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The Third District Court of Appeals Extends The Octane Fitness Standard For Attorney’s Fees In Patent Action to Trademark Actions

In September 2014, the Third Circuit Court of Appeals held that attorney’s fees could be recovered by a prevailing party under the Lanham Act, and that District Courts should use the same test set out by the Supreme Court in Octane Fitness for patent litigation.  Thus, the door is now open for District Court judges to punish specious and meritless trademark/trade dress lawsuits (or defenses thereto) by awarding the prevailing parties with attorney’s fees.  Fair Wind Sailing, Inc. v. Dempster, et. al., (3rd Cir. 2014) 764 F.3d 303.  The case also contains a cautionary tale for those wanting to file a trade dress claim under Section 43 of the Lanham Act.

PROCEDURAL FACTS

Among other claims, Plaintiff Fair Wind filed a claim for trade dress infringement under Section 43 of the Lanham Act.  The gist of the claim was that Defendants were former sailing instructors for Plaintiff Fair Wind.  After leaving Fair Wind, they set up a competing venture, which purportedly copied many aspects of Fair Wind’s business.  Fair Wind alleged that Defendants violated Fair Wind’s trade dress by: using 45-foot catamarans identical to those of Fair Wind, using teaching curriculum and itineraries identical to Fair Wind, using the same procedures to gather student feedback, and using a picture of Fair Wind’s catamaran on Defendants’ website.  Ultimately, the District Court granted Defendants’ 12(b) motion dismissing the trade dress claim.  The District Court concluded that Fair Wind failed to state a valid trade dress claim because the product features Fair Wind sought protection for, were simply functional.  The District Court then awarded Defendants attorney’s fees not under the Lanham Act, but under a Virgin Islands fee statute.  Fair Wind appealed.

THIRD CIRCUIT’S OPINION    

The Third Circuit Court of Appeals affirmed the District Court’s ruling that the product features proffered by Fair Wind were not protectable trade dress under Section 43 of the Lanham Act.  Instead of elements creating a visual impression for consumers, Fair Wind’s claimed features were merely a hodgepodge of unconnected pieces of its business, which did not comprise any sort of composite visual effect.

Of broader importance, the Court of Appeals remanded the issue of attorney’s fees back to the District Court so it could determine whether the trade dress claim was an “exceptional case” under 15 U.S.C. Section 1117(a).  It explained the two-step analysis District Courts used in awarding attorney’s fees under the Lanham Act: (1) first, that a losing party engaged in culpable conduct; and (2) that the culpable conduct was exceptional enough to warrant a fee award.  It then replaced that standard, with the standard set forth by the Supreme Court in Octane Fitness, for determining exceptional cases under Section 285 of the Patent Act.  The Court noted that Section 285 is not only identical to Section 35(a), but that Congress referenced Section 285 in passing Section 35(a).  Additionally, in Octane Fitness the Supreme Court relied in part, on a Federal Circuit case which defined “exceptional” under the Lanham Act as “uncommon” or “not run-of-the-mill.”  Thus, the Court of Appeals believed that the Octane Fitness Court was defining “exceptional” not just for the fee provision in the Patent Act, but for the fee provision in the Lanham Act as well.

CONCLUSION

Resultantly, the prevailing party in trademark or Lanham Act litigation can now recover reasonable attorney’s fees when (a) there is an unusual discrepancy in the merits of the positions taken by the parties; or (b) the losing party has litigated in an “unreasonable manner.”  Thus, without the need for bad faith or other state of mind culpability previous required, parties and their counsel need to be mindful about the real possibility they may have exposure to an attorney’s fees award if they lose a trademark claim.

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