February 25, 2020

Lucky Brand Dungarees, Inc. v. Marcel Fashion Group, Inc.

FEDERAL JURISDICTION

When a Plaintiff Brings a Second Suit Against a Defendant for Continuing to Violate the Plaintiff’s Trademark, Is the Defendant Barred from Raising a Defense that It Did Not Raise in the Plaintiff’s Earlier Case?

CASE AT A GLANCE

In 2001, Marcel Fashion Group, Inc., sued Lucky Brand Dungarees, Inc., for violating its trademark. The parties settled the case and entered into a settlement agreement that, among other things, released Lucky from certain trademark claims in the future. In 2005, Marcel again sued Lucky for trademark violations. Lucky did not raise a defense based on the release, and Marcel prevailed. In 2011, Marcel yet again sued Lucky for ongoing trademark violations. This time, however, Lucky raised a defense based on the release.

Docket No. 18-1086
Argument Date: January 13, 2020
From: The Second Circuit
by Steven D. Schwinn
University of Illinois Chicago John Marshall Law School, Chicago, IL

INTRODUCTION

Under res judicata, a plaintiff is barred from raising a claim or issue that was litigated and resolved in an earlier case between the parties, or a claim or issue that a plaintiff could have raised in an earlier case, but didn’t. This rule helps promote finality in judgment and judicial efficiency by preventing relitigation of issues that are already settled. This case tests whether res judicata applies to defenses that a defendant might have raised in earlier litigation, but didn’t (here, Lucky’s release defense)—the so-called “defense preclusion.”

ISSUE

Can a defendant raise a defense in litigation that it could have raised, but didn’t, in earlier litigation between the parties?

FACTS

This long-running and complicated case centers around a trademark dispute between two apparel corporations and the ownership and use of the phrase “Get Lucky.” On the one side, Marcel Fashion Group is an apparel manufacturer and wholesaler based in Miami, Florida. Marcel has held the federally registered trademark GET LUCKY for uses related to clothing since 1986.

On the other side, Lucky is a global fashion brand, founded in 1990, that markets and sells competing apparel products at Lucky Brand stores nationwide. Lucky owns the federally registered trademark LUCKY BRAND, along with “other marks that include the word ‘Lucky’” (but not GET LUCKY).

The case started in 2001, when Marcel sued Lucky for trademark infringement after Lucky ran advertisements that used the phrase “Get Lucky.” Two years later, in 2003, the parties settled the matter and entered into the Settlement Agreement. Under the Agreement, Lucky agreed to “desist henceforth from use of ‘Get Lucky’ as a trademark” and to pay Marcel $650,000. Marcel, for its part, agreed to dismiss its claims and to release any claims it had or might have relating to Lucky’s right to “use, license and/or register the trademark LUCKY BRAND and/or any other trademarks, trade names, brands, advertising slogans or tag lines owned, registered and/or used by [Lucky]…as of the date of this Agreement.”

After the parties signed the Agreement, Marcel’s licensee, Ally Apparel, marketed a “Get Lucky” line of jeans and sportswear. At the same time, Lucky continued to use the phrase “Get Lucky” in its clothing designs and advertisements.

In 2005, Lucky sued Ally and Marcel, arguing that Marcel “had engaged in unfair business practices” and that the new “Get Lucky” line “infringed on [Lucky’s] trademarks.” Marcel counterclaimed, arguing that Lucky continued to infringe Marcel’s GET LUCKY mark and various other marks.

Lucky moved to dismiss Marcel’s counterclaims, arguing that Marcel should have raised them in the 2001 lawsuit and that the release in the 2003 Settlement Agreement absolved it of liability for infringement. The district court denied Lucky’s motion without prejudice, because it could “not say at this stage that all of the relevant aspects of the disputed counterclaims *** could have been raised prior to the 2003 dismissal and settlement of the  [2001] litigation.” In other words, some of Lucky’s infringements might have occurred after the parties entered into the Settlement Agreement and therefore might not have been covered by the release. The court nevertheless stated that Lucky could raise the release as a defense to Marcel’s action again “after the record is more fully developed, including further development of the nature and use of the post-2003 marks.”

