2009 WL 2709312 (Fed. Cir. Aug. 31, 2009)
On August 31, 2009, the Court of Appeals for the Federal Circuit (“Federal Circuit”), in an important decision for both trademark owners and practitioners, reversed the Trademark Trial and Appeal Board’s (“TTAB” or “Board”) fraud holding in In re Bose Corp.1 The Federal Circuit 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.”2 The court determined, among other things, that by equating “should have known” with intent to deceive, the TTAB erroneously lowered the fraud standard to simple negligence.3 The court held that mere negligence is not suffi cient to infer fraud or dishonesty,4 and gross negligence may not itself justify an inference of intent to deceive.5 Citing the TTAB’s own precedent, the court stated that fraud must be proven “to the hilt” by clear and convincing evidence, and there is “no room for speculation, inference or surmise.”6
As detailed below, this decision signals a strong limitation—and possibly the end—of the strict rule of fraud under the TTAB’s Medinol line of cases. To put the Federal Circuit’s decision in context, before discussing that decision, this article provides background on the TTAB’s Medinol line of fraud cases and its decision in In re Bose Corp., and the arguments made to the Federal Circuit by Bose, the Solicitor’s Offi ce, and the American Intellectual Property Law Association (“AIPLA”) in their briefs and at oral argument.
I. Knew or Should Have Known, Reckless Disregard of the Truth, and Fraud Under Medinol
In a series of cases beginning with its 2003 decision in Medinol Ltd. v. Neuro Vasx, Inc.,7 the Board has imposed a heightened duty of candor and a strict rule of fraud on practice before the PTO. Medinol and its progeny hold that an applicant or registrant commits fraud before the PTO when it makes a statement that is (1) false, (2) material, and (3) made by a person who knew it was false or misleading, or should have known it was false or misleading but acted with “reckless disregard for the truth.”8 Under this line of cases, the Board found fraud if the declarant made false statements about a matter for which it should have had subjective knowledge (e.g., whether it was using its mark in commerce for certain goods or services), and thus should have known that his or her statement was false. A fi nding of fraud, even on only one of several goods or services listed in an application or registration, invalidated the entire class of goods or services in which the fraud occurred.
Most of these cases involved false statements that a mark was being used for all of the goods or services identifi ed in the application or registration, when in fact the mark was being used on only some of them. Although purportedly requiring evidence of a “reckless disregard” for the truth, the Board’s Medinol line of cases has found fraud based on false statements that are arguably the result of mere negligence or justifi able mistake, in stark contrast to pre-Medinol cases refusing to fi nd fraud for false statements that result from honest misunderstandings, inadvertence, or negligent omissions. The Board has warned applicants and registrants that statements about the use of their marks should be “investigated thoroughly prior to signature and submission” to the PTO, and that parties will not be heard to deny that they did not thoroughly read what they had signed.9 The Board has also held that fi ling an amendment to delete any goods or services for which the mark has not been used will not remedy or cure fraud on the PTO, at least where it is fi led after the application is published for opposition, even if the amendment is fi led before an adverse party asserts a claim for fraud.10
II. The TTAB’s Decision in Bose Corp. v. Hexawave, Inc.
In Bose Corp. v. Hexawave, Inc.,11 the Board found fraud under the Medinol standard where a party obtained a renewal of its registration by claiming continued use of its mark in connection with goods it no longer manufactured or sold, but for which it continued to offer repair services.
Hexawave, Inc. (“Hexawave”) fi led a use-based application to register the mark HEXAWAVE for a variety of electronic goods that it claimed to be using in commerce.12 Bose Corporation (“Bose”) opposed Hexawave’s application based on fraud and likelihood of confusion with Bose’s registered WAVE marks for a variety of electronic goods.
Bose’s fraud claim was based on Hexawave’s discovery responses, which failed to provide evidence of use of its mark on all of the goods listed in its application. Bose argued that Hexawave’s discovery responses constituted an admission that it was not using its mark for all of the goods, and therefore proved that Hexawave committed fraud by fi ling its application based on use in commerce.
