Trademark owners can breathe a sigh of relief as the negligence standard applied to cases of fraud, as introduced by the Trademark Trial and Appeal Board (the “Board”) in Medinol v. Neuro Vasx, Inc., 67 U.S.P.Q.2d 1205 (T.T.A.B. 2003), has been stricken as improper under the Lanham Act. In In re Bose Corp., 2009 WL 2709312 (Fed. Cir. August 31, 2009), the U.S. Court of Appeals for the Federal Circuit re-examined the standard used by the Board in Medinol for finding fraud in the procurement or maintenance of a trademark registration. The Federal Circuit found that the Board, by relying on Medinol, erroneously applied a negligence standard when finding Bose guilty of fraud in maintaining its registration for the trademark WAVE.

In reversing the Board’s decision, the Court rejected the Board’s reliance on the “should have known” standard and clarified that a trademark registration is obtained or maintained fraudulently under the Lanham Act only when the applicant or registrant knowingly makes a statement that is (1) false, (2) material, and (3) with the intent to deceive the U.S. Patent and Trademark Office (“PTO”). The Court acknowledged that direct evidence of deceptive intent is hard to come by and that such intent will often be derived from a party’s objective manifestation of that intent, i.e., indirect and circumstantial evidence, but that such evidence must be “clear and convincing” without resorting to speculation and inference. The Court remanded the case to the Board so that it could delete only those goods from Bose’s registration no longer sold under the WAVE mark.

The Case before the Board

Based on its registration for the trademark WAVE, Bose Corporation initiated an opposition proceeding with the Board against Hexawave, Inc.’s application to register the mark HEXAWAVE. In response, Hexawave asserted a counterclaim for cancellation of Bose’s WAVE trademark claiming that Bose committed fraud in renewing its registration for the mark when it claimed use on all goods in the registration while knowing that it had stopped manufacturing and selling certain items listed therein. At the heart of Hexawave’s fraud claim is a January 2001 Section 8 affidavit of continued use and Section 9 renewal application signed by Bose’s general counsel claiming that the mark was still in use on various goods, including audio tape recorders and players. Bose Corp., 88 U.S.P.Q.2d 1332. The evidence before the Board demonstrated that Bose stopped manufacturing and selling audio tape recorders and players sometime between 1996 and 1997 and that the general counsel knew that Bose discontinued those products when he signed the Section 8/9 renewal. Bose, 88 U.S.P.Q2d at 1334-35. However, at the time the general counsel signed the renewal application, Bose continued to repair previously sold audio tape recorders and players. The general counsel claimed it was “his understanding that ‘transporting’ goods in connection with repair services constitutes use in connection with the goods.” Id. at 1335. The Board concluded that the repairing and shipping back did not constitute sufficient use to maintain a trademark registration for goods and found unreasonable the general counsel’s belief that transporting repaired goods constituted use. Id. at 1337-38. As a result, the Board ruled that Bose committed fraud on the PTO in maintaining the WAVE registration and ordered the cancellation of Bose's WAVE registration in its entirety.

The Federal Circuit’s Reversal of the Board’s Decision

Bose appealed the Board’s decision.1 The Federal Circuit reversed the Board’s decision, ruled that Bose did not commit fraud, and remanded the case so that the Board could delete those goods from Bose’s registration that are not sold under the WAVE mark. In reversing the Board’s decision, the Court rejected the Board’s reliance on the “should have known” language to the fraud standard, as introduced in the Medinol case, and held that a trademark is obtained fraudulently under the Lanham Act only if the applicant or registrant knowingly makes a false, material representation with the intent to deceive the PTO.

In reaching its decision, the Court adhered to established law in regards to finding fraud in trademark cases, including decisions of the Court of Customs and Patent Appeal, the Trademark Trial and Appeal Board and other appellate courts. The Court relied on Bart Schwartz Int'l Textiles, Ltd. v. Fed. Trade Comm'n, which stated that the Lanham Act prohibits an applicant from making “knowingly inaccurate or knowingly misleading statements.” 289 F.2d 665, 669 (C.C.P.A. 1961); In re Bose Corp., 2009 WL 2709312, at *2. Additionally, the Court cited Torres v. Cantine Torresella S.r.l., which was also relied upon by the Board in Medinol, which held that “[f]raud in procuring a trademark registration or renewal occurs when an applicant knowingly makes false, material representations of fact in connection with his application.” 808 F.2d 46, 48 (Fed. Cir. 1986) (emphasis added). The Court agreed with the Board in Medinol that in order to determine whether a trademark registration was obtained fraudulently, “[t]he appropriate inquiry is ... not into the registrant's subjective intent, but rather into the objective manifestations of that intent.” Medinol, 67 USPQ2d at 1209; In re Bose Corp., 2009 WL 2709312, at *3. The Court concluded, however, that there was no support in the law to conclude that one commits fraud in procuring or maintaining a trademark registration when it makes material representations of fact in its declaration which it “knows or should know to be false or misleading.” Id. (emphasis added). To the Court’s dismay, it recognized that the Board followed this less stringent fraud standard in the Bose case as well as several other trademark cancellation actions since the time of the Medinol decision. In re Bose Corp., 2009 WL 2709312, at *3.

The court reasoned that by equating “should have known” of the falsity with a subjective intent, the Board in Medinol erroneously lowered the fraud standard to a simple negligence standard, which requires that the defendant know or should have known each of the facts that made its act or omission unlawful. Id. The Court reminded the Board that “mere negligence is not sufficient to infer fraud or dishonesty” and that the standard for finding intent to deceive is stricter than the standard for negligence or gross negligence. Id.; see also, Symbol Techs., Inc. v. Opticon, Inc., 935 F.2d 1569, 1582 (Fed.Cir.1991). Additionally, the Court instructed that there is no fraud if a false misrepresentation is caused by “an honest misunderstanding or inadvertence without a willful intent to deceive.” In re Bose Corp., 2009 WL 2709312, at *5.

In applying the stricter standard, the Court found that while Bose’s general counsel made a false representation in the renewal application which was material (Bose was no longer manufacturing and selling audio tape recorders and players at the time the renewal application was filed), Bose did not commit fraud on the PTO since there was no clear and convincing evidence that the false representation was made with an intent to deceive the PTO (the general counsel believed that Bose’s repair and transportation of tape recorders and players bearing the mark WAVE constituted use of that mark on such goods). Accordingly, the Court concluded that the Board erred in finding fraud and remanded the case to the Board so that it could delete only those goods from the registration no longer sold under the WAVE mark.

Summary

By removing the “should have known” test from the fraud standard in trademark cases, the Court has provided parties with reassurance that an honest misunderstanding or inadvertence will not lead to a finding of fraud and trigger the cancellation of a trademark registration in its entirety. As a result, the threat of possible cancellation actions will likely become less of a concern to trademark owners.