Second Circuit Archives

Second Circuit

Trade Dress Requires Separate Articulation and Distinctiveness Requirements

by Ashley K. Justice | Feb 20, 2025 | Trademarks

The US Court of Appeals for the Second Circuit vacated and remanded a district court’s dismissal of a complaint for trade dress infringement and unfair competition, finding that the district court erred in requiring the plaintiffs to articulate distinctiveness of trade dress infringement at the pleading stage. Cardinal Motors, Inc. v. H&H Sports Protection USA Inc., Case No. 23-7586 (2d Cir. Feb. 6, 2025) (Chin, Sullivan, Kelly, JJ.)

Cardinal is a designer and licensor of motorcycle helmets. At issue was the “Bullitt” helmet, which Cardinal exclusively licenses to Bell Sports and is “one of the most popular helmets made by Bell.” H&H manufactures and sells the “Torc T-1” helmet. Both the Bullitt and Torc T-1 helmets have “flat and bubble versions,” feature “metallic borders around the bottom and front opening of the helmet,” and “share similar technical specifications.”

Cardinal sued H&H in September 2020, alleging unfair competition and trade dress infringement. Cardinal amended its complaint twice but both amended complaints were dismissed for failure “to adequately plead the claimed trade dress with precision or with allegations of its distinctiveness.” In Cardinal’s third amended complaint, it included two alternative trade dresses – a “General Trade Dress” and “Detailed Trade Dress” – which listed features of the Bullitt at different levels of detail.

Despite the amendment, the district court dismissed the third amended complaint with prejudice. Based on the general trade dress, the district court reasoned that Cardinal failed to allege distinctiveness and therefore failed to allege a plausible trade dress claim. The district court extended its reasoning to “summarily conclud[e]” that the detailed trade dress also failed to articulate distinctiveness. Cardinal appealed.

Prior to making any determinations, the Second Circuit clarified that distinctiveness and the articulation requirement are separate inquiries, and that the articulation requirement is evaluated first. A plaintiff meets the articulation “requirement by describing with precision the components – i.e., specific attributes, details, and features – that make up its claimed trade dress.” The Court explained that the articulation requirement assists courts and juries to evaluate infringement claims, ensures the design is not too general to protect, and allows a court to identify what combination of elements would be infringing.

Focusing on distinctiveness, the Second Circuit explained that a trade dress plaintiff must specifically allege that its product design has acquired distinctiveness. Acquired distinctiveness is when the mark has a secondary meaning, where the public primarily associates the mark with the “source of the product rather than the product itself.” Separate from the elements of trademark, the plaintiff must meet the articulation requirement, which entails listing the components that make up the trade dress.

Having clarified the pleading requirements, the Second Circuit found de novo that the district court erred in mixing the articulation requirement with the distinctiveness requirement at the pleading stage. The Second Circuit determined that the district court erred in dismissing Cardinal’s complaint for failure to meet the articulation requirement. The Court found that Cardinal met the articulation requirement because the general trade dress was “sufficiently [...]

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Vimeo’s Fleeting Interaction With Videos Doesn’t Negate Safe Harbor Protections

by Taylor MacDonald | Jan 23, 2025 | Copyrights

The US Court of Appeals for the Second Circuit affirmed a district court’s decision, granting Vimeo qualified protection under the Digital Millennium Copyright Act (DMCA) safe harbor provision. Capitol Records, LLC v. Vimeo, Inc., Case Nos. 21-2949(L); -2974(Con) (2d Cir. Jan. 13, 2025) (Leval, Parker, Merriam, JJ.) This case addresses, for the second time, whether Vimeo had “red flag knowledge” of the defendant’s copyrighted works under the DMCA.

DMCA Section 512(c) provides a safe harbor that shelters online service providers from liability for indirect copyright infringement on their platforms under certain conditions. Congress provided two exceptions that would remove the safe harbor protection:

Actual or red flag knowledge of infringing content
The ability to control content while receiving a financial benefit directly attributable to the accused infringement activity.

EMI, an affiliate of Capitol Records, vehemently opposed Vimeo’s inclusion of videos containing EMI’s music on its site and initiated the present suit in 2009. The district court granted summary judgment in favor of Vimeo, dismissing the plaintiffs’ claims on the ground that Vimeo was entitled to the safe harbor protection provided by Section 512(c). EMI appealed.

