Fifth Circuit Rules That Inconclusive Trademark Settlement Is Crackers
Published By World Trademark Law Report April 13, 2006

In Liberto v. DF Stauffer Biscuit Company Inc., the US Court of Appeals for the Fifth Circuit has found that a final judgment that terminates a trademark infringement action pursuant to a settlement agreement between the parties does not necessarily prevent the defendant from later claiming non-infringement or relying on defenses to infringement.

Since 1950 Frank Liberto has used a red and yellow stripe packaging design mark for his snack-food products. Liberto registered his mark in 1986. Stauffer Biscuit Company started using a similar design mark in 1987 for animal crackers. The US Patent and Trademark Office approved Stauffer's application to register its own mark, and Liberto failed to oppose the application before it registered. Stauffer's right to use its registered mark became incontestable in 1994.

Liberto sued Stauffer for infringement in 1995. The parties eventually executed a settlement agreement, under which Liberto agreed to dismiss his infringement action and to grant an exclusive licence to Stauffer to use his striped design on Stauffer's packaging, and Stauffer agreed to pay royalties. The document provided that specific licence terms were to be agreed upon later, but the parties ultimately were unable to negotiate specific terms. As a result, the settlement agreement omitted such terms as Liberto's right to control the quality of goods sold by Stauffer under the licence.

Even though the parties had not reached agreement on specific licence terms, Liberto moved for entry of final judgment pursuant to the settlement agreement. Stauffer did not oppose the motion, and in 1999 the court entered final judgment. The order entering judgment noted that the parties had 'compromised and settled their differences in the form of the settlement agreement and entered that agreement as the judgment of the court.

A dispute later arose concerning payment of royalties owing from the date of the settlement agreement. Liberto eventually sued to recover royalties. He pleaded trademark infringement, dilution, unfair competition and breach of contract, among other claims. Liberto also terminated the licence, but Stauffer continued using Liberto's design mark. After the parties filed cross-motions for summary judgment, the district court granted partial judgment to Liberto on infringement and other claims, and entered an injunction against Stauffer.

The district court found that the settlement agreement was an enforceable contract under Texas law. It also found that Stauffer's arguments of non-infringement and its reliance on various defences to infringement (e.g., incontestability of its right to use its own design mark) were precluded under the doctrines of res judicata and judicial estoppel. The Fifth Circuit rejected both bases for the district court's order.

The Fifth Circuit held that the settlement agreement was merely an unenforceable 'agreement to agree.' It reasoned that terms essential to any trademark licence agreement, such as the licensor's ability to exercise quality control, were missing. The court observed:

'Given [quality control's] centrality, leaving necessary terms of control to be determined in future negotiations militates against the finding of a binding contract.'

With respect to res judicata, the court noted that Stauffer never expressly acknowledged infringement or renounced its incontestable rights to use its own registered mark. The court found that: '[t]he final judgment [...] neither clearly expresses nor is predicated upon the conclusion that Stauffer infringes Liberto's mark [...] It was final only in its name.'

Similarly, the court rejected judicial estoppel, concluding that Stauffer had not urged or convinced the district court to accept any position in conflict with its defence to trademark infringement.

This article has been reprinted with permission from the April 13, 2006 edition of the World Trademark Law Report . © 2002-2006, Globe Business Publishing Ltd.

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