Rhodes v. Avon Products, Inc. ( 2007 )


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  •                   FOR PUBLICATION
    UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    DEAN RHOADES; DERMANEW, INC., a         
    California corporation,
    No. 05-56047
    Plaintiffs-Appellants,
    v.                           D.C. No.
    CV-05-02169-R
    AVON PRODUCTS, INC., a New York
    OPINION
    corporation,
    Defendant-Appellee.
    
    Appeal from the United States District Court
    for the Central District of California
    Manuel L. Real, District Judge, Presiding
    Argued and Submitted
    May 7, 2007—Pasadena, California
    Filed October 15, 2007
    Before: John T. Noonan, Andrew J. Kleinfeld, and
    Richard A. Paez, Circuit Judges.
    Opinion by Judge Paez
    13943
    13946         RHOADES v. AVON PRODUCTS, INC.
    COUNSEL
    Steven A. Freund and Donald B. Rosen, Law Offices of Ste-
    ven A. Freund; and Howard Posner, Los Angeles, California,
    for the plaintiffs-appellants.
    RHOADES v. AVON PRODUCTS, INC.             13947
    Michelle M. Graham, and William R. Golden, Jr., Kelley
    Drye & Warren, LLP, New York, New York, for the
    defendant-appellee.
    OPINION
    PAEZ, Circuit Judge:
    In this trademark declaratory relief action, we must decide
    whether the district court properly dismissed Plaintiffs’ case
    for lack of subject matter jurisdiction. In their complaint,
    Plaintiffs sought a declaration that several of their trademarks
    did not infringe on Defendant’s registered marks. The juris-
    dictional issue turns on whether Plaintiffs alleged a constitu-
    tionally sufficient case or controversy in their First Amended
    Complaint (“FAC”). We must also decide whether related
    proceedings that were pending before the Trademark Trial
    and Appeal Board (“TTAB”) provided an appropriate basis
    for the district court to invoke the doctrine of primary juris-
    diction in order to dismiss Plaintiffs’ action and, if not,
    whether the court properly exercised its discretion under 28
    U.S.C. § 2201 when it declined to assert jurisdiction.
    We have jurisdiction pursuant to 28 U.S.C. § 1291, and we
    hold that the allegations in the FAC alleged a true case or con-
    troversy that established subject matter jurisdiction. We also
    hold that, although the TTAB provides a forum to address
    trademark registration issues, the availability of such a forum
    does not justify the application of the doctrine of primary
    jurisdiction as a basis for dismissing Plaintiffs’ federal court
    action. Thus, Plaintiffs were not required to wait for the com-
    pletion of TTAB proceedings before seeking declaratory
    relief in federal court. We further hold that, under the circum-
    stances of this case, the district court abused its discretion in
    declining to assert jurisdiction over Plaintiffs’ request for
    declaratory relief. Finally, because of the firmly expressed
    13948             RHOADES v. AVON PRODUCTS, INC.
    views of the assigned district judge, we direct that, on
    remand, the case be reassigned to a new judge.
    I.
    FACTUAL AND PROCEDURAL BACKGROUND
    DermaNew is a cosmetics and skin care company that pat-
    ented and distributes, among other things, hand-held mic-
    rodermabrasion devices and related skin care products.1
    DermaNew’s various products and slogans include “Der-
    maNew,” “KeraNew,” “GemaNew,” “DermaNew Institute,”
    “If It Is Not DermaNew, It Is Not Personal Microdermabra-
    sion,” and “DermaNew Palm Microdermabrasion System.”
    Plaintiff Dean Rhoades, who owns DermaNew and these
    products, has attempted to register these marks with the
    United States Patent and Trademark Office (“PTO”). Avon
    Products, Inc., (“Avon”), a well-known beauty product com-
    pany that distributes a skin-care product line called ANEW,
    challenged DermaNew’s registration applications in the
    TTAB. Avon contested five of DermaNew’s registration
    applications by filing opposition proceedings, and requested
    the cancellation of the registration of two more. See 37 C.F.R.
    §§ 2.61-2.209 (describing the rules of practice in trademark
    cases). At the time Plaintiffs commenced their federal court
    action, therefore, seven trademark proceedings were pending
    before the TTAB. Avon also initiated opposition or cancella-
    tion proceedings against DermaNew in other countries,
    including Brazil, Canada, Hong Kong, Israel, South Korea,
    and the European Community.
    In 2001, soon after Avon filed its first TTAB opposition
    1
    Microdermabrasion is a cosmetic procedure popular in spas and doc-
    tors’ offices in which the dead outermost surface layer of the skin is par-
    tially or completely removed by light abrasion. The procedure does not
    need to be performed by a physician, and is commonly used in conjunc-
    tion with facial spa treatments.
    RHOADES v. AVON PRODUCTS, INC.         13949
    proceeding, the parties began settlement negotiations. Accord-
    ing to DermaNew’s First Amended Complaint, at a settlement
    meeting attended by Rhoades and his wife at Avon’s coun-
    sel’s law offices, John Bergin, Avon’s in-house chief trade-
    mark counsel
    became agitated and pounded his fist on the table,
    explaining in substance, if not these actual words,
    “You have 60 days to get rid of all your products
    with the DermaNew trademark on it and you will
    never use it again or Avon will sue you for trade-
    mark infringement and you will have to pay for our
    losses and legal fees, too.” Additional comments by
    Bergin at that meeting included repetition of the
    threat of a trademark infringement lawsuit, and a
    promise that Avon would appeal any adverse court
    decision.
    Avon responds that these allegations are “wholly fabricated.”
    Settlement negotiations lasted more than four years,
    always, according to the FAC, “under the explicit threat of a[
    trademark] infringement lawsuit.” For example, on October 4,
    2001, Avon’s counsel sent a letter “for settlement purposes
    only” that stated that “Avon has lost confidence that a settle-
    ment will realistically take place” and that “if [DermaNew] is
    unwilling to accept [Avon’s settlement] terms . . . , we will
    immediately proceed with all pending proceedings and initiate
    whatever additional proceedings or litigation is [sic] neces-
    sary to protect Avon’s trademark rights.” On March 22, 2005,
    Avon’s counsel informed DermaNew’s counsel that “Avon
    would not ‘give up its right to damages’ ” unless DermaNew
    accepted Avon’s settlement offer. DermaNew interpreted this
    statement as threatening an infringement lawsuit because only
    in a federal court infringement lawsuit could Avon recover
    damages. See 15 U.S.C. § 1114.2 Finally, on March 24, 2005,
    Avon’s counsel declared negotiations to be “at an impasse.”
    2
    Again, Avon denies that it threatened Plaintiffs.
    13950           RHOADES v. AVON PRODUCTS, INC.
    On March 24, 2005, DermaNew filed a complaint in the
    Central District of California, seeking a declaratory judgment
    that its trademark applications do not infringe on Avon’s. See
    28 U.S.C. § 2201. Avon responded with a motion to dismiss
    under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6),
    asserting that the district court lacked subject matter jurisdic-
    tion and, in the alternative, that the court should decline to
    exercise jurisdiction because the action was brought in bad
    faith to avoid discovery obligations in the TTAB proceedings.
    DermaNew responded by amending its complaint (“the
    FAC”), and by filing an opposition to the motion to dismiss.
    The FAC attempted to cure the alleged jurisdictional defects
    in the original complaint, while the opposition to the motion
    to dismiss forcefully disputed the allegations of bad faith. The
    opposition noted, for instance, that “by filing the instant com-
    plaint [for declaratory relief] Rhoades will have the same dis-
    covery obligations, including depositions, as he would in the
    multitude of proceedings in the TTAB, except the discovery
    will be in one proceeding rather than seven or more.”