The Board rejected Bose’s fraud claim, holding that Hexawave’s discovery responses failed to prove fraud by clear and convincing evidence. According to the Board, Hexawave’s failure to produce evidence that it was using its mark for all of the goods listed in its application did not amount to an admission that it was not using its mark for all of those goods. The Board noted that Hexawave’s responses included objections and qualifying language indicating that its responses were not exhaustive and expressly reserved the right to supplement the responses.13
In contrast, the Board held that Hexawave proved its fraud counterclaim by clear and convincing evidence. Hexawave presented evidence that Bose obtained a renewal of its registration for the mark WAVE in 2001 by claiming that it was still using the mark in connection with the goods listed in its registration, despite knowing that it had not manufactured or sold two of the goods listed in the registration (audio tape recorders and players) since 1997. Bose argued that its renewal application was based on its honest, good-faith belief that its receipt, repair, and return of its previously sold audio tape recorders and players bearing the WAVE mark in 2001 was suffi cient to support renewal of its registration. Bose did not relabel or make any alterations to the products, apart from the technical repairs.
Relying on the Federal Circuit’s decision in Torres v. Cantine Torresella S.r.l.,14 and following Medinol, the Board held that “specifi c intent to commit fraud is not required,” and that “fraud occurs when an applicant or registrant makes a false material misrepresentation that the applicant or registrant knew or should have known was false.”15 To avoid a fi nding of fraud, the Board explained, Bose must prove that its declaration of continued use, though false, was made with “a reasonable and honest belief that it was true.”16
In this case, the Board concluded that it was unreasonable for Bose to believe that its repair services constituted continued use of its mark suffi cient to maintain its registration. Among other things, the Board reasoned that Bose’s repair services did not constitute a trademark use because Bose no longer owned the goods.17
Furthermore, the Board found no evidence that Bose relied on the advice of counsel or otherwise investigated the reasonableness of its belief that its repair services constituted continued use of its mark suffi cient to maintain its registration, despite knowing that it no longer manufactured or sold some of the goods listed in the registration. The Board noted that Bose “could not point to case law that supports” its belief.18 Given the plain language of the Lanham Act, the Board found that it was unreasonable for Bose to believe that its repair and shipment of previously sold goods constituted use of its mark in commerce suffi cient to support its declaration of continued use.19
Finally, the Board found that Bose should have known that its declaration of continued use was false and constituted fraud on the PTO. Noting that fraud cannot be cured by deleting the goods at issue from a registration, the Board ordered the cancellation of Bose’s registration in its entirety.20
III. Arguments on Appeal to the Federal Circuit
A. The Appeal Briefs
Bose appealed the Board’s fraud decision to the Federal Circuit. In its brief,21 Bose argued, among other things, that it was using the WAVE mark in commerce when it repaired damaged goods bearing the mark and returned them to consumers. Bose maintained that Section 45 of the Lanham Act, 15 U.S.C. § 1127, sets forth only two requirements for use in commerce: (1) that the mark be placed on the goods, and (2) that the goods be sold or transported in commerce. Bose argued that it satisfi ed these requirements by receiving the goods it had made and sold, repairing them, and transporting them back to consumers.
Furthermore, Bose claimed that Hexawave introduced no evidence that Bose intended to deceive the PTO. Bose pointed to the demanding standard for proving inequitable conduct in a patent case that the Federal Circuit articulated in Star Scientific, Inc. v. R.J. Reynolds Tobacco Co.,22 which the Board had cited as the proper standard in fraud cases. Bose argued that if the Board correctly applied the rule that fraud must be proven “to the hilt,” it could fi nd “no evidence, let alone clear and convincing evidence, that Bose intended to deceive the USPTO.”23
AIPLA filed an amicus curiae brief in this case,24 arguing that the Board misapplied the “knew or should have known” standard to fi nd fraud on strict liability or negligence. AIPLA also argued that fraud requires intentional deception or reckless conduct, and that a specifi c showing of intent to deceive should be required to fi nd fraud. Further, AIPLA maintained that fraud requires that the false statement concern a material fact and that errors in statements of use may be immaterial when a registration covers highly related goods or services.
