced.

The Affidavit of Use

Real Action’s primary argument centered on the first Affidavit of Use. It argued that Affidavit was defective thereby causing the registration to expire as a matter of law regardless of whether the Section 8 Affidavit was accepted by the Trademark Office. The district court recognized that the Lanham Act requires that the Affidavit of Use be filed by the owner of the mark and not the “registrant.” It also held that the entity that filed the Affidavit of Use and Incontestability for the PepperBall mark was not the legal owner. 2017 WL 713135, at *14. However, the district court concluded that because the mark was incontestable these errors were of no legal significance reasoning:

Section 33(b) of the Lanham Act provides that after a registration reaches its fifth anniversary, “the registration shall be conclusive evidence of the validity of the registered mark and of the registration of the mark, of the registrant's ownership of the mark, and of the registrant’s exclusive right to use the registered mark in commerce.” 15 U.S.C. § 1115(b). Once a registration has passed its fifth anniversary, and assuming the registrant files a Section 8 declaration of ongoing use, it is subject to cancellation for a limited number of reasons enumerated in Section 14 of the Lanham Act. Erroneously filed or mistakenly accepted Section 8 or Section 15 Affidavits are not one of these enumerated exceptions permitting cancellation of such a registration. Real Action tried to skirt this issue by suggesting that the Court should correct the Trademark Office’s error in accepting the Section 8 Affidavit. The court rejected this argument because no case law was offered to support it. In a footnote, the Court explained that the Trademark Office was in a better position to determine the legal ramifications for its erroneous acceptance of the Section 8 Affidavit. Id. at n. 11.

This deference to the Trademark Office seems misplaced. The only way Real Action could have presented this case to the Trademark Office was either by moving to cancel the PepperBall registration or by a special petition to the Director. Since the Lanham Act on its face does not permit cancellation of a five-year-old registration on this basis, the better option would be to petition the Commissioner to issue a notice of deficiency under Section 8 based on newly presented evidence and request that unless the deficiency was corrected that the Office issue a new notice refusing the Section 8 Affidavit. Arguably, this strategy would make the limitations for cancelling an incontestable registration irrelevant. In either event, Real Action could appeal an adverse decision on either the cancellation or the petition for de novo review by the District Court. The requirements for who must file the Section 8 Affidavit are statutory and, ultimately, it is an Article III court that should determine how those obligations are satisfied and not an Article I court.