The Court of Appeals for the Federal Circuit (“CAFC”), in a 2-1 vote, held in Australian Therapeutic Supplies Pty., Ltd. v. Naked TM, LLC, Appeal No. 2019-1567 (Fed.Cir. July 27, 2020) (accessible at http://www.cafc.uscourts.gov/node/26425), that a property interest in a mark is unnecessary for a cancellation petitioner to establish a statutory right to commence a cancellation proceeding. Instead, all a petitioner must do is demonstrate “a real interest in the cancellation proceeding and a reasonable belief of damage.” Id. at p. 2.

In this case, the petitioner (“Australian”) first used the unregistered marks NAKED and NAKED CONDOMS during April, 2003 in the U.S. for condoms advertised and sold via its Australian website and shipped such goods to U.S. customers. The predecessor-in-interest for registrant (“Naked”), a U.S. company, was a junior user of NAKED for the same goods and filed an application to register the NAKED mark during December, 2003. Approximately two years later, Australian learned of Naked’s use of the mark and eventually contacted Naked. From latter July, 2006 to early 2007, the parties negotiated a settlement via E-mails. Not believing a settlement had been reached, however, Australian commenced a cancellation proceeding against Naked’s registration.

Australian’s amended petition for cancellation asserted earlier use of NAKED and sought cancellation due to fraud, a likelihood of confusion and lack of a bona fide intention to use the mark. Naked denied Australian’s claims and asserted affirmative defenses, including one “that Australian lacked standing and was contractually and equitably estopped from pursuing the cancellation.”

At trial, the Trademark Trial and Appeal Board (“TTAB”) upheld Naked’s affirmative defenses, holding that Australian had to establish proprietary rights in its unregistered mark, because the parties had entered into a settlement agreement in which Australian had agreed not to use nor register its mark in the U.S. It also found that Australian had led Naked to reasonably believe that Australian had abandoned its rights in the NAKED mark in the U.S. Lacking such a proprietary interest and reasonable belief of damage, the TTAB held Australian lacked a real interest in the cancellation proceeding or a reasonable basis to believe it would suffer damage if the registration were not cancelled. Australian appealed.

The CAFC analyzed the appeal stating certain issues of “standing” “…are more appropriately viewed as requirements for establishing a statutory cause of action.” Id., p. 5. It referred to 15 USC Section 1064 which provides that cancellation of a registration may be sought by a petitioner who “believes that he is or will be damaged” by the continuance of a registered mark, and that a cancellation proceeding does not depend upon whether proprietary rights in the mark exist. Id., pp. 5-6.[i] The fact that one has contracted away its rights in the mark “does not preclude a petitioner from challenging a mark before the Board, although it could “ultimately bar Australian from proving actual damage.” Id. (emphasis in original).

Next, it analyzed and found that Australian had a real interest in the mark and a reasonable belief of damage, because it had filed two applications against which Naked’s registration had been cited (even though the first application had been abandoned and the second application was filed during the cancellation proceeding, the prosecution of which was suspended by the USPTO while the cancellation proceeding was ongoing) and because Australian had substantial evidence showing it produced and sold condoms under the NAKED mark to U.S. customers, since April, 2003. Id., p. 9. These facts led the CAFC to conclude Australian had a “real interest and reasonable belief of damage”, and it reversed the TTAB’s decision, remanding the case for further proceedings consistent with its opinion. Id., pp. 10-11.

Judge Wallace dissented, in an opinion of equal length. While he agreed with the majority that 15 U.S.C. Section 1064 does not require a petitioner to have a proprietary interest in a mark, he did not think that Australian had demonstrated a real interest in the proceeding and a reasonable belief of damage. He believed that a cancellation petitioner must have a “legitimate commercial interest.” Dissent, p. 4. (Emphasis in original). Pointing to Australian’s agreement to discontinue the NAKED mark in the U.S. and its consent to Naked’s use and registration of that mark in exchange for Naked’s consent to Australian using and registering NUDE for its goods (which Australian’s Managing Director and Co-Owner testified was “something of value,” Id. p. 5-6,) the result was Australian contracting away “any legitimate commercial interest” in the NAKED mark and thus lacking any reasonable belief in damages caused by registration of the NAKED mark. Id., p. 6.

He also interpreted the TTAB decision as referring only to, and requiring proof of, Australian’s pled claims and not requiring a proprietary interest in a mark under 15 USC Section 1064. Id., p. 8. He believed the majority did not sufficiently address the issue of Australian contracting away its rights (Id., pp. 8 -9) and that it erred in dignifying Australian’s abandoned application before the filing of the cancellation proceeding (which was abandoned by Australia due to the pendency of its negotiations with Naked) and the application filed after the amended petition to cancel was filed because it was never raised as a ground for damage in any pleadings. Id., p. 10.

What will the effect of the Naked case be? While it may result in more cancellation and opposition proceedings being filed, it is clear that a petitioner or opposer still will have to prove actual damage to prevail. Will more proceedings be commenced because of the Naked case? Stay tuned.

[i] The TTAB also stated that the statutory requirements to oppose registration of a mark under 15 U.S.C. Section 1063, “are substantively equal” as “both require a party to demonstrate a real interest in the proceeding and a reasonable belief of damage.” ( Id., p. 5)