    Avon’s reply to the opposition argued that the FAC did not
    cure the jurisdictional defects, largely because the alleged
    threats of infringement litigation were excludable under Fed-
    eral Rules of Evidence 408, which limits the use of statements
    made during settlement negotiations. At the hearing on the
    motion to dismiss, DermaNew’s counsel tried to respond to
    Avon’s arguments, but the court ruled, without any additional
    elaboration:
    I think that the complaint is improper, brought for an
    improper motive, and I’m not exercising my discre-
    tion to undertake the declaratory judgment action
    since it should be back where it belongs and be fin-
    ished there motion [sic]. And the motion to dismiss
    is granted.
    When DermaNew tried to argue that one district court action
    would better serve judicial economy than seven TTAB actions
    RHOADES v. AVON PRODUCTS, INC.                 13951
    that might ultimately end up as an infringement action in the
    district court anyway, the court interrupted:
    “Counsel, I’ve already ordered. I gave you the
    opportunity of an order.”
    The hearing was brief, essentially consisting of the above col-
    loquy.
    The court followed its oral ruling with a written order dis-
    missing the action pursuant to Rules 12(b)(1) (lack of juris-
    diction) and 12(b)(6) (failure to state a claim upon which
    relief can be granted). DermaNew timely appealed.
    II.
    STANDARD OF REVIEW
    We review de novo dismissals under Rules 12(b)(1) and
    12(b)(6). Holcombe v. Hosmer, 
    477 F.3d 1094
    , 1097 (9th Cir.
    2007). “[F]or the purposes of” reviewing such dismissals, and
    where, as here, no evidentiary hearing has been held, “all
    facts [alleged in the complaint] are presumed to be true.” Id.;
    see McLachlan v. Bell, 
    261 F.3d 908
    , 909 (9th Cir. 2001).
    District court decisions “about the propriety of hearing declar-
    atory relief actions . . . [are] reviewed for abuse of discretion.”
    Wilton v. Seven Falls Co., 
    515 U.S. 277
    , 289-90 (1995).
    III.
    DISCUSSION
    A.    Dismissal Under Rule 12(b)(1)3
    3
    We agree with DermaNew that the district court erred in denying Der-
    maNew’s motion to amend the judgment to reflect a dismissal based
    solely on Rule 12(b)(1), and not based on Rule 12(b)(6). Avon’s motion
    to dismiss was grounded entirely in the argument that DermaNew had not
    13952             RHOADES v. AVON PRODUCTS, INC.
    As required by Article III, courts may adjudicate only
    actual cases or controversies. U.S. CONST. art. III, § 2, cl.1.
    When presented with a claim for a declaratory judgment,
    therefore, federal courts must take care to ensure the presence
    of an actual case or controversy, such that the judgment does
    not become an unconstitutional advisory opinion. See Pub.
    Serv. Comm’n v. Wycoff, Co., 
    344 U.S. 237
    , 244 (1952) (“The
    disagreement [underlying the declaratory relief action] must
    not be nebulous or contingent but must have taken on a fixed
    and final shape so that a court can see what legal issues it is
    deciding, what effect its decision will have on the adversaries,
    and some useful purpose to be achieved in deciding them.”).
    Absent a true case or controversy, a complaint solely for
    declaratory relief under 28 U.S.C. § 2201 will fail for lack of
    jurisdiction under Rule 12(b)(1). See Fleck and Assoc., Inc. v.
    Phoenix, an Arizona Mun. Corp., 
    471 F.3d 1100
    , 1103-04
    (9th Cir. 2006) (noting, in a declaratory relief action, that a
    true “case or controversy” is required to withstand a Rule
    12(b)(1) motion for lack of jurisdiction).
    [1] “[A]n action for a declaratory judgment that a patent [or
    trademark] is invalid, or that the plaintiff is not infringing,
    [presents] a case or controversy if the plaintiff has a real and
    reasonable apprehension that he will be subject to liability if
    he continues to manufacture his product.” Hal Roach Studios,
    Inc. v. Richard Feiner & Co., Inc., 
    896 F.2d 1542
    , 1555-56
    (9th Cir. 1990) (internal quotation marks, alterations, and cita-
    tions omitted).
    In applying this standard, we focus[ ] upon the posi-
    tion and perceptions of the plaintiff, declining to
    satisfied the jurisdictional “case or controversy” requirement, and such
    motions in this circuit may be brought “only under 12(b)(1).” Bland v.
    Fessler, 
    88 F.3d 729
    , 732 n.4 (9th Cir. 1996). We therefore construe the
    district court’s ruling as based on Rule 12(b)(1), and assess its merits
    accordingly.
    RHOADES v. AVON PRODUCTS, INC.                      13953
    identify specific acts or intentions of the defendant
    that would automatically constitute a threat of litiga-
    tion. The acts of the defendant [a]re instead to be
    examined in view of their likely impact on competi-
    tion and the risks imposed upon the plaintiff, to
    determine if the threat perceived by the plaintiff
    were [sic] real and reasonable.
    Cheesebrough-Pond’s, Inc. v. Faberge, Inc., 
    666 F.2d 393
    ,
    396 (9th Cir. 1982); see also 6 J. Thomas McCarthy, Trade-
    marks and Unfair Competition § 32.51 (4th ed. 2007) (noting
    that to state “an actual controversy . . . [a] threat of infringe-
    ment does not have to be said in so many words. It can be
    expressed in the attitude of the defendant as expressed[, for
    example,] in ‘circumspect language in a letter.’ ”).4
    We conclude that DermaNew’s FAC sufficiently alleged
    the requisite “reasonable apprehension” for purposes of Rule
    12(b)(1). Even though concrete threats are not required, under
    our circuit’s “flexible approach,” in order to demonstrate a
    reasonable apprehension of an infringement suit, see 
    id., Der- maNew’s
    FAC alleges three:5 1) Avon’s lawyer specifically
    threatened a trademark infringement suit at a meeting; 2)
    Avon’s counsel wrote a letter threatening “additional proceed-
    ings or litigation”; and 3) Avon’s counsel told DermaNew’s
    4
    To the extent that both parties rely on the Federal Circuit’s articulation
    of this test, which requires an “explicit threat or other action by the paten-
    tee [or trademark owner],” see Fina Research, S.A. v. Baroid, Ltd., 
    141 F.3d 1479
    , 1481 (Fed. Cir. 1998), that reliance is misplaced, as that burden
    is heavier than what we require.
    5
    DermaNew did not need the court’s approval to file an amended com-
    plaint when it did. Under Rule 15(a), “[a] party may amend the party’s
    pleading once as a matter of course at any time before a responsive plead-
    ing is served.” Fed. R. Civ. P. 15(a). At the time DermaNew filed its FAC,
    Avon had filed only its motion to dismiss. We have held that “a motion
    to dismiss the complaint is not a responsive pleading” within the meaning
    of Rule 15(a). Miles v. Dep’t of Army, 
    881 F.2d 777
    , 781 (9th Cir. 1989).
    Therefore, DermaNew’s FAC was procedurally appropriate.
    13954              RHOADES v. AVON PRODUCTS, INC.
    counsel that Avon would not give up its right to damages. The
    first instance explicitly mentioned a trademark infringement
    suit; the second and third can imply only that course of action.
    As for the second threat, in light of the pending TTAB pro-
    ceedings, a federal infringement suit was the only conceivable
    “additional” type of litigation. The reference to damages in
    the third threat is notable because the TTAB cannot grant
    relief on an infringement claim — either injunctive or dam-
    ages — so Avon’s focus on damages must refer to that
    recourse as well.6
    [2] Under the circumstances of this case, DermaNew’s per-
    ception of threats was more than reasonable. Not only did
    Avon allegedly make three concrete threats of infringement
    litigation, but it did so on the heels of years of unsuccessful
    and tense settlement negotiations, and after Avon initiated
    seven actions in the TTAB. DermaNew thus had good reason
    to worry about the stability and profitability of its product
    lines, and to suspect that Avon would make good on its
    threats and seek hefty damages for any infringement. See
    