On behalf of the PTO, the Solicitor argued that whether transportation of a discontinued good back to the owner in connection with repair services constitutes “use in commerce” is an issue of statutory construction.25 Further, the Solicitor argued that the Federal Circuit “in the past explained that it defers to the TTAB’s reasonable statutory construction.” According to the Solicitor, the “nature and quantum of use contemplated by the defi nition of ‘use in commerce’ requires, at a minimum, a trade in the goods sold under the mark, or at least an active and public attempt to establish such a trade.” The Solicitor argued that Bose had no active trade in audio tape players and recorders bearing the WAVE mark and had discontinued the product at least three years before renewing the registration with no plans to make or sell these goods again.
The Solicitor further argued that the Lanham Act requires that the goods belong to the trademark owner. In the instant case, the Solicitor explained that Bose was “like any electronics repair shop” because it was “merely repairing the products of others without ownership.” That Bose was the original source of the goods was, in the Solicitor’s opinion, “a distinction without a difference.”
Finally, according to the Solicitor, AIPLA’s suggested modifi cations to the fraud test should be rejected. AIPLA proposed that the Federal Circuit adopt a standard requiring a specifi c showing of subjective intent to deceive the PTO. The Solicitor stated that it is “black letter law” that intent to commit fraud can be inferred from the facts and circumstances, because “[d]irect evidence of intent to deceive is typically unavailable.” The Solicitor maintained that the “TTAB in its role as fact-fi nder must be able to evaluate intent and examine the objective reasonableness of a party’s belief based on surrounding facts and circumstances, and to draw appropriate inferences from the evidence.”
B. The Oral Argument
On May 6, 2009, the Federal Circuit heard oral arguments in the case.26 During the argument, the court focused on (1) whether the TTAB’s “know or should have known” fraud standard was improper; (2) whether the “should have known” portion of the test means “reckless disregard” or mere “negligence”; and (3) whether repair of discontinued products and shipment back to consumers constitutes “use in commerce.”
During the argument, the court questioned whether Bose had waived its right to challenge the Board’s fraud standard because it failed to raise the issue in its initial appeal brief. Bose fi rst raised the argument that the Board’s fraud test was improper in its reply brief, which, the court suggested, may have been too late. Counsel for Bose devoted much of his argument to explaining why Bose had not waived the argument that the Board’s fraud test is improper. Counsel for Bose argued that the fraud standard and intent to deceive were mentioned in the questions presented in its blue brief, but the court observed that the questions presented did not highlight any portion of the fraud standard relied on by the Board.
The Amicus Counsel for AIPLA argued that fraud required a showing of specifi c intent to deceive the PTO. While arguing that the Federal Circuit need not overrule its decision in Torres v. Cantine Torresella S.r.l.27 AIPLA attempted to distinguish Torres and signifi cantly limit it to its facts.
The court also questioned Solicitor Chen about the proper fraud test and defi ning “use in commerce.” The court asked whether the PTO’s interpretation of “should have known” is tantamount to mere negligence, as opposed to reckless disregard. The court asked the Solicitor why it was reckless disregard on the part of Bose’s General Counsel to interpret the “use in commerce” requirement as encompassing repairs of discontinued products. The court specifi cally pointed out that when the renewal affi davit was signed in 2001, the changes to the Lanham Act mandating “use in commerce” were fairly recent, and there was no case law at that time explicitly stating that repair and shipment back to consumers does not satisfy the “use in commerce” requirement.
