"Defendant Preclusion" Res Judicata Can Result From Default Judgment

In Nasalok Coating Corp. v. Nylok Corp. ( No. 2007-1432; April 14, 2008), a Federal Circuit panel affirms the PTO Trademark Trial and Appeal Board's dismissal of Nasalok's cancellation petition on grounds that the claims were barred by res judicata. The registered mark in question that is used in connection with metal fasteners consists of a patch of the color blue on a selected number of threads of the fastener, with the blue patch extending more than 90 degrees and less than 360 degrees around the fastener's circumference. In 2003, Nylock had sued Nasalok and other companies in federal district court for infringement of several of its trademarks, including the registered mark in question. Because Nasalok failed to enter an appearance, the district court entered a default judgment in Nylok's favor and entered an injunction prohibiting Nasalok from, among other things, selling within or importing into the United States any self-locking fastener having the color blue or any confusingly similar color. Nasalok did not appeal from the entry of that injunction order.

Five months after the default judgment, Nasalok filed its cancellation petition alleging that the registered mark in question is invalid because it is functional, a phantom mark, descriptive, generic, not distinctive and ornamental, etc. The Board applied the Federal Circuit's three-part Jet, Inc. claim preclusion test and found that the district court proceedings involved the same parties, the final judgment in the district court action was on the merits, and the cancellation petition arose out of the same transactional facts as those present in the district court case because it was an attack on the adjudicated registration in that case. The Federal Circuit panel notes that the test employed by the Board is the test applied to determine whether such a second action by the earlier plaintiff is precluded. The Jet test cannot be used as the exclusive test for preclusion against a defendant in the first action. Different rules of "defendant preclusion" apply in such circumstances. The panel first considers whether Nasalok was required to raise the invalidity issue as a counterclaim in the district court action and concludes that it was not. The subject matter in the two proceedings is not deemed to have arisen out of the same transaction or occurrence. In the course of reaching its conclusion in this regard, the panel finds that the Lear doctrine of freely allowing challenges to the validity of patents should apply to trademark validity challenges as well.

But claim preclusion must be applied, the panel concludes, because the effect of the cancellation petition amounts to a collateral attack on the district court judgment. Allowing Nasalok to challenge the trademark registration's validity would effectively undo the injunctive relief granted by the district court. Cancellation of the registration would require modification of the injunction to permit use of the color blue, something that is not covered by the other trademarks asserted against Nasalok in the infringement action. The panel is not persuaded that preclusion should not apply because the injunction resulted from a default judgment. In circumstances such as present here, namely the default judgment having satisfied due process requirements and Nasalok's attempts to collaterally attack that judgment, the default judgment can operate as res judicata.