Constitutional law - Seventh Circuit denies sovereign immunity defense to counterclaims from appealing state agency - Board of Regents of the University of Wisconsin System v. Phoenix International Software, Inc., 653 F.3D 448 (7th Cir. 2011).

AuthorTyler, Daniel S.

The Eleventh Amendment to the United States Constitution declares that the "Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State." (1) States and state agencies have often invoked this amendment, commonly referred to as the sovereign immunity clause, to avoid facing litigation brought by private citizens in the federal court system. (2) However, recent decisions have shed light on the sovereign immunity waiver distinction between a state party that is involuntarily dragged into federal court, and a state party that enters the federal system as a part of their adversarial plan for defense or appeal in lawsuits. (3) In Board of Regents of the University of Wisconsin System v. Phoenix International Software, Inc., (4) the United States Court of Appeals for the Seventh Circuit considered whether a state plaintiff who initiated an action in a federal district court after an adverse administrative ruling had waived its sovereign immunity rights as to the defendant's counterclaims within the same suit. (5) The Seventh Circuit held that, because the state plaintiff had voluntarily availed itself of the federal district court, it had thus waived its right to sovereign immunity. (6)

In 1997, Phoenix International Software, Inc. ("Phoenix"), a small software developer, registered its mainframe computer software that provides online programming development, library management, and systems development under the trademark name "CONDOR." (7) Four years later in 2001, the Board of Regents of the University of Wisconsin System ("Wisconsin") registered the identical "CONDOR" trademark for a software product that "takes advantage of unused processing power across a network of computers." (8) Seeking to avoid consumer confusion, Phoenix filed a petition to cancel Wisconsin's trademark registration with the Trademark Trial and Appeal Board ("TTAB") in 2004. (9) In its defense during the administrative proceedings, Wisconsin failed to raise the defense of sovereign immunity and challenged the petition on the merits. (10) The TTAB agreed that confusion between the two competing trademarks was likely and granted Phoenix's petition for the cancellation of Wisconsin's registration. (11)

Wisconsin immediately decided to challenge the TTAB ruling in federal district court pursuant to 15 U.S.C. [section] 1071(b). (12) In response to this action filed in the United States District Court for the Western District of Wisconsin, Phoenix defended both the TTAB decision and asserted counterclaims against Wisconsin for trademark infringement and false designation of origin under 15 U.S.C. [section] 1071(b). (13) Wisconsin then petitioned the court for summary judgment on the TTAB ruling and a dismissal of all federal counterclaims on the ground that they were barred by the doctrine of sovereign immunity. (14) The court granted Wisconsin's motions for dismissal and summary judgment, and thus reversed the TTAB's decision to cancel Wisconsin's trademark registration. (15) On appeal, the Seventh Circuit evaluated both the likelihood of confusion question raised in the summary judgment motions as well as whether Wisconsin should be granted immunity against Phoenix's federal counterclaims. (16) The Seventh Circuit concluded that the summary judgment dismissal on the likelihood of confusion issue was premature, and more importantly, that because Wisconsin availed itself of the advantages of a fresh lawsuit in district court and Phoenix's counterclaims were compulsory in nature, Wisconsin had effectively waived its shield of sovereign immunity against such claims. (17)

The Lanham Act provides parties who are dissatisfied with decisions made at the administrative board level of patent infringement cases with a variety of avenues for appeal, starting with a direct appeal to the governing administrative board. (18) The guidelines set forth in the Lanham Act provide parties with the option to obtain a civil judgment, both in the Federal Circuit and in the federal district court systems. (19) Once a party has availed itself of the federal court system, however, it opens itself up to attack by its opposing party, as is required by the Federal Rules of Civil Procedure. (20) When appealing to a district court, a party essentially initiates both an appeal and a new action, which "allows the parties to request additional relief and to submit new evidence." (21)

The Eleventh Amendment to the Constitution, announced by President John Adams, guarantees that "an unconsenting State is immune from suits brought in federal courts by her own citizens as well as by citizens of another State," and the amendment has been commonly referred to as the sovereign immunity clause. (22) There are two main exceptions to sovereign immunity that have developed over the years, beginning with congressional authorization of a lawsuit against a state in the exercise of its power to enforce the Fourteenth Amendment. (23) The second and more common exception to sovereign immunity, known as the party consent exception, occurs when a state waives its immunity by consenting to the suit. (24) A state can consent to federal jurisdiction, and in doing so, waive its right to sovereign immunity, either explicitly or through its behavior. (25) A state's behavior and the resulting waiver of sovereign immunity has been the center of the most recent discussion amongst the varying circuits and the United States Supreme Court. (26)

While there has been some discussion on the effects of a state's actions within federal trademark litigation, all courts agree that the mere entry into the trademark system by a state party will not suffice as a general, constructive waiver of its sovereign immunity. (27) Other state party actions, such as removal from state to federal court, have been considered as voluntary or explicit expressions of waiver to sovereign immunity. (28) Recent circuit court decisions have split with regard to state parties that voluntarily enter the federal court system in response to an adverse administrative ruling and consistently assert their immunity at both the administrative board and the federal court levels. (29) As described by the United States Court of Appeals for the First Circuit, the "challenge of interpreting Lapides has divided the courts of appeals." (30) However, the Supreme Court has yet to specifically address the question of whether the default rule on state sovereign immunity should be one of absolute or restrictive immunity. (31)

In Board of Regents of the University of Wisconsin System v. Phoenix International Software, Inc., the United States Court of Appeals for the Seventh Circuit considered whether a state agency, having voluntarily entered the federal district court system by appealing an adverse administrative ruling, may invoke sovereign immunity protection against the opposing party's compulsory counterclaims. (32) The court recognized that state agencies would normally be able to invoke this type of protection from actions that were filed against them in district courts. (33) However, the court was reluctant to grant Eleventh Amendment protection to those agencies that voluntarily enter the federal system in hopes of gaining a favorable decision when other methods were available to achieve the same results. (34) The court relied heavily on the Supreme Court precedent addressing the issue of a state's waiver to such protection through voluntary actions, noting that when a party chooses the path of the federal district courts, it is essentially both filing an appeal of the previous ruling and commencing a new action. (35)

The Seventh Circuit found that when Wisconsin filed its appeal in the district court, it had availed itself of the federal district courts in a purposeful effort to gain a more favorable ruling to its adverse decision. (36) This voluntary action, while possibly advantageous from a litigation standpoint, effectively waived Wisconsin's sovereign immunity defense to any and all compulsory counterclaims that resulted from the same transaction. (37) The court reasoned that Wisconsin should not be afforded Eleventh Amendment protection when they have only themselves to blame for litigating in the federal courts. (38) The court dismissed Wisconsin's argument that it had been forced into the federal courts to appeal the administrative ruling and found the situation to be similar to those cases in which state parties remove a state claim to federal...

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