Third Circuit Orders Second Look at Delays and Disgorgement of Profits

By on August 26, 2021
Posted In Trademarks

In a long-running trademark dispute between two charitable organizations, the US Court of Appeals for the Third Circuit found that the appellee did not preserve its challenge to the district court’s denial of summary judgment on its trademark cancelation claims, the appellant waived any challenge to the validity of the defendant’s mark and the district court did not abuse its discretion by declining to award enhanced monetary relief or prejudgment interest. Kars 4 Kids Inc. v America Can!, Case Nos. 20-2813; -2900 (3rd Cir., August 10, 2021) (Shwartz, J.) The Court also vacated-in-part and remanded for the district court to reexamine its laches and disgorgement conclusions under applicable law.

As charitable organizations that sell donated vehicles to fund children’s programs, both America Can (as CARS FOR KIDS) and Kars 4 Kids have used similar trademarks since their respective starts in the early- to mid-1990s. In 2003 and 2013, America Can sent cease and desist letters to Kars 4 Kids after seeing its advertisements in the state of Texas. In 2014, Kars 4 Kids sued America Can for federal and state trademark infringement, unfair competition and trademark dilution claims. Less than one year later, America Can filed its own suit—alleging the same claims—plus a petition to cancel a Kars 4 Kids trademark registration and seeking a nationwide injunction and financial compensation.

Both parties appeal from a denial of their respective summary judgment motions as well as (1) the jury finding that Kars 4 Kids willfully infringed America Can’s trademark rights in Texas, (2) the rejection of America Can’s petition for cancellation of a KARS FOR KIDS trademark registration finding that the registration was not knowingly procured by fraudulent means, (3) the conclusion that laches did not apply against America Can’s claims, (4) disgorgement of Kars 4 Kids profits in Texas totaling about $10.6 million, (5) rejection of enhanced monetary relief and (6) an injunction against Kars 4 Kids with respect to use of its trademark in Texas and from using the domain name. On appeal, Kars 4 Kids also renewed its motion for judgment as a matter of law, including an argument that America Can’s trademark is invalid.

The Third Circuit rejected Kars 4 Kids’ effort to overturn the jury’s liability verdict, concluding that Kars 4 Kids failed to preserve its challenge to the validity of the CARS FOR KIDS trademark when it left that issue out of its Rule 50(a) motion. Instead, evidence of America Can’s continuous use of the CARS FOR KIDS mark well prior to 2003 predated Kars 4 Kids’ first use of its trademark in Texas in 2003 and established America Can’s ownership of the CARS FOR KIDS trademark in Texas.

However, after examining the laches claim, the Third Circuit explained that it considered (1) the plaintiff’s inexcusable delay in bringing suit and (2) prejudice to the defendant as a result of the delay. With no statute of limitations under the Lanham Act, the parties agreed that their claims are properly analogized to New Jersey’s six-year fraud statute. Because America Can first discovered Kars 4 Kids’ conduct under the trademark in 2003 and did not bring counterclaims until 2015, the applicable statute of limitations had run on America Can’s claims and it therefore bears the burden of disproving delay and prejudice. While America Can argued that its 2003 demand letter caused Kars 4 Kids to pull back its advertising in Texas until 2011, when America Can ran across the advertisements again, the Court determined that it was important to remand to the district court to consider whether America Can’s delay in filing suit could nevertheless be excused even though Kars 4 Kids had ongoing national advertisements during that same time period.

The Third Circuit next addressed the issues of the disgorgement of Kars 4 Kids profits, as well as the lower court’s refusal to award enhanced monetary relief or prejudgment interest under the Lanham Act. Noting that disgorgement “will be denied where an injunction satisfies the equities of the case” and that the equities must be considered under an extensive six-factor test (none of which were addressed by the district court), the Court vacated the disgorgement order and remanded for the district court to apply all applicable factors. As to enhanced monetary relief, the Court explained that such enhancement may constitute only compensation and not a penalty, and that America Can offers “no non-punitive rationale for enhancing the award” as against Kars 4 Kids. Finally, the Court affirmed the denial of prejudgment interest on both the state and the federal claims, noting that the Lanham Act does not make such an award available under the portion of the statute pled by America Can and finding that America Can had no basis for seeking such an award under state law because there was no verdict in its favor on any state law claim—only the federal infringement claims. The parties now return to the district court for a reexamination of the issues of laches and the disgorgement of Kars 4 Kids’ Texas profits.

Sarah Bro
Sarah Bro is the office managing partner for the Firm’s Orange County office. She focuses her practice on trademark prosecution, enforcement and brand portfolio management, as well as licensing, due diligence, copyright, right of publicity and domain name matters. Read Sarah Bro's full bio.