Storey v. Cello Holdings, L.L.C.

• Decision Date: 09 October 2003
• Docket Number: Docket No. 02-7281.
• Parties: Lawrence STOREY, Plaintiff — Appellee, v. CELLO HOLDINGS, L.L.C., Cello Music and Film Systems, Inc., Defendants — Appellants, Herrick, Feinstein LLP and Odin, Feldman & Pittleman, P.C., Appellants.
• Court: U.S. Court of Appeals — Second Circuit

347 F.3d 370

Lawrence STOREY, Plaintiff — Appellee, v. CELLO HOLDINGS, L.L.C., Cello Music and Film Systems, Inc., Defendants — Appellants, Herrick, Feinstein LLP and Odin, Feldman & Pittleman, P.C., Appellants.

Docket No. 02-7281.

United States Court of Appeals, Second Circuit.

Argued: May 7, 2003.

Decided: October 9, 2003.

COPYRIGHT MATERIAL OMITTED

Franklin H. Stone, Law Office of Franklin H. Stone, Brooklyn, NY, for defendants-appellants Cello Holdings, L.L.C. and Cello Music and Film Systems, Inc.

Elkan Abramowitz (Geri S. Krauss, Elizabeth Small, and Marianne Yen, of counsel), Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., New York, NY, for appellants Herrick, Feinstein LLP and Odin, Feldman & Pittleman, P.C.

James G. McCarney (Thomas E. Engel, of counsel), Engel & McCarney, New York, NY, for plaintiff-appellee.

Before: MESKILL, JACOBS, and SOTOMAYOR, Circuit Judges.

SOTOMAYOR, Circuit Judge.

Broadly framed, this appeal implicates the contentious and ongoing conflict between trademark rights-holders and Internet domain-name registrants. Where the former seek to prevent consumer confusion by policing others' use of the trademarks that identify their goods, services or identities, the latter have acquired rights in domain names, which may be identical or confusingly similar to trademarks, through a first-come, first-serve process that does not consider trademark rights. Plaintiff-appellee Lawrence Storey seeks a declaration that his use of the domain name "cello.com" is lawful, while defendants-appellants Cello Holdings, L.L.C. and Cello Music and Film Systems, Inc. (collectively "Cello") assert that their uncontested rights to use the trademark "cello" in connection with the sale of audio equipment make their claim to the registration of "cello.com" superior to Storey's claim. Relying on the Anticybersquatting Consumer Protection Act ("ACPA"), Pub.L. No. 106-113, 113 Stat. 1501 (1999), Cello accuses Storey of "cyberpiracy," "cybersquatting," or "domain-name hijacking," rhetoric that suggests the illegal possession or occupation of property belonging to Cello under the trademark laws. Storey, in turn, paints Cello's litigious conduct as "reverse domain-name hijacking" or the overreaching use of the mechanisms established to remedy cybersquatting against a registrant with a legitimate interest in his domain name.

As this dispute comes before us on appeal, however, the issues are largely procedural and primarily concern the impact of the extended litigation that has already occurred between the parties on the arguments that the parties presented to the district court. An initial action (the "First Action") brought by Cello against Storey was dismissed "with prejudice," but a subsequent alternative dispute-resolution panel, operating under the terms of the Uniform Domain-Name Dispute-Resolution Policy ("UDRP"), ordered the domain name "cello.com" transferred to Cello. Storey then filed a complaint (the "Instant Action") in the United States District Court for the Southern District of New York (Chin, J.), bringing a cause of action under the ACPA as provided in 15 U.S.C. § 1114(2)(D)(v), and seeking re-transfer of the domain name and a declaration that his use of "cello.com" is lawful. Storey argued, inter alia, that the transfer ordered by the UDRP panel was improper because Cello was barred from bringing its claims before that panel because the First Action had been dismissed with prejudice. Cello, in turn, argued that the district court lacked subject matter jurisdiction to review the panel's decision and was an improper forum under the UDRP, and, alternatively, that Storey was barred from bringing the Instant Action because the UDRP panel decision, which had considered and rejected Storey's res judicata defense, was binding. The district court ruled in Storey's favor, holding that the preclusive effect of the First Action barred Cello "from reasserting its claims in the arbitration proceedings." Storey v. Cello Holdings, L.L.C., 182 F.Supp.2d 355, 362 (S.D.N.Y.2002).

This appeal, accordingly, addresses the effect that the two prior proceedings — the First Action and the UDRP administrative proceeding — have on Storey's claim for relief under § 1114(2)(D)(v) in the Instant Action. We easily conclude that the district court had subject matter jurisdiction over Storey's claim inasmuch as the ACPA provides for federal jurisdiction over claims brought under § 1114(2)(D)(v). See 15 U.S.C. § 1121(a). We also reject Cello's argument that the Southern District of New York was an inappropriate venue for Storey's claim.

