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Supreme Court Overturns Second Circuit Ruling of "Defense Preclusion"

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On May 14, 2020, in Lucky Brand Dungarees, Inc., et al. v. Marcel Fashions Group, Inc., No. 18-1086, 590 U.S. _____ (2020), the Supreme Court unanimously rejected a novel 2018 Second Circuit ruling that Lucky Brand was barred by the doctrine of preclusion (“res judicata”) from raising a defense (as opposed to an offensive claim) it “could have” raised in an earlier phase of the 20 year-old trademark dispute.

 

Marcel’s first suit against Lucky Brand for trademark infringement resulted in a 2003 settlement agreement in which Marcel agreed to release any claims regarding Lucky Brand’s use of its own trademarks. However, the parties engaged in further litigation, namely actions filed in 2005 and 2011. In 2017, the District Court in the 2011 action granted Lucky Brand’s motion to dismiss Marcel’s claims that Lucky Brand’s own LUCKY marks infringed Marcel’s GET LUCKY trademark. Lucky Brand’s motion was based on the defense that Marcel’s lawsuit was barred by the 2003 settlement agreement, which had released Lucky Brand from any further liability. In 2018, the Second Circuit overturned that decision, stating that Lucky Brand should have raised this defense earlier in the years-worth of litigation since the settlement. Because Lucky Brand had not done so, the Second Circuit held it was barred by res judicata. Notably, the Second Circuit acknowledged that it was the first time it had applied preclusion to a defense (“defense preclusion”), as opposed to an offensive claim (“claim preclusion”).

 

In its unanimous decision written by Justice Sonia Sotomayor, the Supreme Court reversed and remanded. The Supreme Court explained:

“As the Second Circuit itself seemed to recognize, [see Marcel Fashions Group, Inc. v. Lucky Brand Dungarees, Inc. 898 F.3d 232, 236–237 (2nd Cir. 2018)], this Court has never explicitly recognized ‘defense preclusion’ as a standalone category of res judicata, unmoored from the two guideposts of issue preclusion and claim preclusion. Instead, our case law indicates that any such preclusion of defenses must, at a minimum, satisfy the strictures of issue preclusion or claim preclusion. See, e.g., Davis v. Brown, 94 U. S. 423, 428 (1877) (holding that where two lawsuits involved different claims, preclusion operates ‘only upon the matter actually at issue and determined in the original action’).² The parties thus agree that where, as here, issue preclusion does not apply, a defense can be barred only if the ‘causes of action are the same’ in the two suits—that is, where they share a‘‘common nucleus of operative fact[s].’’ Brief for Respondent 2,27, 31, 50; accord, Reply Brief 3. [] Put simply, the two suits here were grounded on different conduct, involving different marks, occurring at different times. They thus did not share a ‘common nucleus of operative facts.’”

Lucky Brand Dungarees, Inc., et al. v. Marcel Fashions Group, Inc., No. 18-1086, slip op. at 7-8 (U.S. May 14, 2020), https://www.supremecourt.gov/opinions/19pdf/18-1086_5ie6.pdf.

 

The Court further noted that it need not determine when (if ever) applying claim preclusion to defenses may be appropriate, because a necessary predicate—identity of claims—is lacking. Specifically, the Supreme Court determined that the 2005 and 2011 actions “involved different marks, different legal theories, and different conduct”, and there was therefore a lack of the “common nucleus of operative facts” necessary for the prior action to preclude any defenses available in the 2011 action. At bottom, the Court held that Marcel cannot preclude Lucky Brand from raising new defenses and reversed the judgment of the Second Circuit.

 

Baker Botts will continue to monitor the law as it develops following the Supreme Court’s ruling.

 

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