In a 2016 appeal (Vimeo I ), the Second Circuit considered Vimeo’s activities under the DMCA. In Vimeo I, the Court (in the context of an interlocutory appeal) ruled that the copyright holder must establish that the service provider (e.g., Vimeo) had “knowledge or awareness of infringing content,” and that the service provider bore the initial burden to prove it qualified for the DMCA safe harbor, whereupon the burden shifted to the copyright holder to prove a disqualifying exception.

Knowledge of Infringement

In Vimeo I, the Second Circuit cited its 2012 decision in Viacom Int’l v. You Tube and explained that red flag knowledge incorporates an objective standard. The facts actually known to the service provider must be sufficient such that a reasonable person would have understood there to be infringement that was not offset by fair use or a license. Vimeo I clarified that service provider employees who are not experts in copyright law cannot be expected to know more than any reasonable person without specialized understanding.

The Second Circuit explained that this knowledge analysis is a fact-intensive one, and that copyright owners cannot rely on service provider employees’ generalized understanding to prove red flag knowledge for any video (or other work). The Vimeo I court also noted that the DMCA did not place a burden on service providers to investigate whether users had acquired licenses. In Vimeo I, the Second Circuit further instructed that because the legal community cannot agree on a universal understanding of fair use, it would be unfair to expect “untutored” service provider employees to determine whether a given video is not fair use on its face.

Right and Ability to Control

In analyzing what constitutes the right and ability to control, the Second Circuit emphasized that Congress’ purpose behind the DMCA was to effect a compromise between rightsholders and safe harbor claimants: “Congress recognized that the [...]

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Focus on Funk: 40-Year-Old Copyright Claim Is Time-Barred

by Karen Gover | Dec 12, 2024 | Copyrights

In a summary order, the US Court of Appeals for the Second Circuit affirmed the district court’s orders in a case involving an ownership dispute over the copyrights to certain compositions by Parliament-Funkadelic bandleader George Clinton, finding that the claim was time-barred based on an admission that the claim was first discovered 40 years ago. Bridgeport Music Inc., et al. v. TufAmerica Inc., et al., Case No. 23-7386-cv (2d Cir. Dec. 2, 2024) (Carney, Bianco, Nardini, JJ.) (nonprecedential).

LeBaron Taylor was a Detroit-based music producer, disc jockey, and record company executive. Clinton recorded music for Taylor’s record label, Revilot Records, before it went bankrupt in the late 1960s. After Revilot’s bankruptcy, Clinton began recording music for Westbound Records, including re-recording some of the compositions that he had previously recorded with Revilot. TufAmerica Inc. (d/b/a Tuff City Records) and Kay Lovelace Taylor, LeBaron Taylor’s widow, are Clinton’s successors-in-interest.

In December 2017, TufAmerica sent a letter to Bridgeport Music and Westbound Records stating that TufAmerica was the rightful owner of the copyrights to certain Clinton compositions and that Bridgeport had infringed on those copyrights. In January 2018, Bridgeport filed a complaint seeking a declaratory judgment that it was the rightful owner of the compositions and thus had not committed copyright infringement. After the case was transferred from the Eastern District of Michigan to the Southern District of New York, TufAmerica filed an amended answer and asserted counterclaims seeking a declaratory judgment that it was the rightful owner of the compositions and alleging that Bridgeport had infringed the copyrights in those compositions.

Bridgeport moved for summary judgment on its affirmative claims and TufAmerica’s counterclaims. The district court found that genuine disputes of material fact existed regarding ownership of the compositions, but it granted partial summary judgment in favor of Bridgeport as to TufAmerica’s infringement counterclaims. Bridgeport had submitted a series of agreements in which Clinton assigned ownership in the disputed compositions to Bridgeport Music and exclusive recording rights to Westbound Records, but in his deposition testimony Clinton said that he did not sign the agreements or does not remember signing them.