    Cheesebrough-Pond’s, 666 F.2d at 393
    (holding that Plain-
    tiffs had alleged a reasonable apprehension of an infringement
    suit where “[f]ailure of this court to resolve the dispute would
    force Cheesebrough to choose between continuing to forego
    competition in [its] market, and entering the market, risking
    substantial future damages and harm to relationships with its
    customers and retailers”).
    Avon attempts to evade the case and controversy estab-
    lished by the FAC by arguing that the declaratory relief action
    was brought in bad faith. The district court agreed, stating that
    6
    The powers of the TTAB are limited to “determin[ing] and decid[ing]
    the respective rights of [trademark] registration.” 15 U.S.C. § 1067(a); see
    also 15 U.S.C. §§ 1063(a), 1064. In contrast, a federal district court may,
    in addition to determining registration rights, 15 U.S.C. § 1119, also hear
    actions for trademark infringement, 15 U.S.C. § 1114, for which it may
    grant injunctive relief, 15 U.S.C. § 1116, and award damages, 15 U.S.C.
    § 1117.
    RHOADES v. AVON PRODUCTS, INC.             13955
    “the complaint was brought for an improper motive,” but we
    are not so convinced. Avon emphasizes McCarthy’s comment
    that “an applicant . . . cannot short-circuit the administrative
    process by filing suit for declaratory judgment in the federal
    courts,” see 6 McCarthy § 32:53, but ignores McCarthy’s
    caveat on that very point, applicable here, that
    if the declaratory plaintiff has in fact been threatened
    with litigation for infringement . . . , it should be
    allowed to bring an action for declaratory judgment
    to determine non-infringement, and join with it a
    claim of invalidity of the mark and a prayer for can-
    cellation of the declaratory defendant’s federal regis-
    tration.
    6 McCarthy § 32:55.
    [3] Moreover, Avon’s “ample evidence” of DermaNew’s
    “bad faith” is irrelevant or de minimis. As evidence of this
    “bad faith,” Avon filed declarations that allegedly established
    that 1) DermaNew’s trademarks infringed on Avon’s regis-
    tered marks, 2) the failure of settlement negotiations was due
    in part to DermaNew’s “ever changing cast of counsel,” and
    3) by filing suit, DermaNew sought “to evade [TTAB] discov-
    ery.” We cannot understand how the allegations contained in
    these declarations demonstrate bad faith. First, the alleged
    infringement is itself the subject of the lawsuit; Avon cannot
    premise its bad faith argument claim on the assumption that
    it will prevail on the ultimate trademark dispute.
    [4] Second, having carefully reviewed the record, we can-
    not but conclude that the failed settlement negotiations were
    just that—failure to agree on a settlement. We are unsure why
    Avon insists that DermaNew’s “changing” counsel or reluc-
    tance to accede to Avon’s settlement requests illustrates bad
    faith in filing a declaratory relief action. If anything, it sug-
    gests that DermaNew filed the action after settlement stalled
    because it feared an infringement lawsuit. Third, Avon’s alle-
    13956              RHOADES v. AVON PRODUCTS, INC.
    gation that DermaNew filed this action to avoid TTAB dis-
    covery is perplexing given that, as DermaNew points out,
    “Avon will certainly propound the same discovery in district
    court, [so] any avoidance of discovery would have been a
    temporary convenience at best.” DermaNew may have had
    strategic reasons for bringing this action, but that should not
    affect whether DermaNew’s complaint alleged a case or con-
    troversy that established jurisdiction. As the First Circuit put
    it in a similar case, “absent a showing of bad faith so substan-
    tial as to foreclose equitable relief, [ ] subjective aims do not
    matter.” PHC v. Pioneer Healthcare, Inc., 
    75 F.3d 75
    , 79 (1st
    Cir. 1996).7
    Avon also posits two direct responses to the threats
    recounted in the FAC. First, Avon argues that the threats are
    “wholly fabricated.” Second, it argues that to the extent they
    are not fabricated, they are privileged, having occurred during
    the course of settlement negotiations, and therefore may not
    be considered by this court. Neither contention has merit.8
    7
    Avon’s citation to Bausch & Lomb, Inc. v. CIBA Corp., 
    39 F. Supp. 2d 271
    (W.D.N.Y. 1999), to support its allegation of bad faith in fact under-
    mines the argument. In Bausch & Lomb, the district court declined to exer-
    cise jurisdiction because it determined “this action was designed in part as
    a weapon to strengthen B & L’s hand in any negotiations.” 
    Id. at 275.
    In
    that case, however, no settlement negotiations preceded the declaratory
    relief action, so the court noted that “[i]f B & L had genuinely wanted to
    resolve the dispute amicably, it could have sought to do so without starting
    a lawsuit.” 
    Id. In contrast,
    in this case settlement negotiations spanned sev-
    eral years without success before the filing of the declaratory judgement
    action. Avon characterizes the facts here as “far more egregious [with
    respect to a bad faith showing] than those facing the Bausch & Lomb
    Court.” We think not. Bausch & Lomb revealed its own bad faith by
    bringing a federal court action without attempting settlement, whereas
    DermaNew took this squabble to court only after years of effort to avoid
    litigation. Bausch & Lomb thus evidences the lack of bad faith in this case.
    8
    Avon devotes a significant portion of its brief to explaining why pend-
    ing TTAB proceedings do not themselves create a reasonable apprehen-
    sion of an infringement lawsuit for declaratory judgment purposes. Avon
    relies on McCarthy’s treatise and the Federal Circuit standard for this
    RHOADES v. AVON PRODUCTS, INC.                    13957
    1.    Factual Allegations For the Purpose of Reviewing
    Motions to Dismiss
    [5] Avon’s contention that DermaNew’s allegations of
    threats of an infringement suit are false is not relevant at this
    stage in the litigation. Although both parties submitted decla-
    rations in connection with the motion to dismiss, because no
    evidentiary hearing was held we must accept DermaNew’s
    version of events as true for the purposes of establishing juris-
    diction and surviving a 12(b)(1) motion. 
    McLachlan, 261 F.3d at 909
    ; see also Mattel, Inc. v. Greiner and Hausser GmbH,
    
