Rhoades v. Avon Products, Inc.

• Decision Date: 15 October 2007
• Docket Number: No. 05-56047.,05-56047.
• Citation: 504 F.3d 1151
• Parties: Dean RHOADES; DermaNew, Inc., a California corporation, Plaintiffs-Appellants, v. AVON PRODUCTS, INC., a New York corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

504 F.3d 1151

Dean RHOADES; DermaNew, Inc., a California corporation, Plaintiffs-Appellants, v. AVON PRODUCTS, INC., a New York corporation, Defendant-Appellee.

No. 05-56047.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 7, 2007.

Filed October 15, 2007.

Steven A. Freund and Donald B. Rosen, Law Offices of Steven A. Freund, A Professional Corporation; and Howard Posner, Los Angeles, CA, for the plaintiffs-appellants.

Michelle M. Graham, and William R. Golden, Jr., Kelley Drye & Warren, LLP, New York, NY, for the defendant-appellee.

Appeal from the United States District Court for the Central District of California; Manuel L. Real, District Judge, Presiding. D.C. No. CV-05-02169-R.

Before: JOHN T. NOONAN, ANDREW J. KLEINFELD, and RICHARD A. PAEZ, Circuit Judges.

PAEZ, Circuit Judge:

In this trademark declaratory relief action, we must decide whether the district court properly dismissed Plaintiffs' case for lack of subject matter jurisdiction. In their complaint, Plaintiffs sought a declaration that several of their trademarks did not infringe on Defendant's registered marks. The jurisdictional issue turns on whether Plaintiffs alleged a constitutionally sufficient case or controversy in their First Amended Complaint ("FAC"). We must also decide whether related proceedings that were pending before the Trademark Trial and Appeal Board ("TTAB") provided an appropriate basis for the district court to invoke the doctrine of primary jurisdiction in order to dismiss Plaintiffs' action and, if not, whether the court properly exercised its discretion under 28 U.S.C. § 2201 when it declined to assert jurisdiction.

We have jurisdiction pursuant to 28 U.S.C. § 1291, and we hold that the allegations in the FAC alleged a true case or controversy that established subject matter jurisdiction. We also hold that, although the TTAB provides a forum to address trademark registration issues, the availability of such a forum does not justify the application of the doctrine of primary jurisdiction as a basis for dismissing Plaintiffs' federal court action. Thus, Plaintiffs were not required to wait for the completion of TTAB proceedings before seeking declaratory relief in federal court. We further hold that, under the circumstances of this case, the district court abused its discretion in declining to assert jurisdiction over Plaintiffs' request for declaratory relief. Finally, because of the firmly expressed views of the assigned district judge, we direct that, on remand, the case be reassigned to a new judge.

I. FACTUAL AND PROCEDURAL BACKGROUND

DermaNew is a cosmetics and skin care company that patented and distributes, among other things, hand-held microdermabrasion devices and related skin care products.¹ DermaNew's various products and slogans include "DermaNew," "KeraNew," "GemaNew," "DermaNew Institute," "If It Is Not DermaNew, It Is Not Personal Microdermabrasion," and "DermaNew Palm Microdermabrasion System." Plaintiff Dean Rhoades, who owns DermaNew and these products, has attempted to register these marks with the United States Patent and Trademark Office ("PTO"). Avon Products, Inc., ("Avon"), a well-known beauty product company that distributes a skin-care product line called ANEW, challenged DermaNew's registration applications in the TTAB. Avon contested five of DermaNew's registration applications by filing opposition proceedings, and requested the cancellation of the registration of two more. See 37 C.F.R. §§ 2.61-2.209 (describing the rules of practice in trademark cases). At the time Plaintiffs commenced their federal court action, therefore, seven trademark proceedings were pending before the TTAB. Avon also initiated opposition or cancellation proceedings against DermaNew in other countries, including Brazil, Canada, Hong Kong, Israel, South Korea, and the European Community.

In 2001, soon after Avon filed its first TTAB opposition proceeding, the parties began settlement negotiations. According to DermaNew's First Amended Complaint, at a settlement meeting attended by Rhoades and his wife at Avon's counsel's law offices, John Bergin, Avon's in-house chief trademark counsel

became agitated and pounded his fist on the table, explaining in substance, if not these actual words, "You have 60 days to get rid of all your products with the DermaNew trademark on it and you will never use it again or Avon will sue you for trademark infringement and you will have to pay for our losses and legal fees, too." Additional comments by Bergin at that meeting included repetition of the threat of a trademark infringement lawsuit, and a promise that Avon would appeal any adverse court decision.

Avon responds that these allegations are "wholly fabricated."