In its summary judgment response and counterstatement of material facts, TufAmerica admitted that Taylor worked as a disc jockey in the 1970s and played Bridgeport’s recordings of the Clinton compositions on the air. TufAmerica received no royalties. The district court found that TufAmerica’s claims accrued at the time Taylor was put on notice of the alleged exploitation of the work without receiving royalties and that the claims were therefore time-barred by the Copyright Act’s three-year statute of limitations period. Because the ownership counterclaim was time-barred, the district court granted summary judgment to Bridgeport on the related counterclaims for infringement and damages since the infringement claim could not be properly adjudicated unless ownership was first determined. TufAmerica moved for reconsideration, which the district court denied while also granting the parties’ request to conditionally dismiss Bridgeport’s affirmative claims in the absence of any live dispute between the parties. TufAmerica appealed.

TufAmerica argued that its [...]

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Let’s Not Get It On: Battle of the Greatest Hits

by Kavya Rallabhandi | Nov 14, 2024 | Copyrights

The US Court of Appeals for the Second Circuit affirmed a district court ruling that Ed Sheeran’s 2014 hit “Thinking Out Loud” does not infringe the copyright on Marvin Gaye’s 1973 classic “Let’s Get It On.” Structured Asset Sales, LLC v. Sheeran, Case No. 23-905 (2d Cir. Nov. 1, 2024) (Calabresi, Parker, Park, JJ.)

In 1973, Ed Townsend and Marvin Gaye wrote the Motown hit “Let’s Get It On.” Townsend subsequently registered a copyright for the song’s melody, harmony, rhythm, and lyrics by sending the deposit copy of sheet music to the US Copyright Office. Townsend, Gaye, and Motown Records each held a one-third share in the copyright. Structured Asset Sales (SAS) purchases royalty interests from musical copyright holders, securitizes them, and sells the securities to other investors. SAS owns a one-ninth interest in the royalties from “Let’s Get It On.” Townsend’s remaining two-ninths share in the copyright is split between Kathryn Griffin, Helen McDonald, and the estate of Cherrigale Townsend.

In 2014 Ed Sheeran and Amy Wadge wrote the global chart-topper and Grammy-award-winning song “Thinking Out Loud.” In 2018, SAS brought a copyright infringement suit against Sheeran, Wadge, and various entities that produced, licensed, and distributed “Thinking Out Loud” (collectively, Sheeran). SAS alleged similarities in harmonies, drums, bass lines, tempos, and chord progression combined with anticipation (harmonic rhythm). SAS’s lawsuit followed the Griffin/McDonald/estate of Cherrigale Townsend’s 2017 lawsuit against Sheeran (Griffin lawsuit) alleging materially similar claims.

The district court determined that SAS’s infringement claim was limited to the scope of Townsend’s registration as reflected in the deposit copy (i.e., the sheet music) and excluded the sound recording of “Let’s Get It On.” As evidence that the songs were similar, SAS’s expert witness testified that the “Let’s Get It On” deposit copy included an inferred bass line that matched the bass line in Gaye’s sound recording of “Let’s Get It On” and the bass line in “Thinking Out Loud.” The district court rejected this testimony, concluding that “copyright law protects only that which is literally expressed, not that which might be inferred or possibly derived from what is expressed.”

The district court then denied Sheeran’s two motions for summary judgment without prejudice, determining that whether chord progression and harmonic rhythm in “Let’s Get It On” demonstrated sufficient originality and creativity to warrant copyright protection was a factual question to be determined at trial. Sheeran filed a motion for reconsideration. After the jury in the Griffin lawsuit found that Sheeran did not infringe the “Let’s Get It On” copyright, the district court granted Sheeran’s motion for reconsideration and concluded that “[t]here is no genuine issue of material fact as to whether defendants infringed the protected elements of [‘Let’s Get It On’]. The answer is that they did not.” SAS appealed.

SAS argued that the district court erred in limiting the evidence SAS could present to support its infringement claim and in granting summary judgment in favor of Sheeran. The Second Circuit rejected both arguments.

The Second Circuit explained that excluding the audio recording of “Let’s Get It On” was not error because the 1909 Copyright Act protects [...]