    354 F.3d 857
    , 862 (9th Cir. 2003) (noting that to establish the
    jurisdiction necessary to withstand a Rule 12(b)(1) motion,
    “conflicts between the facts contained in declarations submit-
    ted by the two sides must be resolved in” the plaintiff’s
    favor).
    [6] In other words, the question presented is whether Der-
    maNew’s FAC is, on its face, sufficient to survive a motion
    to dismiss, not whether the alleged facts will ultimately prove
    accurate. Therefore, when determining whether the district
    court erred in dismissing the complaint, we must take Der-
    maNew’s allegations as true. These allegations describe con-
    crete threats of an infringement lawsuit that easily establish a
    proposition, but has missed our own precedent holding just the opposite.
    See 
    Cheesebrough-Pond’s, 666 F.2d at 396
    (explicitly rejecting the analy-
    sis of a Seventh Circuit case holding that “the filing of a notice of opposi-
    tion to registration with the Patent and Trademark Office is not equivalent
    to a charge of infringement”). While we have noted that “a simple opposi-
    tion proceeding in the Patent and Trademark Office generally will not
    raise a real and reasonable apprehension of [an infringement] suit,” our
    “flexible approach” to these cases precludes any such black and white
    lines. 
    Id. (holding that
    notice of opposition action, under the circumstances
    of that case, created reasonable apprehension of trademark infringement
    suit) (emphasis added). In any case, DermaNew has never claimed that the
    pending TTAB proceedings created the reasonable apprehension here.
    Instead, it relies on three alleged threats of a trademark infringement
    action in federal court.
    13958            RHOADES v. AVON PRODUCTS, INC.
    case or controversy. Cf. Bausch & 
    Lomb, 39 F. Supp. 2d at 273-74
    (holding allegations insufficient to confer jurisdiction
    where the purported threats were nothing more than “unattri-
    buted ‘rumors’ ”).
    2.     Federal Rule of Evidence 408
    Even discounting the allegations of oral threats, Der-
    maNew’s FAC establishes jurisdiction. It alleges that Avon’s
    counsel threatened an infringement suit by letter, a copy of
    which we have reviewed. The letter, which promises that
    Avon will “initiate whatever additional proceedings or litiga-
    tion is necessary to protect Avon’s trademark rights,” is suffi-
    cient in itself to leave DermaNew with a reasonable
    apprehension of an infringement suit. Avon argues that we
    should ignore the letter because “allegations based on settle-
    ment discussions . . . are inadmissible for any purpose, includ-
    ing showing jurisdiction,” and the letter specifically warned it
    was “written for settlement purposes only and shall not be
    admissible for any purpose in any legal proceeding.” Quite
    simply, this argument is not an accurate statement of the law.
    [7] Rule 408 provides as follows:
    Rule 408. Compromise and Offers to Compro-
    mise
    (a) Prohibited uses — Evidence of the following is
    not admissible on behalf of any party, when offered
    to prove liability for, invalidity of, of amount of a
    claim that was disputed as to validity or amount, or
    to impeach through a prior inconsistent statement or
    contradiction:
    (1) furnishing or offering or promising to
    furnish — or accepting or offering or prom-
    ising to accept — a valuable consideration
    RHOADES v. AVON PRODUCTS, INC.             13959
    in compromising or attempting to compro-
    mise the claim; and
    (2) conduct or statements made in compro-
    mise negotiations regarding the claim,
    except when offered in a criminal case and
    the negotiations related to a claim by a pub-
    lic office or agency in the exercise of regu-
    latory, investigative, or enforcement
    authority.
    (b) Permitted uses — This rule does not require
    exclusion if the evidence is offered for purposes not
    prohibited by subdivision (a). Examples of permissi-
    ble purposes include proving a witness’s bias or prej-
    udice; negating a contention of undue delay; and
    proving an effort to obstruct a criminal investigation
    or prosecution.
    The text of the rule is clear: evidence from settlement negotia-
    tions may not be considered in court “when offered to prove
    liability for, invalidity of, or amount of a claim that was dis-
    puted as to validity or amount, or to impeach through a prior
    inconsistent statement or contradiction.” Rule 408, however,
    does not bar such evidence when “offered for [other] purposes
    . . . [such as] proving a witness’s bias or prejudice.” See, e.g.,
    United States v. Technic Servs., Inc., 
    314 F.3d 1031
    , 1045
    (9th Cir. 2002) (holding that evidence from settlement negoti-
    ations was admissible to prove “obstruction of the EPA’s
    investigation”); United States v. Pend Oreille Pub. Utility
    Dist. No. 1, 
    926 F.2d 1502
    , 1507 n.4 (9th Cir. 1991) (same,
    where the evidence was “introduced only to prove that dis-
    puted lands were suitable for agricultural use prior to con-
    struction of [a] dam”). Notwithstanding the letter’s attempt to
    claim an absolute privilege, therefore, statements made in set-
    tlement negotiations are only excludable under the circum-
    stances protected by the Rule.
    13960             RHOADES v. AVON PRODUCTS, INC.
    [8] Here, DermaNew does not rely on the threats in an
    attempt to prove whose trademark is valid, or to impeach
    Avon. Instead, it uses the threats to satisfy the jurisdictional
    requirements of an action for declaratory relief.9 This is per-
    fectly acceptable under Rule 408. Avon’s citation to Aspen
    Title & Escrow, Inc. v. Jeld-Wen, Inc., 
    677 F. Supp. 1477
    (D.
    Ore. 1987), for the proposition that “settlement conferences in
    their entirety are covered under Rule 408, even when pur-
    ported threats are made during those conferences,” is mislead-
    ing and taken out of context. The “threat” at issue in Aspen
    Title was the statement “we will put you out of business,”
    which “Aspen contends . . . show[ed] a specific intent by
    defendants to drive Aspen out of business.” 
    Id. at 1485.
    The
    district court in that case excluded the threat because it
    occurred during settlement negotiations, and rightly so; the
    threat was offered for the purpose of establishing an antitrust
    conspiracy—for the purpose, in other words, of proving liabil-
    ity. Aspen Title, therefore, is inapposite.
    [9] Avon makes much of the “policy behind” Rule 408, as
    if any recognition of statements made during settlement will
    ruin the “freedom of communication with respect to compro-
    mise” that the Rule protects. Clemco Indus. v. Comm. Union
    Ins. Co., 
    665 F. Supp. 816
    , 829 (N.D. Cal. 1987). Yet the
    Rule, by its own terms, is one of limited applicability. In other
    words, Rule 408 is designed to ensure that parties may make
    offers during settlement negotiations without fear that those
    same offers will be used to establish liability should settle-
    ment efforts fail. When statements made during settlement are
    introduced for a purpose unrelated to liability, the policy
    underlying the Rule is not injured.
    [10] DermaNew’s FAC, having alleged a case or contro-
    versy, established subject matter jurisdiction. Avon’s argu-
    9
    The “other purpose” need not be specifically mentioned; those men-
    tioned by Rule 408 are not an “exhaustive” list, “but [are instead] only
    illustrative.” Technic 
    Servs., 314 F.3d at 1045
    .
    RHOADES v. AVON PRODUCTS, INC.                    13961
    ments to the contrary are unavailing. We therefore hold that
    the district court erred in dismissing the case based on Federal
    Rules of Civil Procedure 12(b)(1).10
    B.     Discretionary Dismissal
    The district court’s written order dismissed the case on the
    basis of Rule 12(b)(1). In its oral ruling at the hearing, how-
    ever, it also stated it was “not exercising . . . discretion to
    undertake the declaratory judgment action.” Because of the
    court’s firm ruling, we view its invocation of this ground as
    an alternative basis for dismissing DermaNew’s complaint.
    Accordingly, we address this discretionary ruling, and hold
    that the court erred here as well.
    1.    Primary Jurisdiction
    [11] In deciding not to assert jurisdiction under 28 U.S.C.
    § 2201, the district court stated that the complaint “should be
    back where it belongs and be finished there” before the
    TTAB. Although the court did not cite any authority, it
    appears to have invoked the doctrine of primary jurisdiction
    as a basis for declining to hear the case. See 
    PHC, 75 F.3d at 80
    (interpreting a district court’s ruling declining to hear a
    declaratory relief action about trademark rights as based on a
    primary jurisdiction rationale even though the “district court
    did not use this phrase” because it said that “it saw no reason
    ‘to take this case’ from ‘an administrative scheme designed to
    hear it’ ”). We hold, however, that this was not an appropriate
    reason to decline to entertain DermaNew’s lawsuit.11
    10
    In light of this conclusion, we need not address DermaNew’s argu-
    ment that the district court erred in denying DermaNew’s motion to amend
    the judgment to reflect that the dismissal was “without prejudice.”
    11
    Although we review the ultimate decision to decline to exercise juris-
    diction for abuse of discretion, see 
    Wilton, 515 U.S. at 289-90
    , we conduct
    de novo review of the court’s application of the primary jurisdiction doc-
    trine, Int’l Bhd. of Teamsters, Chauffeurs Warehousemen & Helpers, Gen-
    eral Truck Drivers, Office Food and Warehouse Local 952 v. Am.
    Delivery Serv. Co., Inc., 
    50 F.3d 770
    , 773 (9th Cir. 1995).
    13962           RHOADES v. AVON PRODUCTS, INC.
    The primary jurisdiction doctrine provides: When
    there is a basis for judicial action, independent of
    agency proceedings, courts may route the threshold
    decision as to certain issues to the agency charged
    with primary responsibility for governmental super-
    vision or control of the particular industry or activity
    involved.
    United States v. Culliton, 
    328 F.3d 1074
    , 1081 (9th Cir.
    2003). We have never addressed whether a district court
    should defer, on primary jurisdiction grounds, a trademark
    declaratory relief action pending the completion of related
    TTAB proceedings. The First and Second Circuits have both
    addressed similar circumstances, however, and have held that
    the primary jurisdiction rationale does not justify deferral. We
    agree.
    In PHC v. Pioneer Healthcare, 
    75 F.3d 75
    (1st Cir. 1996),
    the First Circuit considered a dispute over the name “Pioneer
    Healthcare.” Pioneer threatened PHC with an infringement
    lawsuit in two letters and initiated TTAB proceedings, and
    PHC responded with a declaratory judgment action in federal
    district court. 
    Id. at 77-78.
    The district court dismissed the
    complaint for lack of jurisdiction and failure to state a claim,
    as well as because of primary jurisdiction considerations. 
    Id. at 78-80.
    The First Circuit reversed, holding, inter alia, that
    the action “should not be deferred based on primary jurisdic-
    tion concerns.” 
    Id. at 80.
    The court explained that, in general, “[t]he expertise of the
    agency, avoidance of conflict, indications of legislative intent,
    and other factors may permit, sometimes even require, . . .
    deference by court to agency,” but that “[t]wo facts weigh[ed]
    heavily against deference to the administrative proceeding
    here.” 
    Id. First, the
    TTAB
    is not an ordinary administrative agency whose find-
    ings control unless set aside after court review under
    RHOADES v. AVON PRODUCTS, INC.              13963
    a highly deferential standard. [Cf. Chevron U.S.A.
    Inc. v. Natural Res. Def. Council, Inc., 
    467 U.S. 837
    ,
    843-45 (1984).] Under the Lanham Act, where a
    contested Board proceeding has already addressed
    the validity of the mark, the Board’s findings can be
    challenged in a civil action in district court through
    new evidence, and, at least to a large extent, the
    issues can be litigated afresh. 15 U.S.C. § 1071(b).
    And Congress permits an initial proceeding in the
    district court to challenge or affirm a federally regis-
    tered mark in civil suits in which a federally regis-
    tered mark is in issue, even without any prior resort
    to the Board. 15 U.S.C. § 1119.
    Second, at least where an infringement claim is
    involved — whether directly asserted by an “owner”
    or challenged in a declaratory action — there is often
    some urgency. Ongoing business conduct is likely to
    be involved and harm, possibly irreparable, may be
    accruing. Further, [unlike a federal district court,] the
    Board cannot give relief for an infringement claim,
    either injunctive or by way of damages. [See 15
    U.S.C. §§ 1063(a), 1064, 1067(a). Cf. 15 U.S.C.
    §§ 1114-1119 (powers of the district court are much
    broader).] Under these circumstances awaiting the
    Board’s action is less attractive; and this is doubly so
    because (as already noted) its administrative findings
    can so easily be relitigated in court.
    
