Reversing a district court’s dismissal of a plaintiff’s trademark claims, the U.S. Court of Appeals for the Second Circuit has held that a Russian government-owned company can challenge a distributor’s ownership of the prized STOLICHNAYA trademark in spite of the mark’s incontestable status under the Lanham Act. Federal Treasury Enterprise v. Spirits International NV et al., Case No. 06-3532 (2d Cir., Oct. 8, 2010) (Parker, J.).

Prior to the collapse of the Soviet Union, the Soviet government used the name Stolichnaya, Russian for “from the capital,” to market its vodka both domestically and abroad. A Soviet government entity, registered the STOLICHNAYA trademark with the United States Patent and Trademark Office (USPTO) in February 1969. The mark became incontestable in 1974 upon the appropriate filing with the USPTO. In 1991, the Soviet entity owning the trademark assigned to PepsiCo its rights to the American marks and the authorization to import vodka under those marks into the United States. The contract that provided that all rights in the STOLICHNAYA marks would revert back to the Soviet entity in 2001. Following the dissolution of the Soviet Union in December 1991, however, the General-Director of the Soviet entity and others designed a scheme and engaged in a series of transactions transferring assets from the entity to themselves. The General-Director and his allies did so in a manner that convinced PepsiCo that their private entity was in fact the successor of the state-owned entity. Accordingly, the rights in the U.S. STOLICHNAYA marks were assigned to the private entity upon expiration of the PepsiCo agreement.

Eventually, the private entity sold its purported rights to the STOLICHNAYA marks to defendant Spirits International N.V. (SPI), a Dutch company, and related entities (collectively, SPI). In November 2000, SPI entered into an agreement with defendant Allied Domecq Spirits & Wines USA, Inc. (Allied Domecq) and related entities, in which SPI agreed to assign the STOLICHNAYA marks to Allied Domecq from 2001 until 2011, at which point the marks would revert back to SPI. The purported assignment was filed with the USPTO. Upon the execution of this agreement, Allied Domecq began marketing and selling STOLICHNAYA-brand vodka in the United States.

Meanwhile, the Russian government created plaintiff Federal Treasury Enterprise Sojuzplodoimport (FTE) and charged it with representing its interests relating to the recovery and registration of Russian alcohol trademarks abroad. In 2005, FTE sued the SPI entities and Allied Domecq, asserting 15 claims, including fraud, misappropriation and various types of direct and contributory trademark infringement and unfair competition under the Lanham Act. The plaintiff also sought a declaratory judgment and rectification of the trademark register. The defendants moved to dismiss plaintiffs’ claims.

In 2006, the district court dismissed most of the plaintiff’s claims for failure to state claims upon which relief could be granted. The court held that the plaintiff’s trademark claims failed because FTE sought to challenge ownership of a trademark that had become incontestable under the Lanham Act without alleging the existence of any of the Act’s statutory exceptions to incontestability. Because the STOLICHNAYA marks had become incontestable under the Lanham Act and the USPTO records identified defendant Allied Domecq as the record owner of the marks as a result of the assignment from PepsiCo, the court determined that the plaintiff could not challenge the validity of the assignment to defendant Allied Domecq. After the district court dismissed the bulk of FTE’s claims, the plaintiff voluntarily dismissed its remaining claim for unfair competition and the district court entered a final judgment.

On appeal, the 2d Circuit vacated the district court’s dismissal of FTE’s Lanham Act claims and vacated the case for further proceedings, finding that the district court erred in “one very important respect,” when it permitted defendant Allied Domecq to “step into the shoes” of PepsiCo, the previous registrant of the STOLICHNAYA marks, and rely upon the incontestable registration of the STOLICHNAYA trademarks as conclusive evidence of ownership. Pursuant to the Lanham Act, an “incontestable” trademark provides “conclusive” evidence of a registrant’s ownership for the mark (subject to certain limited exceptions) and of registrant’s “exclusive right to use the mark.” Although this evidence also benefits a registrant’s “assigns,” an assignee may only succeed to the rights of the assignor after a valid assignment of a trademark. Thus, the district court erred in failing to inquire whether a valid assignment of the STOLICHNAYA marks to defendant Allied Domecq had taken place. With respect to the assignment recorded with the USPTO, it confers only prima facie evidence of execution” of an assignment, which the court instructed is “not the same as conclusive evidence of the validity of an assignment.” To accept the district court’s finding that the mere fact that the defendants recorded the purported assignment with the USPTO barred plaintiff’s claims would “transform recording—a ministerial act—into a mechanism for conclusively defeating allegations … challenging the legality of the assignment.” Further, the appeals court held that federal jurisdiction existed over invalid assignment claim, in spite of the fact that the validity of the assignment would likely be governed state or foreign law, due to the fact that FTE pled claims that arise under the federal Lanham Act in the same suit.

Practice Note: This holding suggests that incontestability is not the equivalent of invincibility—in addition to the Lanham Act’s enumerated challenges available to incontestable marks, a trademark may still be challenged on ownership grounds, i.e., that an assignment is invalid, decades after reaching incontestable status.