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Clear Vision: Keyword Search Term Purchase Doesn’t Blur Trademark Lines

by Eleanor B. Atkins | Oct 17, 2024 | Trademarks

Addressing the issue of trademark infringement based on the purchase of search advertising keywords, the US Court of Appeals for the Second Circuit joined the consensus view and upheld a district court decision finding that the mere purchase of a search advertising keyword containing another’s trademark does not by itself constitute trademark infringement. 1-800 Contacts, Inc. v. JAND, Inc., Case No. 22-1634 (2d Cir. Oct. 8, 2024) (Chin, Carney, Lee, JJ.)

1-800 Contacts is an established online retailer for contact lenses. JAND (doing business as Warby Parker) was originally an online retailer for eyeglasses and began selling contact lenses online as well in 2019. As a newcomer to the market of online contact lenses, Warby Parker purchased search advertising keywords that included 1-800 Contacts’ trademarks. This practice is known as search keyword advertising, and it is a type of marketing that allows parties to purchase certain terms from search engines that, when used as a search query, result in the paying party’s advertisements appearing above the organic search results as part of the “paid results.”

1-800 Contacts sued Warby Parker for engaging in this practice, alleging that the purchase and use of 1-800 Contacts’ trademarks constituted trademark infringement and unfair competition under federal and New York state law. The district court disagreed, granting Warby Parker’s motion for judgment on the pleadings and finding that 1-800 Contacts’ trademarks and the “Warby Parker” trademark were entirely dissimilar. 1-800 Contacts appealed.

1-800 Contacts argued that Warby Parker purchased search engine keyworks consisting of 1-800 Contacts’ trademarks to use them in connection with an adverting campaign designed to mislead consumers. 1-800 Contacts alleged that the purchase of these keywords resulted in consumer confusion because users searching for “1-800 contacts” would receive Warby Parker’s “ambiguous ads that generate source, sponsorship or initial interest confusion.” 1-800 Contacts further alleged that the webpage that was linked to Warby Parker’s advertisements “magnified this confusion” because it mimicked the look and feel of 1-800 Contacts’ website.

The Second Circuit noted that two types of consumer confusion were at issue in the case: sponsorship confusion, which occurs when consumers believe “the mark’s owner sponsored or otherwise approved the use of the trademark,” and initial-interest confusion. To sufficiently plead internet-related initial-interest confusion, “a showing of intentional deception [is necessary] . . . because consumers diverted on the Internet can more readily get back on track that those in actual space.”

The Second Circuit reviewed the eight-factor Polaroid test to assess whether 1-800 Contacts sufficiently pled a likelihood of confusion. The Court agreed with the district court that certain factors, including the strength of the mark, the competitive proximity of the products, the relative quality of the products, and good faith, favored 1-800 Contacts. However, other factors, including, most importantly, the similarity of the marks, favored Warby Parker: “Here, the pleadings failed to plausibly allege that Warby Parker used 1-800’s Marks anywhere during the search advertising process outside of its purchase at the initial, permissible keyword auction. . . . Thus, the [...]

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Dolly Pardon: American Girl Can Sue Foreign Counterfeiter for Internet Sales

by Karen Gover | Sep 26, 2024 | Copyrights, Trademarks

The US Court of Appeals for the Second Circuit clarified its standards for establishing personal jurisdiction over foreign defendants that conduct business over the internet. American Girl, LLC v. Zembrka, DBA www.zembrka.com; www.daibh-idh.com, Case No. 21-1381 (2d Cir. Sept. 17, 2024) (Cabranes, Parker, Kahn, JJ.)

In 2021, American Girl, the famous doll manufacturer, filed suit against Zembrka in the US District Court for the Southern District of New York. American Girl brought multiple claims under the Lanham Act, including claims for trademark counterfeiting and trademark infringement, for advertising and sales of counterfeit American Girl dolls through Zembrka’s websites. Zembrka is located in and operates from the People’s Republic of China. American Girl was granted a temporary restraining order (TRO) that enjoined Zembrka from marketing, manufacturing, or distributing counterfeit American Girl products and from advertising counterfeit or confusingly similar American Girl marks.

Zembrka appealed and moved to dissolve the TRO and dismiss the complaint for lack of personal jurisdiction. Zembrka argued that it did not transact or do business in New York as required to establish personal jurisdiction under C.P.L.R. § 302(a)(1). American Girl asserted, with supporting evidence, that customers in New York could place orders through Zembrka’s interactive websites by inputting payment, billing, and shipping information, and that customers were sent confirmations of their orders to shipping addresses in New York. American Girl’s counsel purchased and paid for allegedly counterfeit American Girl merchandise through Zembrka’s website and received order confirmation emails. Zembrka conceded at oral argument that the allegedly counterfeit American Girl dolls were available via its website for purchase by people in New York.

