Electro Source v. Brandess-Kalt-Aetna Group, Inc.

• Decision Date: 14 August 2006
• Docket Number: No. 04-55844.,No. 04-56648.,No. 04-55909.,04-55844.,04-55909.,04-56648.
• Citation: 458 F.3d 931
• Parties: ELECTRO SOURCE, LLC, a California limited liability company, Plaintiff-counter-defendant-Appellant, v. BRANDESS-KALT-AETNA GROUP, INC., an Illinois corporation, Defendant-Appellee, Pelican Products, Inc., a California corporation, Defendant-counter-claimant-Appellee. Electro Source, LLC, a California limited liability company, Plaintiff-counter-defendant-Appellee, v. Brandess-Kalt-Aetna Group, Inc., an Illinois corporation, Defendant-Appellant, Pelican Products, Inc., a California corporation, Defendant-counterclaimant-Appellant. Electro Source, LLC, a California limited liability company, Plaintiff-counter-defendant-Appellee, v. Brandess-Kalt-Aetna Group, Inc., an Illinois corporation, Defendant-Appellant, Pelican Products, Inc., a California corporation, Defendant-counter-claimant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

458 F.3d 931

ELECTRO SOURCE, LLC, a California limited liability company, Plaintiff-counter-defendant-Appellant, v. BRANDESS-KALT-AETNA GROUP, INC., an Illinois corporation, Defendant-Appellee, Pelican Products, Inc., a California corporation, Defendant-counter-claimant-Appellee.

Electro Source, LLC, a California limited liability company, Plaintiff-counter-defendant-Appellee, v. Brandess-Kalt-Aetna Group, Inc., an Illinois corporation, Defendant-Appellant, Pelican Products, Inc., a California corporation, Defendant-counterclaimant-Appellant.

Electro Source, LLC, a California limited liability company, Plaintiff-counter-defendant-Appellee, v. Brandess-Kalt-Aetna Group, Inc., an Illinois corporation, Defendant-Appellant Pelican Products, Inc., a California corporation, Defendant-counter-claimant-Appellant.

No. 04-55844.

No. 04-55909.

No. 04-56648.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 4, 2006.

Filed August 14, 2006.

Larry C. Russ and Clark D. Gross, Russ, August & Kabat, Los Angeles, CA, for Electro Source, LLC.

Gregory B. Wood, Fulbright & Jaworski, LLP, Los Angeles, CA, for Brandess-Kalt-Aetna Group, Inc. and Pelican Products, Inc.

Appeal from the United States District Court for the Central District of California; Nora M. Manella, District Judge, Presiding. D.C. No. CV-02-07974-NM.

Before SIDNEY R. THOMAS, M. MARGARET McKEOWN, and MARSHA S. BERZON, Circuit Judges.

McKEOWN, Circuit Judge.

Is a summary judgment determination of abandonment appropriate when the record supports an inference that the trademark holder—a small, troubled business—continued to transport and sell trademarked goods in the ordinary course of trade as part of a good faith effort to deplete inventory? The answer is no, because the trademark law requires both discontinuance of all bona fide trademark use in the ordinary course of trade and an intent not to resume such use. 15 U.S.C. § 1127. Legitimate commercial transport or sales of trademarked goods, even for a failing business, are sufficient to defeat a claim of abandonment.

Ronald Mallett owned federal Trademark No. 2,073,287 (the "Pelican Mark"), consisting of the word "pelican" below an outline of a flying pelican in a circle, for a backpack/ luggage line. His business had enjoyed some modest success but later was set back by dwindling prospects. Nonetheless, Mallett kept plugging, selling a few backpacks and promoting them at trade shows for several years until he assigned the Pelican Mark to Electro Source, LLC ("Electro Source"). Because he continued to transport and sell his trademarked goods in commerce, he never ceased using the Pelican Mark. The district court concluded, however, that Mallet's use of the mark while depleting his inventory was neither bona fide nor in the ordinary course of trade, and that he therefore abandoned the mark. In reaching its decision, the district court improperly weighed evidence at the summary judgment stage and applied a mistaken legal standard. We reverse the district court's cancellation of the mark and its determination that Mallett abandoned the Pelican Mark before assigning it and remand for further proceedings.

BACKGROUND

In 1995, Mallett began selling goods under the Pelican Mark. The mark was primarily designed by Mallett's friend Tom Robbins, who lived in Thailand and had access to manufacturing facilities. After working out an unwritten "handshake" agreement, Robbins agreed to manufacture Pelican Mark products overseas, while Mallett agreed to design, market, and sell the goods in the United States.

On November 20, 1995, Mallett filed an application to register the Pelican Mark with the United States Patent and Trademark Office. In 1997, the Pelican Mark issued as Trademark No. 2,073,287, covering wallets, backpacks, totebags, and luggage.

Mallett transported and sold goods branded with the Pelican Mark from 1995 through 2002. At first, sales were promising. According to Mallett, his business was building up a reputation for making quality goods, including "the best backpack in the business." Mallett employed sales representatives to sell his products in 1996 and 1997.

