Reality Check: Court Defines Distinctiveness Standard for Marks

After a self-proclaimed “Internet Entrepreneur” registered a variety of domain names with “veri,” he claimed he was considering entering the transaction verification business — but he never did. When he refused an offer by Vericheck, a provider of electronic transaction processing services, to buy one of his domain names, they filed a complaint. The subsequent ruling outlined the legal distinctiveness standard and made an important ruling regarding the registration of “highly similar marks” by third parties. A sidebar to this article discusses the finding that the defendant had acted with “a bad faith intent to profit” from the use of the Vericheck mark.

REALITY CHECK

A statutory presumption of distinctiveness is a prerequisite for trademark infringement and cybersquatting claims. In Lahoti v. Vericheck, Inc., the Ninth U.S. Circuit Court of Appeals outlined the distinctiveness standard and made an important ruling regarding the registration of “highly similar marks” by third parties.

TRANSACTION HISTORY

Vericheck provides electronic transaction processing services, including check verification. It operates a website at http://www.vericheck.net and owns the domain names vericheck.org, vericheck.cc, vericheck.us and vericheck.biz. Vericheck secured a Georgia state registration for its service mark, which consisted of a check mark over the word “VeriCheck,” for use in connection with “check verification and check collection services.”

Vericheck then attempted to obtain federal registration for its service mark. The U.S. Patent and Trademark Office (PTO), however, denied the application in 2003 because an Arizona company already had registered a “Vericheck” trademark for use with “check verification services.” That mark expired while this case was pending.

David Lahoti, a self-proclaimed “Internet Entrepreneur,” acquired the vericheck.com domain name in 2003. He claimed he was registering domain names with “veri” because he was considering entering the transaction verification business. However, he never developed such a business. The Web site at vericheck.com redirected visitors to a different site with search results, including links to Vericheck’s competitors. Lahoti made money when visitors clicked on the links.

In 2004, Vericheck offered to purchase the domain name from Lahoti. After Lahoti asked for $72,500 and then $48,000 for the domain name, negotiations fizzled. In 2006, Vericheck filed an arbitration complaint pursuant to the Uniform Domain-Name Dispute-Resolution Policy. The arbitrator ordered the transfer of the domain name to Vericheck.

Instead of complying, Lahoti sought a declaratory judgment in district court, saying that he hadn’t violated the Lanham Act’s cybersquatting or trademark infringement provisions. Vericheck counterclaimed that Lahoti had violated, among other laws, the Federal Trademark Act and the Anticybersquatting Consumer Protection Act (ACPA). The district court determined that the Vericheck mark was inherently distinctive and that Lahoti’s use of the Vericheck mark was in bad faith and violated the trademark law and the ACPA. Lahoti appealed, challenging the district court’s determination that the Vericheck mark was inherently distinctive.

APPLYING THE DISTINCTIVENESS STANDARD: DEFINITION OF DISTINCTIVE

Under federal law, suggestive, arbitrary or fanciful marks are inherently distinctive for trademark or ACPA purposes. Generic marks or descriptive marks that lack a secondary meaning aren’t distinctive.

The primary criterion for distinguishing between a suggestive and a descriptive mark, according to the Ninth Circuit, is the directness and immediacy of the thought process from the mark to the particular product. A mark is suggestive if a “mental leap” is necessary to reach a conclusion about the nature of the referenced product. Conversely, a mark is descriptive if it defines a specific characteristic of the product in a way that doesn’t require any imagination.

A MATTER OF SUFFIXES

On appeal, the Ninth Circuit scrutinized the district court’s finding that the Vericheck mark was distinctive. The district court had determined that the Vericheck mark was suggestive in part because the PTO had previously granted federal trademark registration for the third party Arizona mark, which, like the Vericheck Mark, consisted solely of a design element around the word “VeriCheck.”

The Ninth Circuit acknowledged that courts may defer to the PTO’s registration of highly similar marks on distinctiveness but noted that a series of prior registrations could support descriptiveness in some cases. For example, numerous registrations for electronic products of marks with a “–TRONICS” or “–TRONIX” suffix could indicate that the registrants and public regard the suffix as descriptive for electronic products.

It also cautioned that a third-party registration isn’t determinative of distinctiveness if circumstances have materially changed since that registration, or if that third party registration is distinguishable because it combines part of the disputed mark with nondescriptive terms. Ultimately, the Ninth Circuit concluded that the registration of the Arizona mark showed that the PTO regarded “Vericheck” as distinctive.

But the court faulted the district court for requiring the disputed mark to describe all of Vericheck’s services to qualify as merely descriptive. The Ninth Circuit held that a mark could be found descriptive without meeting this requirement. The proper inquiry is “whether, when the mark is seen on the goods or services, it immediately conveys information about their nature.”

In addition, courts may analyze all components of the mark to determine whether they, taken together, simply describe the goods or services. The district court had held that the disputed mark couldn’t be broken down into “veri” and “check” for purposes of a descriptiveness analysis.

Because the district court’s distinctiveness finding was partly based on reasoning contrary to federal trademark law, the Ninth Circuit sent it back for reconsideration under the proper standards. Above all, this case highlights how the issue of distinctiveness and applying the distinctiveness standard is fact-based and makes for a tough call.

SIDEBAR: PROVING A CYBERSQUATTER'S BAD FAITH

In Lahoti v. Vericheck, Inc. (see main article), the Ninth U.S. Circuit Court of Appeals also reviewed the finding that Lahoti had acted with “a bad faith intent to profit” from the use of the Vericheck mark — a prerequisite to a liability finding under the Anticybersquatting Consumer Protection Act (though not necessarily under the Federal Trademark Act).

The court cited several factors that supported the finding of bad faith. Lahoti had never used the domain name in connection with a bona fide offering of goods and services. Instead, he’d earned income when customers clicked on links on the Web Site — some of which directed them to Vericheck’s competitors.

Further, Lahoti had asked for as much as $72,500 to sell the domain name to Vericheck, even though he’d had no interests associated with the “Vericheck” name. Finally, Lahoti was a repeat cybersquatter who had registered more than 400 domain names (including nissan.org, 1800mattress.com and ebays.com) resembling distinctive or famous trademarks and been admonished by judicial bodies for doing so.

About the trademark law firm:

Klemchuk LLP is an Intellectual Property (IP), Technology, Internet, and Business law firm.  The firm offers comprehensive legal services including litigation and enforcement of all forms of IP as well as registration and licensing of patents, trademarks, trade dress, and copyrights.  The firm also provides a wide range of technology, Internet, e-commerce, and business services including business planning, formation, and financing, mergers and acquisitions, business litigation, data privacy, and domain name dispute resolution. 

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