The TRO was served on Zembrka. Two weeks later, Zembrka canceled the orders and refunded the payments for the purchases made by American Girl’s counsel. The district court granted the motion to dismiss for lack of personal jurisdiction, reasoning that because American Girl did not provide evidence that the allegedly counterfeit goods had shipped to New York, no business was transacted under § 302(a)(1). American Girl moved for reconsideration, providing evidence of other purchases of allegedly counterfeit merchandise by New York customers. It also produced evidence showing that New York customers purchased more than $41,000 worth of other Zembrka products over the past year via PayPal. The district court denied the motion because American Girl still did not demonstrate that any of the allegedly infringing products were actually delivered to New York, and customer payments were refunded. American Girl appealed.

The primary issue on appeal was whether American Girl sufficiently established that Zembrka transacted business in New York for the purposes of § 302(1)(a). The Second Circuit found that this requirement was easily satisfied, explaining that the district court had incorrectly interpreted the Second Circuit’s 2010 decision in Chloe v. Queen Bee of Beverly Hills as requiring a shipment to be an essential component of “transacting business.” It was enough that American Girl provided evidence that New York customers submitted orders and payments for allegedly counterfeit merchandise through Zembrka’s websites: “Section 302(a)(1) [...]

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Even Free Libraries Come With a Cost

by Anisa Noorassa | Sep 12, 2024 | Copyrights

The US Court of Appeals for the Second Circuit affirmed a district court’s judgment of copyright infringement against an internet book archive, holding that its free-to-access library did not constitute fair use of the copyrighted books. Hachette Book Group Inc. v. Internet Archive, Case No. 23-1260 (2d Cir. Sept. 4, 2024) (Menashi, Robinson, Kahn, JJ.)

Hachette Book Group, HarperCollins Publishers, John Wiley & Sons, and Penguin Random House (collectively, the publishers) brought suit against Internet Archive alleging that its “Free Digital Library,” which loans copies of the publishers’ books without charge, violated the publishers’ copyrights. Internet Archive argued that its use of the publishers’ copyrighted material fell under the fair use exception to the Copyright Act because Internet Archive acquired physical books and digitized them for borrowing (much like a traditional library) and maintained a 1:1 ratio of borrowed material to physical copies except for a brief period during the COVID-19 pandemic.

The district court reviewed the four statutory fair use factors set forth in § 107 of the Copyright Act:

The purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes.
The nature of the copyrighted work.
The amount and substantiality of the portion used in relation to the copyrighted work as a whole.
The effect of the use upon the potential market for or value of the copyrighted work.

The district court found that Internet Archive’s use of the works was not covered by the fair use exception because its use was non-transformative, was commercial in nature due to its solicitation of donations, and was disruptive of the market for e-book licenses. Internet Archive appealed.

The Second Circuit affirmed, addressing each factor in turn.

The Second Circuit held that Internet Archive’s use of the copyrighted material was non-transformative because Internet Archive copied the works wholesale and the “transformation” of the material from a physical copy to a digital copy that could be loaned out was not sufficient to fundamentally alter the nature of the copyrighted material. The Court maintained that the “recasting of a novel as an e-book” is a “paradigmatic” example of a derivative work.

However, contrary to the district court, the Second Circuit found that Internet Archive’s use of the works was not commercial in nature despite its solicitation of donations, citing Internet Archive’s nonprofit status and free distribution of archived materials. The Court explained that the mere association with other platforms where users may buy print copies of the works combined with the existence of a “donate” button was insufficient to render the use commercial.

The Second Circuit held that the second fair use factor also weighed against Internet Archive, since both the fiction and nonfiction works digitized by Internet Archive were nonetheless original and creative. The Court held that the “greater leeway” that is allowed for fair use of “factual or informational” work was not sufficient to weigh in favor of Internet Archive since the nonfiction works nevertheless “represent the authors’ [...]

