Nasalok Coating Corp. v. Nylok Corporation (Fed. Cir., April 14, 2008)

In 2000, Nylok obtained Federal Trademark Registration No. 2,398,840 for threaded fasteners with a patch of blue on a selected number of threads of an externally threaded fastener (“the blue thread”).

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Three years later, Nylok filed a complaint against four companies, including Nasalok in the Northern District of Illinois, alleging infringement of the blue thread trademark. Nasalok, a Korean corporation, was properly served but failed to enter an appearance. Default Judgment was awarded to Nylok on May 12, 2005. An injunction was also issued against Nasalok. The court’s order also found the blue thread registration valid and enforceable, and the order was made final.

Five months later, in a creative effort to overturn the injunction, counsel for Nasalok filed a petition to cancel the blue thread registration with the Trademark Trial and Appeals Board (“the Board”). Nasalok argued that Nylok’s claim of distinctiveness of the mark after five years of exclusive use was fraudulent. Nylok won summary judgment at the Board based on the doctrine of claim preclusion. Nylok’s believed that Nasalok’s failure to argue invalidity of the mark at the District Court level should preclude it from arguing validity in a Board Cancellation proceeding. The Board agreed with Nylok and held that claim preclusion applies, since the action in the District Court was final, arose out of the same transactional facts, and the validity of the registration could have been raised as a defense.

Collateral Estoppel forecloses the relitigation of matters already decided. The Federal Circuit found that a judicial determination made in an order by the lower court was not equivalent to litigation of the issue, and Collateral Estoppel simply was not available to Nylok.

Claim preclusion is a doctrine that arises to foreclose matters that never have been litigated because of a determination that they should have been advanced in an earlier suit. The Federal Circuit, in a different ruling, Jet Inc. v. Sewage Aeration Systems, 223 F.3d 1360 (Fed. Cir. 2000), refused to apply claim preclusion to a cancellation after an infringement action, based on the likelihood of confusion, stating that a cancellation proceeding is not the same allegation because it requires inquiry into the registrability of the mark in question. Here, citing precedent, the court concluded that, since the Cancellation grounds did not arise out of the transaction of occurrence that gave rise to the infringement action, the validity claim was not compulsory and, thus, the doctrine of claim preclusion was not applicable on this ground.

The court then addressed a second less known basis for applying defendant claim preclusion against Nasalok; claims are precluded when their effect is a collateral attack on a judgment of a first action. If a defendant attempts to undermine a previous judgment by asserting in a subsequent action a claim or defense that was or could have been asserted in the earlier case, the rules of defendant preclusion will apply.

The Federal Circuit found that canceling the blue thread trademark would result in rendering the default judgment moot. Since the default judgment satisfies due process, attacks on it are collateral attacks barred by defendant claim preclusion.

Practice Tip:

Defendant should never allow a case to be defaulted for failure to respond. Cancellations can be undertaken only after defendants have fully complied with the injunction and ceased trade of the article under the infringing trademark. The cancellation can then be undertaken and trade can resume only after the mark has been cancelled and the injunction has been challenged in court.