The parties engaged in extensive discovery, and the case went to trial. The jury found in favor of Marcel, and the court entered an injunction prohibiting Lucky from using the GET LUCKY mark. Lucky did not appeal. Despite the court’s earlier invitation, Lucky declined to raise the release defense again at any point in the 2005 litigation.

In 2011, Marcel sued Lucky again, this time seeking relief for Lucky’s continued use of the LUCKY BRAND mark following the earlier injunction. As in the 2005 litigation, Lucky did not assert a release defense in the early stages of the 2011 litigation. Instead, Lucky moved for summary judgment on the basis that Marcel’s claims were precluded by res judicata based on the final judgment in the 2005 suit. The district court granted the motion, but the Second Circuit reversed, holding that Marcel’s alleged infringements occurred after the 2005 judgment (and therefore could not have been part of the 2005 judgment).

On remand, Marcel filed an amended complaint. This time, Lucky raised a defense (its only defense) based on the release and moved to dismiss. Marcel countered that Lucky was precluded by res judicata from raising the release defense, because Lucky failed to raise it in the 2005 litigation. The district court agreed with Lucky and granted the motion to dismiss. The Second Circuit reversed, holding that Lucky could have raised this defense, but did not, and therefore could not raise it now. This appeal followed.

CASE ANALYSIS

This case involves a federal jurisdictional principle called res judicata. As a general matter, res judicata prevents a plaintiff from relitigating a claim or issue against the same defendant that it lost, or that a court settled, in earlier litigation between the parties. It also prevents a plaintiff from litigating a claim or issue that the plaintiff could have raised against the same defendant in earlier litigation, but did not. (A quick note on nomenclature. Res judicata is also sometimes called “collateral estoppel.” It is also sometimes called “claim preclusion” when it applies to relitigated claims or “issue preclusion” when it applies to relitigated issues.) Res judicata is designed to promote finality of judgments and judicial efficiency by preventing parties from relitigating already-decided claims and issues.

This case tests whether res judicata applies not only to a plaintiff’s claims and issues, but also to a defendant’s defenses—in this case, Lucky’s release defense.

Lucky argues first that claim preclusion has no application to this case, because Marcel’s claims (and thus Lucky’s defense) are based on new and distinct actions that came after Marcel filed its initial complaint. It notes that both Second Circuit rulings below recognized that “all of the facts giving rise to the claims now at issue arose after the parties’ prior litigation ended.” It says that these events involve different conduct, different theories of liability, and different periods of time. Moreover, Lucky says that issue preclusion is inapplicable because, as the Second Circuit acknowledged, its “release defense ‘was in no way “actually litigated and determined”’ in the 2005 Action.”

Lucky argues next that the Second Circuit’s novel “defense preclusion” is out of step with basic principles of res judicata. For one, Lucky contends that the Second Circuit’s approach effectively precluded it from raising an issue, the release defense, that was never raised or decided by any prior court. Lucky says that this violates the general rule that res judicata only precludes issues that have been actually litigated and actually decided by a prior court.

For another, Lucky claims that the Second Circuit’s approach means that a defendant must raise every defense at the first opportunity and litigate it to judgment, in order to avoid losing it. Lucky asserts that this is in tension with the Federal Rules of Civil Procedure, which distinguish between compulsory and permissive counterclaims and thus permit defendants not to assert all of their claims at the earliest points of a lawsuit.

Finally, Lucky contends that the Second Circuit’s approach undermines the judicial efficiency purpose of res judicata, because that approach requires defendants to raise every possible defense. Lucky says that this is particularly problematic in trademark suits (like this one), because trademark rights “regularly wax and wane” and “depend[] on extrinsic facts that are constantly changing,” and thus “a defense to trademark infringement might be much stronger (or weaker) today than it was a decade ago.”

