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IP Alert: Seventh Circuit Addresses Sovereign Immunity in Trademark Case

August 10, 2011

The Court of Appeals for the Seventh Circuit recently issued an opinion having important ramifications for trademark disputes that involve state entities: Board of Regents of the University of Wisconsin System v. Phoenix International Software, Inc. Significantly, this case addresses an important question of state immunity in trademark actions under the Eleventh Amendment to the U.S. Constitution.

The Eleventh Amendment generally provides that individual states, including state entities such as public universities, are immune from lawsuits filed in the federal court system. This doctrine is subject to several exceptions, one of which is that a state may waive its Eleventh Amendment immunity. The state’s waiver may be express, or the state may take action that implicitly leads to a waiver of immunity.

In the Phoenix case, the University of Wisconsin (“UW”) had obtained a trademark registration for the mark “CONDOR.” Phoenix software had an earlier identical registration for the CONDOR mark and sought cancellation in an administrative proceeding before the Trademark Trial and Appeal Board (TTAB). The TTAB determined that the UW registration was likely to cause confusion with the earlier Phoenix registration and cancelled the UW mark. The UW sought redress in the courts.

A party who has lost a cancellation proceeding may appeal to the Court of Appeals for the Federal Circuit, with review limited to the record before the TTAB and entitlement to trademark registration. Another option is to file an action in federal court against the opposing party. This procedure allows for the admission of new evidence and has certain other procedural differences. The UW sought the latter route and brought an action in federal district court.

Phoenix raised counterclaims alleging trademark infringement and false designation of origin against the UW’s use of the CONDOR mark. The UW sought to dismiss these counterclaims on the grounds of Eleventh Amendment immunity. The district court agreed with the UW and dismissed the counterclaim. The Seventh Circuit disagreed, and reversed.

Referring to the earlier Supreme Court case Lapides v. Board of Regents of the University System of Georgia, the court reasoned that “Waivers by litigation conduct depend on whether the state has made a voluntary change in behavior that demonstrates it is no longer defending the lawsuit and is instead taking advantage of the federal forum.” The court found “it would be manifestly unfair if Wisconsin were allowed to enjoy the advantages of the district court while using sovereign immunity to avoid the disadvantages.” The court also noted that the UW had not chosen alternative procedures that would have preserved the UW’s immunity, such as the noted appeal to the Federal Circuit or refusing to acquiesce to the TTAB proceedings, among others.

The court found that Phoenix’s counterclaims were compulsory under the federal rules. “Compulsory” claims are those claims that arise out of the transaction or occurrence that is the subject matter of the opposing party's claim and that the court is empowered to resolve. The court held that the UW’s filing of the federal action constituted a waiver of Eleventh Amendment immunity at least for such compulsory counterclaims. The court expressly declined to decide whether the filing of a federal action constituted a waiver of other counterclaims.

Finally, the court noted that at least one other appellate court has rendered a contrary ruling under the Eleventh Amendment. This suggests that the Eleventh Amendment question may be appropriate for Supreme Court review.

The Phoenix decision has important ramifications both for universities and other trademark-holding state entities and for parties who hold competing trademarks. If you would like more information or have questions concerning this case, please contact Fitch Even partner John E. Lyhus.

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