Settlement negotiations lasted more than four years, always, according to the FAC, "under the explicit threat of a[trademark] infringement lawsuit." For example, on October 4, 2001, Avon's counsel sent a letter "for settlement purposes only" that stated that "Avon has lost confidence that a settlement will realistically take place" and that "if [DermaNew] is unwilling to accept [Avon's settlement] terms ..., we will immediately proceed with all pending proceedings and initiate whatever additional proceedings or litigation is [sic] necessary to protect Avon's trademark rights." On March 22, 2005, Avon's counsel informed DermaNew's counsel that "Avon would not `give up its right to damages'" unless DermaNew accepted Avon's settlement offer. DermaNew interpreted this statement as threatening an infringement lawsuit because only in a federal court infringement lawsuit could Avon recover damages. See 15 U.S.C. § 1114.² Finally, on March 24, 2005, Avon's counsel declared negotiations to be "at an impasse."

On March 24, 2005, DermaNew filed a complaint in the Central District of California, seeking a declaratory judgment that its trademark applications do not infringe on Avon's. See 28 U.S.C. § 2201. Avon responded with a motion to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), asserting that the district court lacked subject matter jurisdiction and, in the alternative, that the court should decline to exercise jurisdiction because the action was brought in bad faith to avoid discovery obligations in the TTAB proceedings. DermaNew responded by amending its complaint ("the FAC"), and by filing an opposition to the motion to dismiss. The FAC attempted to cure the alleged jurisdictional defects in the original complaint, while the opposition to the motion to dismiss forcefully disputed the allegations of bad faith. The opposition noted, for instance, that "by filing the instant complaint [for declaratory relief] Rhoades will have the same discovery obligations, including depositions, as he would in the multitude of proceedings in the TTAB, except the discovery will be in one proceeding rather than seven or more."

Avon's reply to the opposition argued that the FAC did not cure the jurisdictional defects, largely because the alleged threats of infringement litigation were excludable under Federal Rules of Evidence 408, which limits the use of statements made during settlement negotiations. At the hearing on the motion to dismiss, DermaNew's counsel tried to respond to Avon's arguments, but the court ruled, without any additional elaboration:

I think that the complaint is improper, brought for an improper motive, and I'm not exercising my discretion to undertake the declaratory judgment action since it should be back where it belongs and be finished there motion [sic]. And the motion to dismiss is granted.

When DermaNew tried to argue that one district court action would better serve judicial economy than seven TTAB actions that might ultimately end up as an infringement action in the district court anyway, the court interrupted:

"Counsel, I've already ordered. I gave you the opportunity of an order."

The hearing was brief, essentially consisting of the above colloquy.

The court followed its oral ruling with a written order dismissing the action pursuant to Rules 12(b)(1) (lack of jurisdiction) and 12(b)(6) (failure to state a claim upon which relief can be granted). DermaNew timely appealed.

II. STANDARD OF REVIEW

We review de novo dismissals under Rules 12(b)(1) and 12(b)(6). Holcombe v. Hosmer, 477 F.3d 1094, 1097 (9th Cir. 2007). "[F]or the purposes of" reviewing such dismissals, and where, as here, no evidentiary hearing has been held, "all facts [alleged in the complaint] are presumed to be true." Id.; see McLachlan v. Bell, 261 F.3d 908, 909 (9th Cir.2001). District court decisions "about the propriety of hearing declaratory relief actions ... [are] reviewed for abuse of discretion." Wilton v. Seven Falls Co., 515 U.S. 277 289-90, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995).

III. DISCUSSION

A. Dismissal Under Rule 12(b)(1)³

As required by Article III, courts may adjudicate only actual cases or controversies. U.S. CONST. art. III, § 2, cl.1. When presented with a claim for a declaratory judgment, therefore, federal courts must take care to ensure the presence of an actual case or controversy, such that the judgment does not become an unconstitutional advisory opinion. See Pub. Serv. Comm'n v. Wycoff, Co., 344 U.S. 237, 244, 73 S.Ct. 236, 97 L.Ed. 291 (1952) ("The disagreement [underlying the declaratory relief action] must not be nebulous or contingent but must have taken on a fixed and final shape so that a court can see what legal issues it is deciding, what effect its decision will have on the adversaries, and some useful purpose to be achieved in deciding them."). Absent a true case or controversy, a complaint solely for declaratory relief under 28 U.S.C. § 2201 will fail for lack of jurisdiction under Rule 12(b)(1). See Fleck and Assoc., Inc. v. Phoenix, an Arizona Mun. Corp., 471 F.3d 1100, 1103-04 (9th Cir.2006) (noting, in a declaratory relief action, that a true "case or controversy" is required to...