Marcel counters that defense preclusion is perfectly consistent with principles of res judicata. It claims that preventing a defendant who loses in one lawsuit from raising a defense in a subsequent lawsuit serves the finality and judicial efficiency purposes of res judicata. It contends that trademark suits, like this one, illustrate the point. For example, it says that defense preclusion can prevent a former trademark defendant from converting a neglected defense into a later affirmative infringement claim of its own in a subsequent suit for declaratory relief arising out of the same pattern of behavior. Another example: Marcel asserts that defense preclusion can bar a defendant from continuing to infringe a trademark after an initial judgment against it and force the plaintiff to file another infringement claim.

Marcel argues next that the Second Circuit correctly applied defense preclusion in this case. As an initial matter, it says that this case and the 2005 case arise out of the same set of facts, even though some of the alleged infringements occurred after the 2005 suit. According to Marcel, that’s because “[a] series of connected transactions do not cease to arise from a common nucleus of operative fact—they do not cease to form a single cause of action for preclusion purposes—simply because some precede and others follow the conclusion of a first lawsuit.” Marcel contends that applying defense preclusion to Lucky’s claims while at the same time allowing Marcel to pursue its claims is not at all inconsistent,  because Marcel’s claims are based on events that had not yet occurred in 2005.

Marcel goes on to argue that defense preclusion is appropriate against Lucky, because Lucky, as a “sophisticated litigant,” knew that it had a release defense in 2005 (and even initially raised it), but declined to pursue it. Marcel says that Lucky had no compelling reason not to pursue its release defense and that there is nothing unfair about denying Lucky the opportunity to raise it now, in this later litigation.

Finally, Marcel argues that Lucky’s arguments about precedent and the Federal Rules are wrong. Marcel says that Lucky is incorrect to claim that the Court foreclosed defense preclusion in Davis v. Brown, 94 U.S. 423 (1877). According to Marcel, that’s because Davis says only that a lawsuit on one negotiable instrument involves a different cause of action than a suit on a different negotiable instrument—a holding that says nothing about the application of defense preclusion when a defendant engages in a continuing pattern of offending behavior, as here. Moreover, Marcel contends that Lucky is incorrect to invoke the distinction between compulsory and permissive counterclaims in the Federal Rules. Marcel says that this distinction is just a “procedural implementation of one element of res judicata” that does not rule out applying other elements of res judicata and that, in any event, the labels don’t really matter: if allowing a defendant to relitigate any theory (call it a counterclaim, or a defense) would call into question the outcome of a prior suit, then the defense is barred. Finally, Marcel claims, counter to Lucky, that defense preclusion is fully consistent with due process, because it permits a defendant to raise and fully litigate its defense—in the earlier suit.

SIGNIFICANCE

This case will obviously resolve a key question in the long-running dispute between Marcel and Lucky over the use and infringement of Marcel’s trademark. But it’s important to note that a ruling for Lucky will mean only that Lucky can raise its release defense to Marcel’s most recent suit. Such a ruling would not guarantee that Lucky wins. (That’s because the parties continue to contest the meaning of the release.) For the same reason, a ruling for Marcel would mean only that Lucky cannot raise this defense; it would not guarantee that Marcel wins on its underlying infringement claim.

Beyond this case, the Court’s ruling will settle whether res judicata includes “defense preclusion” for all federal litigants. (Lucky argued in its petition for certiorari that the Second Circuit ruling created a split with three other circuits. Marcel disputed this. Either way, the Court’s ruling will settle the question.) The holding will either give defendants flexibility in raising defenses that they could have raised in earlier litigation, but didn’t; or it will restrict them from raising those defenses. As Marcel points out, this will probably matter most to litigants in cases with alleged ongoing violations, like this one.

Steven D. Schwinn is a professor of law at the University of Illinois Chicago John Marshall Law School and coeditor of the Constitutional Law Prof Blog. He specializes in constitutional law and human rights. He can be reached at 312.386.2865 or sschwinn@jmls.edu.

PREVIEW of United States Supreme Court Cases 47, no. 4 (January 13, 2020): 4–6. © 2020 American Bar Association

ATTORNEYS FOR THE PARTIES

  • For Petitioner Lucky Brand Dungarees, Inc., et al. (Dale M. Cendali, 212.446.4800)
  • For Respondent Marcel Fashions Group, Inc. (Michael B. Kimberly, 202.756.8901)