Hyson USA Inc. v. Hyson 2U, Ltd. , 821 F.3d 935 ( 2016 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-3261
HYSON USA, INC.,
LEONID TANKSY, and
ENNA GAZARYAN,
Plaintiffs-Appellants,
v.
HYSON 2U, LTD.,
KAROLIS KAMINSKAS, INC.,
and KAROLIS KAMINSKAS,
Defendants-Appellees.
____________________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 14 C 4320 — Milton I. Shadur, Judge.
____________________
ARGUED SEPTEMBER 10, 2015 — DECIDED MAY 16, 2016
____________________
Before FLAUM, RIPPLE, and SYKES, Circuit Judges.
SYKES, Circuit Judge. This is a trademark dispute between
two food-distribution companies named Hyson. Hyson
USA, Inc., is owned by Leonid Tansky and formerly em-
2 No. 14-3261
ployed Karolis Kaminskas as a manager. In early 2012 Hyson
USA experienced a serious financial setback and suspended
its operations. In a role reversal, Tansky then went to work
for Kaminskas at his newly formed company Hyson 2U, Ltd.
That company operated in much the same way as Hyson
USA.
About 17 months later, Tansky was fired. This suit is his
response. Tansky and his company, Hyson USA, accuse
Hyson 2U and Kaminskas of trademark infringement. See
15 U.S.C. §§ 1114 et seq. Hyson 2U moved to dismiss for
failure to state a claim, see FED. R. CIV. P. 12(b)(6), arguing
that the complaint affirmatively established the defense of
acquiescence. That defense estops recovery if the trademark
owner, by his words or conduct, manifested his consent to
the defendant’s use of the mark. The district court granted
the motion and dismissed the case.
We reverse. The district judge jumped the gun in dis-
missing the case at the pleading stage. Acquiescence is a
fact-intensive equitable defense that is rarely capable of
resolution on a motion to dismiss under Rule 12(b)(6).
I. Background
Hyson USA and Hyson 2U are food distributors with a
common history. Hyson USA is wholly owned by its presi-
dent, Leonid Tansky, and has operated since 2006. Karolis
Kaminskas was one of its managers. In the spring of 2012,
Hyson USA encountered serious financial difficulty, culmi-
nating in the loss of its liability insurance. That move forced
the company to suspend its operations.
In September 2012 Kaminskas established Hyson 2U, and
Hyson USA then transferred its branded inventory and
No. 14-3261 3
equipment to the new company. Hyson 2U also leased the
warehouse from which Hyson USA had operated. Tansky
then switched roles with Kaminskas and went to work for
him at his new company. After the changeup Hyson 2U
operated in the same manner and in the same markets as
Hyson USA.
For reasons not disclosed, in February 2014 Tansky was
fired. About five months later, he and Hyson USA—now up
and running again—sued Hyson 2U and Kaminskas alleging
claims for trademark infringement under the Lanham Act; 1
the suit also included several state-law claims. 2 The defend-
ants (we’ll refer to them collectively as “Hyson 2U”) moved
to dismiss the federal claims under Rule 12(b)(6), arguing
that the allegations in the complaint established the affirma-
tive defense of acquiescence. The judge agreed, dismissed
the trademark claims, and relinquished supplemental juris-
diction over the state-law claims. This appeal followed.
II. Discussion
We review de novo the district court’s order dismissing
the complaint under Rule 12(b)(6) for failure to state a claim.
Citadel Grp. Ltd. v. Wash. Reg’l Med. Ctr., 692 F.3d 580, 591
(7th Cir. 2012). Dismissal is appropriate under that rule
when the factual allegations in the complaint, accepted as
1 The Lanham Act claims are for trademark infringement, false designa-
tion of origin, trademark dilution, and cybersquatting. See 15 U.S.C.
§ 1114(1); id. § 1125(a), (c), (d).
2Tansky’s wife, Enna Gazaryan, is also a plaintiff, but her presence in the
suit is not important here. We’ll refer to the plaintiffs collectively as
“Hyson USA.”
4 No. 14-3261
true, do not state a facially plausible claim for relief. Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007); Silha v. ACT, Inc., 807 F.3d 169, 173–
74 (7th Cir. 2015). This case implicates the pleading principle
that “[t]he mere presence of a potential affirmative defense
does not render the claim for relief invalid.” Brownmark
Films, LLC v. Comedy Partners, 682 F.3d 687, 690 (7th Cir.
2012). That is, a plaintiff ordinarily need not anticipate and
attempt to plead around affirmative defenses. Chi. Bldg.