In response to this promising trend, Mallett placed a very large order with Robbins in 1996. Unfortunately, sales did not meet expectations, and the 1996 inventory order was not depleted until 2002. Sales dropped sharply in 1997 and 1998. Disappointed with the sales, Robbins parted ways with Mallett in 1998.

Mallett suffered another setback in 1998, undergoing multiple surgeries that spanned the entire calendar year. During this time, Mallett's business took a sharp turn for the worse. His flagging sales required him to fire his sales representatives, and he no longer used invoices or letterhead with the Pelican Mark. Instead, he began making "on the spot" sales for cash, only some of which he documented. Also, because his business failed to show a profit, he ceased to segregate the business income on his tax returns. By late 1998, Mallett was selling backpacks at a steep discount.

In 1999, Mallett took a job selling products as a commissioned salesman for various manufacturers, including No Fear, Billabong, and Koko Island. Although his arrangement with Koko Island was subject to a non-competition agreement, Mallett continued to market his remaining Pelican Mark inventory on the assumption that his products (backpacks and totes) did not compete with the Koko Island goods (shorts, hats and shirts).

From 1999 to 2002, Mallett tried to sell Pelican Mark products out of the trunk of his car to Koko Island customers. Mallett also went to a Florida trade show twice a year (as he had been doing since 1995) to market his products. Documented sales of Pelican Mark goods were made during this time; Mallett also claims that many other undocumented cash transactions were made as well.¹ Although Mallett's enterprise was not as successful as he had hoped, his goods always bore the Pelican Mark and, according to Mallett, his business continued to enjoy the reputation of having the "best-made" backpack.

Mallett testified that he continued to sell products out of his car and travel bi-annually to the Florida trade show until he assigned the Pelican Mark, along with all the goodwill of the business, to Electro Source on August 5, 2002. In return for the assignment, Electro Source paid Mallett $15,000 and a grant-back license to use the Pelican Mark on certain goods, subject to maintenance of product quality. At the time of the assignment, Mallett had at least ten boxes of inventory bearing the Pelican Mark. Using his license, Mallett continued to market Pelican Mark goods until finally, in December 2002, he sold his remaining inventory to Electro Source.

Pelican Products, Inc. and Brandess-Kalt-Aetna Group, Inc. (collectively "PPI") manufacture, market, and distribute a variety of products under the trademarks "Pelican Products," "Pelican," and "Peli Products." PPI also registered the mark "www.pelican.com." Electro Source commenced suit against PPI in 2002, setting forth a variety of claims, including trademark infringement of its Pelican Mark. PPI responded with various counterclaims and defenses alleging, among other things, that Mallett had abandoned the Pelican Mark prior to the assignment to Electro Source. PPI moved for summary judgment. The district court agreed with PPI that the Pelican Mark had been abandoned, thus rendering the subsequent assignment to Electro Source ineffective. The court ordered cancellation of the Pelican Mark but denied PPI's application for attorneys' fees. Electro Source appeals the determination of abandonment and the cancellation order, and PPI cross-appeals the denial of attorneys' fees.

ANALYSIS

This appeal focuses on a single legal question: does the Lanham Act mandate a finding of trademark abandonment where the record on summary judgment supports an inference that the trademark holder persisted in exhausting excess inventory of trademarked goods at reduced prices through good faith marketing and sales, despite the decline of his business?² To answer this question, we begin with § 1127 of the Lanham Act, giving its words their plain and ordinary meaning. See United States v. TRW Rifle 7.62X51mm Caliber, One Model 14 Serial 593006, 447 F.3d 686, 689 (9th Cir.2006).

I. SECTION 1127 OF THE LANHAM ACT DEFINES TRADEMARK ABANDONMENT AS REQUIRING DISCONTINUANCE OF TRADEMARK USE AND INTENT NOT TO RESUME SUCH USE

The Lanham Act defines abandonment as (1) discontinuance of trademark use and (2) intent not to resume such use:

A mark shall be deemed to be "abandoned" if . . . the following occurs:

(1) When its use has been discontinued with intent not to resume such use. Intent not to resume may be inferred from circumstances. Nonuse for 3 consecutive years shall be prima facie evidence of abandonment. "Use" of a mark means the bona fide use of such mark made in the ordinary course of trade, and not made merely to reserve a right in a mark.

15 U.S.C. § 1127 (emphasis added).

Neither "bona fide use" nor "ordinary course of trade" is defined in the statute. Both phrases, however, also appear in the statute's definition of "use in commerce," which provides:

The term "use in commerce" means the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark. For purposes of this chapter, a mark shall be deemed to be in use in commerce —

(1) on goods when —

(A) it is placed in any manner on the goods or their containers or the displays associated therewith or on the tags or labels affixed thereto ... and

(B) the goods are sold or transported in commerce ....

Id. (emphasis added). Because "trademark" is defined under the statute in part by the "bona fide intention to use [it] in commerce," id., and because both "use in commerce" and "use" for the purposes of abandonment mean "bona fide use ... in the course of ordinary trade," the meaning of "use"...