Fault Lines in Trademark Default Judgments

• Publication year: 2014

Fault Lines in Trademark Default Judgments

David S. Welkowitz

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Welkowitz: Fault Lines in Trademark Default Judgments

FAULT LINES IN TRADEMARK DEFAULT JUDGMENTS

David S. Welkowitz^*

TABLE OF CONTENTS

I. DEFAULTS AND DEFAULT JUDGMENTS.................................................103

II. WILLFULNESS AND THE LANHAM ACT..................................................104

III. DEFAULTS AND WILLFULNESS.................................................................108

IV. DEFAULT, WILLFULNESS, AND BANKRUPTCY......................................119

V. COMPARING TRADEMARK DEFAULTS TO PATENT AND COPYRIGHT—CONTRAST AND CONFLUENCE.....................................123

A. PATENT CASES......................................................................................123
B. COPYRIGHT CASES...............................................................................128

VI. STATUTORY DAMAGES AND DUE PROCESS..........................................130

VII. IS IT A PROBLEM TO BE SOLVED—AND HOW?....................................134

A. A REQUIREMENT OF NOTICE............................................................135
B. DEMANDING FURTHER PROOF.........................................................137

VIII. OBSERVATIONS, SUGGESTIONS, AND CONCLUSIONS.........................138

APPENDIX..................................................................................................................142

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Imagine that you receive in the mail an envelope from a law firm. Inside is (what we in the legal profession know as) a summons and complaint and a form to be signed and returned acknowledging "service" of these papers. The complaint accuses you of some kind of infringement and/or dilution of a trademark or perhaps cybersquatting if you registered an internet domain name or domain names. The relatively lengthy document you have received accuses you of "willfully and maliciously" violating the law and asks for an injunction and damages in the hundreds of thousands, or even millions of dollars. It also asks that you be made to pay "costs, and reasonable attorneys' fees" in an unspecified amount. Now, you don't have hundreds of thousands of dollars, let alone millions. You don't know any attorneys, except your second cousin in Poughkeepsie.¹ And, after reading the complaint, you realize that at least some of it is true—you did do the basic things it says you did (sold certain merchandise, used a certain name for your store, products, or services, registered a particular domain name or domain names), although you do not believe that you acted "willfully and maliciously." Given all of that, you might think it is just junk mail, a joke, or something else you should ignore.² Or you ignore it because you don't know what else to do. If you wait long enough, the sender likely will act—they will obtain an entry of default from the clerk of the court,³ and will follow it up with a motion for a default judgment.⁴ At that time, the court would find that you did "willfully and maliciously" infringe and could award substantial damages. For cybersquatting, for example, the law allows damages of $1,000 to $100,000 per domain name that you registered, without any showing of actual damages.⁵ In addition, you may be compelled to pay the plaintiff's attorneys' fees. The Lanham Act allows for awards of

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attorneys' fees in "exceptional cases."⁶ If the court finds your infringement to be "willful," it may conclude that the case is "exceptional."⁷

This somewhat melodramatic narrative illustrates the general issue I propose to address. Many trademark cases end with default judgments. Because of the rules regarding defaults, allegations of willful conduct often are accepted with little concrete evidence. Moreover, courts often find willfulness and an exceptional case based on the default itself.⁸ Although default judgments serve valid purposes, both in trademark law and in litigation generally, the easy finding of willfulness, which greatly enhances potential liability, should be exercised with caution. This Article examines findings of willfulness and exceptionality in default cases in trademark law—and, for comparison, in some copyright and patent cases. The Article expresses skepticism about the process of making such findings in many cases, as well as about the disuniformity of such findings. Thereafter, I propose some process guidelines for default cases to properly balance the right of a trademark owner to an appropriate recovery against the right of a defendant to not be harshly treated for the mere act of defaulting. I also make some general observations about the manner in which courts decide these cases.