Design v. Mongolian House, Inc., 770 F.3d 610, 613 (7th Cir.
2014).
An exception applies when “the allegations of the com-
plaint … set forth everything necessary to satisfy the affirm-
ative defense.” United States v. Lewis, 411 F.3d 838, 842 (7th
Cir. 2005). However, because affirmative defenses frequently
“turn on facts not before the court at [the pleading] stage,”
Brownmark Films, 682 F.3d at 690, dismissal is appropriate
only when the factual allegations in the complaint unambig-
uously establish all the elements of the defense, Brooks v.
Ross, 578 F.3d 574, 579 (7th Cir. 2009). In other words, the
plaintiff “must affirmatively plead himself out of court.” Chi.
Bldg. Design, 770 F.3d at 614.
At issue here is the doctrine of acquiescence, a fact-
sensitive equitable defense that may estop a trademark
owner from obtaining injunctive and monetary remedies for
trademark infringement. Before turning to the specifics of
the defense, it’s helpful to step back and recall some basics of
trademark law.
The purpose of trademark protection is to identify the
source of a good or service to consumers. See RESTATEMENT
(THIRD) OF UNFAIR COMPETITION § 9 (AM. LAW INST. 1995).
No. 14-3261 5
Trademark law does this by granting the owner of a mark
the right to prevent others from using the mark in a way that
is likely to cause confusion. See Sorensen v. WD-40 Co.,
792 F.3d 712, 726 (7th Cir. 2015) (“The keystone of trademark
infringement is likelihood of confusion as to source, affilia-
tion, connection, or sponsorship of goods or services among
the relevant class of customers and potential customers.”)
(internal quotation marks and citation omitted). Trademark
protection is granted only for so long as the mark reliably
identifies the source of a good or service. Accord Eva’s Bridal
Ltd. v. Halanick Enters., 639 F.3d 788, 790 (7th Cir. 2011) (“A
person who visits one Kentucky Fried Chicken outlet finds
that it has much the same ambiance and menu as any oth-
er. … The trademark's function is to tell shoppers what to
expect—and whom to blame if a given outlet falls short.”).
If a trademark owner acquiesces to another’s use of his
mark, however, then the mark’s original source-identifying
power is weakened and the owner may be estopped from
obtaining relief in an infringement action against the junior
user. See TMT N. Am., Inc. v. Magic Touch GmbH, 124 F.3d
876, 885 (7th Cir. 1997); accord Eva’s Bridal, 639 F.3d at 790.
Thus, acquiescence is an affirmative defense in an action for
trademark infringement under the Lanham Act. See
15 U.S.C. § 1115(b)(9).
Generally speaking, acquiescence is an equitable doctrine
that permits the court to deny relief in an action for trade-
mark infringement if the evidence shows that the owner of
the mark has, through his words or conduct, conveyed his
consent to the defendant’s use of the mark. See Magic Touch,
124 F.3d at 885; Piper Aircraft Corp. v. Wag-Aero, Inc., 741 F.2d
925, 932–33 (7th Cir. 1984); see also SunAmerica Corp. v. Sun
6 No. 14-3261
Life Assurance Co., 77 F.3d 1325, 1334 (11th Cir. 1996); see
generally RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 29.
The defense prevents the trademark owner from impliedly
permitting another’s use of his mark and then attempting to
enjoin that use after the junior user has invested substantial
resources to develop the mark’s goodwill. See Magic Touch,
124 F.3d at 885. We’ve noted (as have other courts) that
“acquiescence is related to the doctrine of laches, by which
equity comes to the aid of an innocent user and grants him
refuge from a claimant who has calmly folded his hands and
remained silent while the innocent user has exploited and
strengthened the mark.” Id. (internal quotation marks omit-
ted). Indeed, our acquiescence cases import aspects of laches
analysis, looking to the reliance interests of the junior user,
the senior user’s delay in enforcing his rights, and the preju-
dice to the junior user if the senior user’s rights are enforced.
See, e.g., Piper Aircraft, 741 F.3d at 932–33; Magic Touch,
124 F.3d at 885–86; Seven-Up Co. v. O-So-Grape Co., 283 F.2d
103, 106 (7th Cir. 1960) (formally decided under the doctrine
of laches but also discussing acquiescence).
Importantly, however, “[w]hereas laches is a negligent,
unintentional failure to protect trademark rights,
[a]cquiescence is associated with intentional abandonment.”