    Id. In arriving
    at this conclusion, the First Circuit relied on an
    earlier Second Circuit opinion, Goya Foods, Inc. v. Tropicana
    Prod., Inc., 
    846 F.2d 848
    (2d Cir. 1988). There, the court
    noted that
    [i]f a district court action involves only the issue of
    whether a mark is entitled to registration and if sub-
    13964           RHOADES v. AVON PRODUCTS, INC.
    ject matter jurisdiction is available, the doctrine of
    primary jurisdiction might well be applicable,
    despite the differences between the trademark regis-
    tration scheme and other regulatory patterns. In such
    a case, the benefits of awaiting the decision of the
    [Patent and Trademark Office (“PTO”)] would
    rarely, if ever, be outweighed by the litigants’ need
    for prompt adjudication. But where, as in the pend-
    ing case, a district court suit concerns infringement,
    the interest in prompt adjudication far outweighs the
    value of having the views of the PTO. Whether a liti-
    gant is seeking to halt an alleged infringement or, as
    in this case, seeking a declaration of non-
    infringement, it is entitled to have the infringement
    issue resolved promptly so that it may conduct its
    business affairs in accordance with the court’s deter-
    mination of its rights. Delaying consideration of
    Goya’s claim pending the outcome of the TTAB pro-
    ceedings undercuts the purpose of declaratory relief
    by forcing Goya either to abandon use of trademarks
    it has used for more than a decade or to persist in pil-
    ing up potential damages.
    