IV. Federal Circuit Rejects TTAB’s Medinol Fraud Standard
On August 31, 2009, the Federal Circuit reversed the TTAB’s fraud decision in In re Bose Corp., signaling an end to the strict rule of fraud under Medinol. Chief Judge Michel, writing for the court, reaffi rmed decisions of its predecessor court, the Court of Customs and Patent Appeals, “which prohibit an applicant from making ‘knowingly inaccurate or knowingly misleading statements.’” Absent requisite intent to mislead the PTO, the court held, “even a material misrepresentation would not qualify as fraud under the Lanham Act warranting cancellation.”28
Analyzing the TTAB’s Medinol decision and its progeny, the Federal Circuit acknowledged that the TTAB had correctly found “a material legal distinction between a ‘false’ representation and a ‘fraudulent’ one, the latter involving an intent to deceive, whereas the former may be occasioned by a misunderstanding, an inadvertence, a mere negligent omission, or the like.”29 The court also agreed with the TTAB that in determining 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,” and that “intent must often be inferred from the circumstances and related statement made.”30
But the court stressed that evidence of intent to deceive and fraud must be clear and convincing, and that inferences drawn from lesser evidence cannot satisfy the deceptive-intent requirement for proving fraud.31 The court specifi cally rejected the principal holding in the TTAB’s Medinol line of cases, namely, that “a trademark applicant commits fraud in procuring a registration when it makes material representations of fact in its declaration which knows or should know to be false or misleading.”32
The court stated that “[b]y equating ‘should have known’ of the falsity with a subjective intent, the Board erroneously lowered the fraud standard to a simple negligence standard.”33 The court observed that
[we] have previously stated that “[m]ere negligence is not suffi cient to infer fraud or dishonesty.” We even held that “a fi nding that particular conduct amounts to ‘gross negligence’ does not of itself justify an inference of intent to deceive.” The principle that the standard for fi nding intent to deceive is stricter than the standard for negligence or gross negligence, even though announced in patent inequitable conduct cases, applies with equal force to trademark fraud cases. After all, an allegation of fraud in a trademark case, as any other case, should not be taken lightly. Thus, we hold 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.34
The court declined to address whether a “reckless disregard” of the truth satisfi es the “intent to deceive” requirement for fraud. Because neither the PTO nor any court had interpreted “use in commerce” to exclude repairing and shipping repaired goods, the court said that even assuming that reckless disregard qualifi es, there is no basis for fi nding the conduct reckless in this case.
The court did, however, dismiss the TTAB’s reliance on Torres to justify its “should have known” standard. Although the court recognized that Torres did use the phrase “knows or should know” in fi nding an intent to deceive and fraud before the PTO, it said the Board “read Torres too broadly.”35 The court cautioned that “one should not unduly focus on the phrase ‘should know’ and ignore the facts of the case.”36 As the court noted, Torres admitted that he made false statements to the PTO about trademark and usage when he fi led his renewal application.37
In this case, the court found that Bose’s General Counsel knew that the company had stopped manufacturing and selling audio tape records and players at the time the Section 8 and 9 renewal was fi led. Thus, the court concluded that Bose’s statement in the renewal application that the WAVE mark was in “use in commerce” for such goods was a material, false misrepresentation to the PTO.38 The court noted, however, that the counsel testifi ed under oath that he believed that repairing previously sold audio tape recorders and players under the WAVE mark satisfi ed the “use in commerce” requirement at the time he signed the renewal application. Whether such belief was reasonable, the court said, “is not part of the analysis.”39 Rather, the court held that “[t]here is no fraud if a false misrepresentation is occasioned by an honest misunderstanding or inadvertence without a willful intent to deceive.”40
The court ultimately concluded that Bose did not commit fraud in renewing its registration and that the TTAB erred in canceling the mark in its entirety. However, the court held that since Bose no longer used the mark on audio tape recorders and players, “the registration needs to be restricted to refl ect commercial reality” and, thus, remanded the case to the TTAB for appropriate proceedings.41
The Federal Circuit’s holding in Bose signals a strong limitation—and possibly the end—of the TTAB’s strict rule of fraud under Medinol. Under Bose, the court has expressly reestablished the standard that fraud will be found only if an applicant or registrant knowingly makes a false, material representation with the intent to deceive the PTO. This decision also clarifi es that mere negligence is not suffi cient to infer fraud or dishonesty, and gross negligence may not itself justify an inference of intent to deceive. Further, it cautions that a challenger has a heavy burden to prove fraud “to the hilt” by clear and convincing evidence.
Although the Federal Circuit’s Bose ruling may curtail the fl ood of fraud allegations that have become commonplace in TTAB proceedings, it does not necessarily mean that all false statements concerning use of the mark in commerce can never rise to the level of fraud. Indeed, the court did not resolve the issue of whether “reckless disregard” satisfi es the “intent to deceive” requirement. And the court did not defi ne “reckless disregard” or what type of conduct, if any, constitutes a “reckless disregard” before the PTO. Nor did the court comment on the TTAB’s warning that statements about the use of marks should be investigated thoroughly prior to signature and submission to the PTO, and that parties will not be heard to deny that they did not thoroughly read what they had signed. Thus, trademark owners should remain vigilant in taking steps to ensure the accuracy of the goods and services listed in an application or registration, if possible, to correct any false statements in an application or registration before an actual or threatened challenge to the application or registration.