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IP Alert: Seventh Circuit Holds Equitable Defenses "Rarely Capable of Resolution on a Motion to Dismiss"

May 19, 2016

On May 16, 2016, the U.S. Court of Appeals for the Seventh Circuit issued a decision underscoring that certain affirmative defenses based on equity, such as acquiescence, are not easily amenable to resolution on the pleadings. In Hyson USA, Inc., et al. v. Hyson 2U, Ltd., et al., the Seventh Circuit overturned the district court’s dismissal of a trademark infringement action. The lower court had ruled that the pleadings affirmatively established the plaintiff’s acquiescence to the defendant’s use of the Hyson mark.

In the pleadings, Hyson USA alleged that the company encountered a serious financial difficulty in early 2012, forcing it to suspend operations. A company manager, Karolis Kaminskas, left Hyson USA and established Hyson 2U in September 2012. The owner and president of Hyson USA, Leonid Tansky, transferred the company’s branded inventory and equipment to the newly formed Hyson 2U and started working at Hyson 2U. Hyson 2U operated in the same manner and markets as Hyson USA. In early 2014, after being fired from Hyson 2U for undisclosed reasons, Tansky resumed operation of Hyson USA and within a few months sued Hyson 2U for infringement of the Hyson mark under federal statute and under state law claims.

In the district court action, defendant Hyson 2U moved to dismiss the alleged infringement under federal statute for failure to state a claim under FRCP 12(b)(6). Hyson 2U argued that the complaint’s alleged facts, when accepted as true for purposes of argument, set forth the acquiescence of Hyson USA to Hyson 2U’s use of the Hyson mark. The court agreed and granted the motion to dismiss.

On appeal, the Seventh Circuit cautioned that “the plaintiff ‘must affirmatively plead himself out of court,” citing Chi. Bldg. Design v. Mongolian House, Inc. The plaintiff’s own complaint must “unambiguously establish all the elements of the defense.” The Seventh Circuit found that the complaint does not allege all the factual elements of the affirmative defense needed to support the dismissal.

In trademarks, acquiescence is an affirmative defense based on equitable principles looking at whether the trademark owner actively consented to use of a mark through words or conduct. The Seventh Circuit, citing the Eleventh Circuit in SunAmerica Corp. v. Sun Life Assurance Co., summarized the three elements of acquiescence as “(1) the senior user actively represented that it would not assert a right or a claim; (2) the [senior user’s] delay between the active representation and assertion of the right or claim was not excusable; and (3) the delay caused the defendant undue prejudice.” While touching on the related doctrine of laches, the court distinguished laches as passive consent involving negligent and unintentional failure to police trademark rights. In contrast, acquiescence requires the trademark owner’s affirmative word or action communicating implied consent to the junior user.

The Seventh Circuit’s review of the complaint did not find allegations that Hyson USA actively represented it would refrain from making claims to the Hyson mark. Finding this first element of acquiescence missing, the court declined to discuss the remaining two elements of delay and undue prejudice. In returning the case to the district court, the Seventh Circuit further cautioned against preliminary rulings on equitable defenses, commenting that the trademark owner may also show inevitable confusion to the public, which may support relief despite acquiescence.

If you have questions regarding this opinion, please contact Fitch Even partner John E. Lyhus, author of this alert.

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