    Id. at 853-54
    (citations and internal quotation marks omitted);
    see also 
    PHC, 75 F.3d at 80
    -81.
    [12] We find this reasoning persuasive. Allowing the dis-
    trict court to decline a declaratory relief action on a primary
    jurisdiction rationale is sensible only if the agency is better
    equipped to handle the action. Here, however, Congress has
    not installed the PTO as the exclusive expert in the field. As
    noted, parties may litigate these issues in federal court without
    previously exhausting their claims before the TTAB. See, e.g.,
    15 U.S.C. § 1071(b)(1). Indeed, we have previously noted this
    potential for overlapping litigation as a reason why pending
    TTAB proceedings may themselves, under certain circum-
    stances, create a reasonable apprehension of an infringement
    lawsuit. See 
    Cheesebrough-Pond’s, 666 F.2d at 396
    (holding
    RHOADES v. AVON PRODUCTS, INC.                   13965
    that Plaintiff had alleged a reasonable apprehension of an
    infringement lawsuit based on Defendant’s TTAB opposition
    action in part because “a decision of the Patent and Trade-
    mark Office allowing the registration of Chesebrough’s trade-
    mark would not preclude a subsequent infringement action or
    be determinative of the issues involved”). More importantly,
    where, as here, there is a potential infringement lawsuit, fed-
    eral courts are particularly well-suited to handle the claims so
    that parties may quickly obtain a determination of their rights
    without accruing potential damages.12
    Avon’s attempts to distinguish PHC and Goya Foods are
    not persuasive. It dismisses reliance on PHC because in that
    case the infringement threats were not made during “privi-
    leged settlement negotiations,” and because the PHC parties
    had not been involved in “years of settlement talks.” As
    already explained, however, in the context of this case the
    threats of trademark infringement litigation are not privileged,
    despite occurring during the course of settlement negotiations.
    Avon suggests that the “years of settlement talks” prove
    DermNew’s bad faith, but if anything, we think they prove the
    opposite — that DermaNew did make a good faith attempt to
    resolve the dispute amicably.
    Avon distinguishes Goya Foods by pointing out that the
    “narrow issue” in that case was whether the plaintiff should
    have leave to amend its complaint. That is indeed a proce-
    dural difference between that case and the instant one, but it
    is one without substance; in both cases the fundamental issue
    was whether “the pendency of a PTO proceeding was . . . a
    proper basis to forestall” an action for declaratory relief. Goya
    12
    For this reason, Avon’s contention that “Rhoades is just plain wrong
    to argue that the District Court is the only forum that can adjudicate all
    the issues between the parties in a single action” because the TTAB has
    consolidated the United States proceedings is itself “plain wrong.” The
    point is not the number of TTAB proceedings, but rather that only the dis-
    trict court can award damages or injunctive relief in an infringement
    action.
    13966              RHOADES v. AVON PRODUCTS, INC.
    