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It’s All Grecco to Me: No “Sophisticated Plaintiff” Exception to Discovery Rule

by Katherine Pappas | Aug 29, 2024 | Copyrights

In a case of first impression, the US Court of Appeals for the Second Circuit held that there is no “sophisticated plaintiff” exception to the Copyright Act’s discovery rule, which provides that a copyright claim only accrues upon the copyright owner’s discovery of the infringement or when the copyright owner (in the exercise of due diligence) should have discovered the infringement. Michael Grecco Productions, Inc. v. RADesign, Inc., Case No. 23-1078 (2d Cir. Aug. 16, 2024) (Wesley, Chin, Lee, JJ.)

Michael Grecco Productions (MGP) is a photography studio and business owned by commercial photographer Michael Grecco, who presents himself as an industry leader in copyright registration and enforcement. This case arose in the context of Grecco’s January 2017 photos of a model wearing shoes designed by Ruthie Davis. The photos were published in a magazine in August 2017. MGP claimed that Davis republished at least two of these photos on her brand’s website and social media platforms without a license. In its complaint, MGP alleged that Davis’s use of the photos began on August 16, 2017, but that MGP did not discover this infringement until February 8, 2021. On October 12, 2021 (more than four years after the infringement began but less than one year after its discovery), MGP filed suit against Davis alleging copyright infringement. MGP’s complaint also pled facts describing Grecco’s “efforts to educate photographers concerning the benefits of copyright registration” and how Grecco himself “spends time and money to actively search for hard-to-detect infringements, and how he enforces his rights under the Copyright Act.”

Davis moved to dismiss the suit as time-barred, arguing that the complaint was deficient on its face based on the Copyright Act’s three-year limitations period. Purporting to apply the governing “discovery rule,” the district court found that MGP’s “relative sophistication as an experienced litigator in identifying and bringing causes of action for unauthorized uses of Grecco’s copyrighted works leads to the conclusion that it should have discovered, with the exercise of due diligence,” the alleged infringement within the statute’s three-year limitations period. Based on this rationale, the district court granted Davis’s motion to dismiss. MGP appealed.

Reviewing the district court’s ruling de novo, the Second Circuit found that the district court erred as a matter of law in concluding that MGP’s complaint was barred by the three-year limitations period.

The Second Circuit explained that it (and 10 other circuit courts) had already held that in enacting the Copyright Act, Congress intended to employ “the discovery rule” as the measure of when a claim for infringement accrues. Under this rule, a claim for copyright infringement accrues when a diligent plaintiff discovers or should have discovered the infringement. This timing is in contrast to “the injury rule,” under which the claim would accrue when the infringement in-fact occurred. As the Court explained, the discovery rule is not an equitable tolling or estoppel doctrine available to some “worthy” plaintiffs but not others. Rather, it is the rule used to determine when a cognizable claim for copyright [...]

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Due Diligence Deficit Sinks Fraud Claims in Trademark Battle

by Kavya Rallabhandi | Aug 22, 2024 | Trademarks

The US Court of Appeals for the Second Circuit affirmed the dismissal of an independent action asserting “fraud on the court” based on the finding that the alleged fraud on the US Patent & Trademark Office (PTO) should have been uncovered by the exercise of due diligence in a prior action. Marco Destin Inc. v. Levy et al., Case No. 23-1330 (2d Cir. Aug. 8, 2024) (Jacobs, Sack, Sullivan, JJ.)

In 2007, L&L Wings filed a lawsuit against Marco Destin and related entities (collectively, Marco Destin) in the District Court for the Southern District of New York, asserting claims of breach of contract and trademark infringement related to Marco Destin’s unauthorized use of L&L’s unregistered trademark WINGS on beach apparel. Although L&L and Marco Destin entered into an allegedly valid temporary licensing agreement in 1998, L&L alleged that Marco Destin continued to use the mark after the agreement expired in 2006. Post-discovery, L&L revealed a recent trademark registration for the WINGS mark, causing L&L and Marco Destin to enter a stipulated order of settlement and dismissal in 2011. Marco Destin paid L&L $3.5 million, ceased using the WINGS mark, and agreed to never bring an action based on the WINGS mark or the 1998 temporary licensing agreement.