I. DEFAULTS AND DEFAULT JUDGMENTS

Procedurally, default judgments in federal court are governed by Rule 55.⁹ Under Rule 55(a), if a defending party "fail[s] to plead or otherwise defend"¹⁰ the clerk must enter a default.¹¹ This is not a judgment. Judgments are

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governed by Rule 55(b); a clerk may only enter a judgment "for a sum certain."¹² Otherwise, a motion must be made to the court for a default judgment.¹³ The court has discretion about the entry of the judgment and the relief granted,¹⁴ although it is limited to the kind of relief requested by the complaint and it cannot award more than the amount requested in the complaint.¹⁵ The defendant is only required to receive notice of the hearing on the motion for a default judgment if he or she "has appeared personally or by a representative."¹⁶ Appellate courts have set forth various factors to guide district judges when deciding whether to enter default judgments.¹⁷ Moreover, judges will accept the "well pleaded" allegations of the complaint as true—conclusory allegations that would not suffice to raise plausible factual claims need not be accepted.¹⁸ Although courts frequently hold hearings before awarding damages, a court may decide the issue on the motion papers.¹⁹

II. WILLFULNESS AND THE LANHAM ACT

The Lanham Act uses the term "willful" in a number of places, although not as an element of a trademark infringement claim. Trademark infringement does not require fault or bad faith; demonstrating willful conduct is not necessary to obtain an injunction.²⁰ An injunction is the most common form of relief for

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trademark infringement,²¹ and default judgments commonly include such relief.²² "Willful" conduct is used instead to enhance the relief available to successful litigants beyond an injunction. Monetary relief generally is governed by Section 35 of the Lanham Act,²³ and it is this form of relief for which willfulness is most relevant. Sometimes willfulness is judicially inserted into the analysis even if the statute does not require it, while in other cases the statute specifically refers to "willful" activity. Section 35(a) allows plaintiffs to recover actual damages and/or defendant's profits. Actual damages sustained by plaintiff do not ordinarily require proof of willfulness.²⁴ However, some circuits require a showing of willfulness if defendant's profits are to be recovered.²⁵ In addition, Section 35(a) allows the court to enhance the damages—up to three times actual damages or whatever amount is "just" if profits are an inadequate measure. Courts tend to use willfulness as a factor in deciding whether to enhance the damages even though the statute bars using enhancement as a penalty.²⁶ The sole mention of willfulness in Section 35(a) is in reference to dilution; Section 35(a) applies only to "a willful violation under section 1125(c) of this title" (i.e., Section 43(c)).²⁷ Section 43(c), the dilution provision of the Lanham Act, contains a very curious reference to willfulness. Under Section 43(c)(5), damages in dilution cases are only available if defendant "willfully intended to trade on the recognition of the famous mark" or "willfully

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intended to harm the reputation of the famous mark."²⁸ This seeming redundancy of "willful" and "intent" is not explained.

For specific types of infringement, Section 35 contains statutory damage provisions (i.e., provisions allowing damage awards without any actual proof of harm) and additional enhanced damage provisions. One such situation involves counterfeit marks.²⁹ Section 35(b) requires a trebling of damages or profits for a knowing use of a counterfeit mark.³⁰ If actual damages or defendant's profits cannot be shown—a real possibility if defendant does not appear—then Section 35(c) provides statutory damages for the use of counterfeit marks. Section 35(c)(1) gives a very wide range: $1,000 to $200,000 per mark per type of goods sold "as the court considers just."³¹ The ceiling increases from $200,000 to $2 million "if the court finds that the use of the counterfeit mark was willful."³²

If defendant violates the anti-cybersquatting provisions of Section 43(d)(1), then statutory damages are available under Section 35(d). The permissible amounts range from $1,000 to $100,000 per domain name;³³ although not specified in the statute, courts use willfulness as a factor in determining what amount is "just."³⁴

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Finally, Section 35(a) permits an award of attorneys' fees "in exceptional cases."³⁵ The determination of exceptionalism involves several factors, but willful infringement is one of the key factors.³⁶ There has been some disagreement about whether electing statutory damages under Section 35(c) (for counterfeits) precludes an award of attorneys' fees under Section 35(a).³⁷ The Second Circuit has ruled that a plaintiff may be awarded both statutory damages and attorneys' fees.³⁸

Thus, willfulness is an important aspect of trademark remedies, though not of liability in general. But all of these statutory provisions lack a crucial feature—a definition of "willful." Is it any intentional conduct? That seems too broad. It would turn almost any infringement suit into a willful infringement, since defendants normally intend their own actions. Perhaps it is...