Turning to the merits of the district court's ruling, we vacate the judgment of the district court, noting two errors in its analysis. First, the district court erred in focusing on whether Cello was barred from bringing the UDRP administrative proceeding because the issue in the Instant Action is neither the res judicata effect of the First Action on the UDRP panel, nor the res judicata effect of the UDRP proceeding on the Instant Action. The district court appears to have believed that the Instant Action involved review or enforcement of the UDRP panel decision. Because a domain-name registrant's claim under § 1114(2)(D)(v) does not involve review of a UDRP decision, the district court's inquiry should have been on Cello's right in the Instant Action to contest the lawfulness of Storey's use of "cello.com" directly under the ACPA. Second, we hold that the res judicata effect of the First Action is not dispositive in the Instant Action as Cello may have a claim premised on facts arising after the First Action. The "bad faith intent to profit" element of a trademark rights-holder's ACPA claim may be premised on the domain-name registrant's ongoing use of the domain name. In this respect ACPA rights differ from traditional property rights in land, to which ownership of a domain name is often analogized. The judgment in the First Action, therefore, does not bar Cello from arguing that Storey's use of "cello.com" is unlawful insofar as Cello relies on conduct post-dating the First Action to make its claim.

The district court also granted Storey's motion for sanctions against both Cello and its counsel under Fed.R.Civ.P. 11(b). Due in part to the lack of well-established law in this area and due in part to the limited scope of the notice Cello and its counsel received, we also vacate the Rule 11 sanctions.

BACKGROUND

A. The parties

In 1997, Storey registered the domain name¹ "cello.com" with Network Solutions, Inc. ("NSI"), a domain-name registrar,² as part of an attempt to register approximately twenty musical-instrument domain names. Cello Holdings, a Delaware limited liability company, registered the trademark "Cello" on the federal register for use in the audio equipment business in 1995. Cello Music and Film Systems, Inc. sold high-quality audio equipment, although it had allegedly ceased operations by the time the Instant Action was initiated.

B. The First Action

In 1997, Cello brought the First Action against Storey, initially alleging only trademark dilution. After discovery and while cross-motions for summary judgment were pending, the ACPA was signed into law, and Cello sought to add an ACPA claim. After requesting and receiving additional briefing on the ACPA, the district court held that genuine issues of material fact existed as to all the elements of Cello's trademark and ACPA claims, and granted Cello leave to amend its complaint, see Cello Holdings, L.L.C. v. Lawrence-Dahl Cos., 89 F.Supp.2d 464, 472-75 (S.D.N.Y. 2000), which Cello did.

On August 15, 2000, shortly before the case was scheduled for trial, the district court issued an order stating the following:

It having been reported to this Court that the above entitled action has been settled, IT IS ORDERED that this action be, and the same hereby is, discontinued with prejudice but without costs; provided, however, that if settlement is not consummated within thirty days of the date of this order, either party may apply by letter within the 30-day period for restoration of the action to the calendar of the undersigned, in which event the action will be restored.

Neither party applied for restoration within the thirty day period. Correspondence from Cello's counsel to Storey's counsel, dated August 16, 2000, suggests that both parties received this order, states that the parties had informed Judge Chin that they believed they had "reached an agreement for voluntarily [sic] dismissal of this action," and offers to draft "some general release language." It also reports a conversation that occurred between Cello's counsel and Judge Chin's courtroom deputy as follows: "[The courtroom deputy] asked if I thought we could work out the issues within thirty days. I told him that I thought we could. He said that was good, because he was going to have Judge Chin issue a `thirty-day order.'"

The information conveyed to the district court by Cello's counsel that led to this thirty-day order, however, may not have been an accurate description of the agreement between the parties. In its January 24, 2002 Opinion in the proceedings now on appeal, the district court described the events leading to its August 15, 2000 order as follows: "Cello's counsel advised the Court that the case had been `settled.' In fact, as the Court has now learned, the First Action had not actually `settled,' but instead Cello had merely decided to discontinue its claims. The parties did not enter into a settlement agreement." Storey, 182 F.Supp.2d at 358. Cello contends that, although "[a]ttempts were made to negotiate a settlement agreement, ... [n]o agreement ... was reached other than to enter a voluntary dismissal of the First Action."

C. The September 25 Letter

On September 25, 2000, after the thirty-day window for restoration of the First Action had passed, Storey's counsel sent a letter (the "September 25 Letter") to "Cello Limited,"...