The Court of Appeals for the Second Circuit held that a Russian government-owned entity may challenge the validity of the assignment of the incontestable STOLICHNAYA marks to defendants. The assignment was allegedly procured by a series of transactions tainted by fraud, and the court reasoned that the marks’ incontestability did not shield them from a challenge to the assignment that allegedly granted defendants ownership. The court also found that the district court had federal jurisdiction to determine the validity of the assignment and ownership of the marks as part of plaintiff’s claims brought under the Lanham Act.
STOLICHNAYA, which means “from the capital” in Russian, is a well-known name that the Soviet government used to sell vodka worldwide before the collapse of the Soviet Union. In 1969, a Soviet government entity registered the mark STOLICHNAYA with the PTO. The registration for the mark became incontestable in 1974. In 1991, the same Soviet entity assigned the rights to the U.S. trademark and the right to import vodka to the United States under the STOLICHNAYA marks to PepsiCo. Under the agreement, the marks had to revert back to the Soviet government in 2001.
Shortly after the Soviet government signed the agreement with PepsiCo, the Soviet Union collapsed. In 2000, after a series of complicated transactions involving numerous entities, defendant Spirits International N.V. (“SPI”) and related entities entered into an agreement with defendant Allied Domecq Spirits & Wines USA, Inc. (“AD”) and related entities, in which SPI agreed to assign the marks (the rights to which it purported to trace back to the PepsiCo transaction) to AD beginning in 2001 until 2011, at which point the marks would revert back to SPI. AD then began marketing and selling STOLICHNAYA vodka in the United States.
Meanwhile, plaintiff Federal Treasury Enterprise Sojuzplodoimport (“FTE”) is a Russian governmentowned entity and claims to be the corporate descendant of the Soviet entity that had entered into the agreement with PepsiCo. FTE alleged in a fifteen-claim complaint that defendants SPI and AD usurped the rights in the STOLICHNAYA marks, which were supposed to revert back to the now-Russian government in 2001, through a series of unlawful transactions, including assignment of the marks allegedly perpetuated by fraud.
In 2006, the Southern District of New York dismissed most of FTE’s claims for failure to state a claim upon which relief may be granted. Specifically, the district court dismissed FTE’s trademark infringement, dilution, false designation of origin, unfair competition, and misappropriation claims on the ground that they sought to challenge ownership of a mark that had become incontestable under the Lanham Act. After the district court threw out the bulk of FTE’s claims, FTE voluntarily dismissed the remaining claim— unfair competition due to false advertising against AD—and appealed to the Second Circuit.
The Second Circuit focused on the district court’s reasons for dismissing FTE’s claims, namely, that the STOLICHNAYA trademarks were incontestable. The appeals court recited the well-established rule that, subject to a limited number of defenses, an incontestable trademark provides evidence of the registrant’s ownership of the mark and gives the registrant the “exclusive right to use the mark.” 15 U.S.C. § 1115(b). Under 15 U.S.C. § 1127, the term “‘registrant’ embrace[s] the . . . assigns” of the registered mark, which the defendants in this case claimed to be.
The appellate court ruled that the district court erroneously permitted AD to “step into the shoes” of PepsiCo, the prior registrant of the marks, based on 15 U.S.C. § 1127. The court explained that while the term “registrant” indeed includes its “assigns” under the Act, the inquiry did not end there. The appellate court held that the district court should have inquired into whether a valid assignment had ever actually taken place “because only after a valid assignment of trademarks does the assignee succeed to the rights of the assignor. Obviously, an assignment obtained by fraud would not be valid.”
The court emphasized that the recordation of an assignment with the PTO “is a ministerial act” and that the PTO “does not examine the substance of the transaction.” The court concluded:
If the mere fact that the registrant satisfied the requirements for incontestability could preclude FTE’s claim, then incontestability would transform recording – a ministerial act – into a mechanism for conclusively defeating allegations (which must be credited on a motion to dismiss) challenging the legality of the assignment.
Here, FTE alleged that AD was not the legitimate successor-in-interest to the incontestable marks because the transactions that led to the assignment were tainted by fraud. If FTE could prove that the incontestable marks were illegally assigned, then, the court concluded, the district court would be obligated to grant FTE appropriate relief.
Having concluded that the “validity of the assignment is antecedent to the question of contestability,” the court considered whether FTE brought its suit in the right forum. AD claimed that the question of the validity of the purported assignment was a state-law claim and, therefore, FTE had no federal claim. While the court agreed that state law, and even possibly Russian law, may govern the validity of the assignment of the STOLICHNAYA trademarks from PepsiCo to AD, the Second Circuit found that a federal court may decide the issue of the ownership of a mark as part of a federal trademark infringement claim under the Lanham Act. The court noted that holding to the contrary would leave plaintiffs with two unappealing options: either engage in piecemeal litigation (a state court proceeding to decide ownership followed by a federal Lanham Act lawsuit) or litigate all aspects of the case in a state court, thereby depriving litigants of the choice between state and federal courts that Congress offered litigants pursuing Lanham Act claims.
This case demonstrates that the assignment of an incontestable trademark is not “bulletproof” simply because the mark is incontestable. While incontestability is a powerful sword in any trademark dispute, it cannot shield a litigant who obtained ownership of the incontestable mark unlawfully.