Piper Aircraft, 741 F.2d at 933 (emphasis added and quotation
marks omitted). It requires an “affirmative word or deed”
that conveys the trademark owner’s implied consent to the
junior user’s use of his marks. Magic Touch, 124 F.3d at 885
(emphasis added and quotation marks omitted).
Or, as the Fourth Circuit has aptly put it, “[a]cquiescence
is the active counterpart to laches, a doctrine based on
passive consent. Both doctrines connote consent by the
No. 14-3261 7
owner to an infringing use of his mark, but acquiescence
implies active consent.” What-A-Burger of Va., Inc. v.
Whataburger of Corpus Christi, Tex., 357 F.3d 441, 452 (4th Cir.
2004) (internal quotation marks omitted); accord Creative
Gifts, Inc. v. UFO, 235 F.3d 540, 548 (10th Cir. 2000) (“Acqui-
escence requires proof even more demanding than a show-
ing[,] which would suffice for a laches defense[,] that the
party seeking to enforce its trademark rights has unreasona-
bly delayed pursuing litigation and, as a result, has material-
ly prejudiced the alleged infringer.”).
In short, although our cases sometimes blend the doc-
trines of acquiescence and laches, they are formally distinct
and should be analyzed separately. See 6 J. THOMAS
MCCARTHY, MCCARTHY ON TRADEMARKS AND UNFAIR
COMPETITION § 31:41 (4th ed. 2014) (“To preserve some
semantic sanity in the law, it is appropriate to reserve the
word ‘acquiescence’ for use only in those cases where the
trademark owner, by affirmative word or deed, conveys its
implied consent to another. That is, laches denotes a merely
passive consent, while acquiescence implies active consent.
This results in two separate legal categories: ‘estoppel by
laches’ as distinct from ‘estoppel by acquiescence.’”).
The Eleventh Circuit has distilled acquiescence doctrine
into three elements: “(1) the senior user actively represented
that it would not assert a right or a claim; (2) the [senior
user’s] delay between the active representation and assertion
of the right or claim was not excusable; and (3) the delay
caused the defendant undue prejudice.” SunAmerica, 77 F.3d
at 1334; see also Coach House Rest., Inc. v. Coach & Six Rests.,
Inc., 934 F.2d 1551, 1558 (11th Cir. 1991). The Second and
Ninth Circuits agree and have adopted this test for the
8 No. 14-3261
defense. See Seller Agency Council, Inc. v. Kennedy Ctr. for Real
Estate Educ., Inc., 621 F.3d 981, 989 (9th Cir. 2010) (listing the
same elements); Pro Fitness Physical Therapy Ctr. v. Pro-Fit
Orthopedic & Sports Physical Therapy P.C., 314 F.3d 62, 67 (2d
Cir. 2002) (same). Our acquiescence cases engage in essen-
tially the same analysis (though without listing elements), so
we’ll use this formulation too.
Applying this understanding of the doctrine here, Hyson
USA’s complaint does not unambiguously establish the
affirmative defense of acquiescence. The complaint alleges
that Hyson USA transferred its branded inventory and
equipment to Hyson 2U, that Hyson USA knew Hyson 2U
was using its marks, and that Tansky worked for Hyson 2U
for about 17 months before he was fired. There are no allega-
tions that Hyson USA or Tansky made any active represen-
tations—by word or deed—that they would not assert a
right or claim regarding the Hyson trademark. The other
two elements of the defense—delay and undue prejudice—
cannot alone support a finding of acquiescence, so we need
say no more about them here.
We note in closing that an equitable defense like acquies-
cence is not ordinarily susceptible to resolution at the plead-
ing stage. The defense requires a qualitative examination of
the parties’ words and conduct and an equitable evaluation
of the length of the delay and the degree of prejudice to the
defendant if the trademark owner’s rights are enforced. That
kind of analysis generally requires a factual record. We note
as well that even when an acquiescence defense can be
proven, “[t]he law … allows the senior user’s claim to be
revived from estoppel if the senior user can show that
‘inevitable confusion’ would result from dual use of the
No. 14-3261 9
marks.” Magic Touch, 124 F.3d at 886 (quoting SunAmerica,
77 F.3d at 1334). That question, too, is generally inappropri-
ate for resolution on the pleadings.
Because the allegations in the complaint do not unam-
biguously establish everything necessary for the affirmative
defense of acquiescence, it was error to dismiss the case
under Rule 12(b)(6). Accordingly, we reverse the judgment
and remand for further proceedings consistent with this
opinion.
REVERSED.