More than a decade later, Marco Destin sued L&L again in the Southern District of New York for “fraud on the court” and “fraud” and demanded vacatur, sanctions and damages due to key facts revealed in a separate unrelated Eastern District of North Carolina action. In relevant part, it was discovered that L&L was not the owner of the WINGS mark. Rather, an entity named Shepard Morrow owned the WINGS mark and licensed it to L&L for a brief period in the 1990s. L&L stopped paying the required licensing fees to Shepard Morrow and improperly licensed the unregistered WINGS mark to other entities (including Marco Destin). As a result, the Eastern District of North Carolina granted sanctions against L&L for failing to disclose Shepard Morrow’s trademark registration and license agreement, and L&L’s WINGS mark registration was cancelled as a consequence of L&L’s false representations to the PTO. L&L moved to dismiss Marco Destin’s New York complaint pursuant to FRCP 12(b)(6). The district court granted the motion to dismiss, concluding that the “fraud on the court” claim was an independent action for relief from a judgment under Rule 60(d)(3) and Marco Destin had a reasonable opportunity to discover L&L’s false representations during the initial litigation. Marco Destin appealed.

The Second Circuit affirmed, reviewing the dismissal of an independent action for fraud on the court under FRCP 60(d)(3) for abuse of discretion. A party challenging a judgment may file either a timely motion within a fixed time window – one year under FRCP 60(b)(3) – or an independent action any time after that pursuant to FRCP 60(d)(3). Independent actions require a more demanding showing of fraud (such as fraud on the court itself) than a timely motion, and generally claimants seeking equitable relief through independent [...]

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One Bite at the Apple Where State and Federal Jurisdiction Is Concurrent

by Abigail A. Rubinstein | Aug 15, 2024 | Trade Secrets

The US Court of Appeals for the Second Circuit upheld a federal district court’s dismissal of a case on res judicata grounds after a state court issued a decision on different claims but had concurrent jurisdiction over the claims alleged in the federal case. Beijing Neu Cloud Oriental Sys. Tech. Co. v. Int’l Bus. Machs. Corp., Case No. 22-3132 (2d Cir. July 25, 2024) (Livingston, Menashi, Kahn, JJ.)

Beijing Neu Cloud Oriental System Technology filed suit in federal district court against several International Business Machines companies (collectively, IBM defendants) asserting a single claim for trade secret misappropriation under the Defend Trade Secrets Act (DTSA). Shortly thereafter, Neu Cloud also sued the IBM defendants in New York state court, alleging state law causes of action for unfair competition, unjust enrichment, breach of fiduciary duty, breach of contract and tortious interference.

The state court dismissed the claims. After the state court issued its decision, the IBM defendants moved to dismiss the federal action, arguing that:

Neu Cloud’s claim was time-barred.
Neu Cloud failed to state a plausible DTSA claim.
The judgment of the New York Supreme Court precluded the instant DTSA claim under res judicata.

The district court granted the motion to dismiss, agreeing with the IBM defendants on the DTSA claims but not on the effect of res judicata. Neu Cloud appealed the dismissal of its complaint. The Second Circuit only considered the arguments related to the IBM defendants’ res judicata defense.

Applying New York law to determine the preclusive effect of the state court’s judgment, the Second Circuit explained that under New York preclusion law “a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter.” This rule applies if the subsequent claim was “actually litigated” in the prior action or if it merely “could have been raised in the prior litigation.”

The Second Circuit found that the district court’s decision was on the merits and the trade secret claims could have been raised in the state court action. The Court held that the New York state court would have been competent to adjudicate the DTSA claim since jurisdiction for DTSA actions is not exclusive to federal courts. The Court noted that the plain text of the DTSA is strong evidence that Congress intended for jurisdiction over DTSA claims to be federal and state concurrent. Moreover, the Second Circuit found that the legislative history revealed no evidence that Congress affirmatively intended to confer exclusive jurisdiction over DTSA claims on the federal courts. The Court noted that many other circuit courts had come to the same conclusion.

Since the parties were clearly the same, the state court case involved the same subject matter, and the claims alleged the same injury and arose out of the same or related facts, the Second Circuit stated that the relevant question was whether Neu Cloud should have sought recovery in state court for its claim of trade secret [...]

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