    Foods, 846 F.2d at 850
    . We therefore find both the First and
    Second Circuit’s determinations to be entirely relevant and
    instructive in this case.13
    [13] In light of the above considerations, we hold that the
    district court abused its discretion in declining to hear Der-
    maNew’s action. We agree with the Second Circuit that some
    situations might justify deferring a declaratory judgment case
    when related TTAB proceedings are pending; specifically,
    where the “district court action involves only the issue of
    whether a mark is entitled to registration,” it might make
    more sense to resolve the registration claims at the TTAB
    first. See 
    id., at 853-54.
    On the other hand, if, as here, a poten-
    tial infringement claim “requires the district court to resolve
    much or all of [the registration issues], it would waste every-
    one’s time not to settle the registration issue now[, in district
    court].” 
    PHC, 75 F.3d at 81
    . The deciding factor should be
    efficiency; the district court should exercise jurisdiction “if
    this course is more efficient; otherwise, not.”14 
    Id. Avon had
    ample opportunity to demonstrate the necessity of, or even
    any factor weighing in favor of, deferring the action. Instead,
    13
    Avon relies heavily on an district court case, Citicasters Co. v. Coun-
    try Club Commc’ns, No. 97-0678 RJK, 
    1997 WL 715034
    (C.D. Cal. July
    21, 1997) (unpublished), for its argument that district courts should
    “defer[ ] to the TTAB in cases where that would be the most efficient
    course of action.” In the first place, no one contests that assertion; the
    question is whether, in this case, deferring to the TTAB would in fact be
    the most efficient course. More importantly, however, besides lacking pre-
    cedential value, it is not clear that Citicasters involved any of the notewor-
    thy factors present here. Citicasters does not explain whether the federal
    court proceedings there involved a claim for declaratory relief, nor is there
    any indication that the federal case involved an infringement action.
    14
    Because the Supreme Court’s decision in Wilton v. Seven Falls, 
    515 U.S. 277
    (1995), involved a pending parallel state court action, we do not
    think that the factors that weighed in favor of deferral there, based mostly
    on concerns about comity, are applicable to the pending parallel TTAB
    proceedings in this case, to which the district court owes no special defer-
    ence, see 
    id. at 283-83
    (citing factors from Brillhart v. Excess Ins. Co. of
    Am., 
    316 U.S. 491
    (1942)).
    RHOADES v. AVON PRODUCTS, INC.           13967
    it has urged upon this court borderline frivolous arguments
    about Rule 408 and jurisdiction. Under the circumstances, we
    see no reason not to order the district court to entertain this
    action.
    2.     Remand to Different Judge
    DermaNew has requested that, upon remand, the case be
    assigned to a different judge. See 28 U.S.C. § 2106. We grant
    that request.
    [14] Under § 2106, remand to a different district is
    appropriate if there is a demonstration of personal
    bias or unusual circumstances. In determining
    whether unusual circumstances exist the court con-
    siders:
    (1) whether the original judge would reasonably be
    expected upon remand to have substantial difficulty
    in putting out of his or her mind previously
    expressed views or findings determined to be errone-
    ous or based on evidence that must be rejected, (2)
    whether reassignment is advisable to preserve the
    appearance of justice, and (3) whether reassignment
    would entail waste and duplication out of proportion
    to any gain in preserving the appearance of fairness.
    The first two factors are considered to be of equal
    importance; moreover, a finding of either one would
    support remand to a different judge.
    United Nat’l Ins. Co. v. R & D Latex Corp., 
    141 F.3d 916
    ,
    920 (9th Cir. 1998) (quoting California v. Montrose Chem.
    Corp., 
    104 F.3d 1507
    , 1521 (9th Cir. 1997)). We are per-
    suaded by our review of the record that the assigned district
    court judge “cannot reasonably be expected upon remand to
    disregard his previously expressed views in this matter.” 
    Id. at 919-20.
    13968          RHOADES v. AVON PRODUCTS, INC.
    [15] In this case, the district judge granted Avon’s motion
    to dismiss without allowing DermaNew’s counsel the oppor-
    tunity to respond, even briefly, to Avon’s Rule 408 argument.
    The judge reasoned that the complaint was “brought for an
    improper motive” and that “it should be back where it
    belongs.” As we have explained, we have carefully reviewed
    the record and can find no evidence of any such “improper
    motive” whatsoever, and furthermore, the judge’s invocation
    of the primary jurisdiction doctrine was legally erroneous.
    Under the circumstances of this case, we “conclude that if this
    case were before him[, the judge] would have substantial dif-
    ficulty in putting his previously expressed views out of his
    mind.”
    VACATED and REMANDED with direction that the
    case be reassigned to a different judge, who should exer-
    cise jurisdiction over this declaratory relief action.
    

Document Info

Docket Number: 05-56047

Filed Date: 10/15/2007

Precedential Status: Precedential

Modified Date: 10/14/2015

Authorities (22)

Phc, Inc. v. Pioneer Healthcare, Inc. , 75 F.3d 75 ( 1996 )

Goya Foods, Inc. v. Tropicana Products, Inc. , 846 F.2d 848 ( 1988 )

No. 02-56272 , 354 F.3d 857 ( 2003 )

Hal Roach Studios, Inc., a Delaware Corporation v. Richard ... , 896 F.2d 1542 ( 1990 )

98-cal-daily-op-serv-2502-98-daily-journal-dar-3457-united-national , 141 F.3d 916 ( 1998 )

Blair G. McLachlan v. James Bell Michael George Charles ... , 261 F.3d 908 ( 2001 )

United States v. James M. Culliton , 328 F.3d 1074 ( 2003 )

Fleck and Associates, Inc., an Arizona Corporation v. ... , 471 F.3d 1100 ( 2006 )

william-bland-and-national-association-of-telecomputer-operators-v-daniel , 88 F.3d 729 ( 1996 )

international-brotherhood-of-teamsters-chauffeurs-warehousemen-helpers , 50 F.3d 770 ( 1995 )

Ursula Holcombe v. David Hosmer Richard Kirkland, and Dale ... , 477 F.3d 1094 ( 2007 )

chesebrough-ponds-inc-a-corporation , 666 F.2d 393 ( 1982 )

state-of-california-v-montrose-chemical-corporation-of-california-pcb , 104 F.3d 1507 ( 1997 )

united-states-of-america-as-trustee-for-the-kalispel-indian-tribe-and , 926 F.2d 1502 ( 1991 )

Wilton v. Seven Falls Co. , 115 S. Ct. 2137 ( 1995 )

Brillhart v. Excess Insurance Co. of America , 62 S. Ct. 1173 ( 1942 )

Fina Research, S.A. v. Baroid Limited, and Henkel Kgaa , 141 F.3d 1479 ( 1998 )

Bausch & Lomb Inc. v. Ciba Corp. , 39 F. Supp. 2d 271 ( 1999 )

Aspen Title & Escrow, Inc. v. Jeld-Wen, Inc. , 677 F. Supp. 1477 ( 1987 )

Clemco Industries v. Commercial Union Insurance , 665 F. Supp. 816 ( 1987 )

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