Lahoti v. Vericheck: How to Lose a Cybersqatting Case against a Serial Cybersquatter
It seems unthinkable. How can a business that has registered and used a trademark for a decade lose an ACPA case against a serial cybersquatter who has been adjudicated to have used the mark at issue in bad faith? The fact is that it can and does happen. When a plaintiff sues under the Anti-Cybersquatting Consumer Protection Act, it must prove that it owns a valid trademark. 15 U.S.C. § 1125(d). This means that an ACPA suit puts the validity of the plaintiff's trademark at issue. And if the defendant chooses to put up a fight, the end result of an ACPA suit can be that the plaintiff's trade name loses protection as a trademark.
This was the result in American Blind. It also may be the result in Lahoti v. Vericheck, 9th Cir., No. 08-35001. Lahoti is the defendant in a trademark infringement and ACPA case brought by Vericheck, Inc. Vericheck is a Georgia corporation that provides electronic fund transaction processing services, including check verification and account verification. Vericheck has a website at vericheck.net and also owns the domain names vericheck.org, vericheck.cc, vericheck.us and vericheck.biz.
In 2001, Vericheck obtained a Georgia state service mark registration for its trademark, which consists of a checkmark over the word "VeriCheck." Vericheck attempted to get federal registration, but the U.S. Patent and Trademark Office denied the application because an Arizona company had already registered the name for use in check verification services. However, the Arizona company apparently never used the trademark for check verification and its mark expired in 2006.
According to the 9th Circuit, the defendant, David Lahoti, had previously registered over 400 domain names containing the trademarks of other companies, such as Nissan.org and ebays.com. In two cases, WIPO ordered him to give up control of domain names because they infringed on trademarks. In 2000, a Central District of California court found that Lahoti was a "cybersquatter" and that his registration and attempted sale of the estamps.com domain name violated the ACPA.
In 2003, Lahoti obtained the vericheck.com domain name. However, he did not develop a check verification service. Instead, he used the vericheck.com name for a website which merely contained links to Vericheck competitors. Vericheck frequently received calls from its customers complaining that they visited the Vericheck.com website, but could find not information about Vericheck.
In 2004, Vericheck offered to purchase vericheck.com from Lahoti. However, negotiations ended with Lahoti's final offer to sell at $48,000. Vericheck then filed a UDRP action and the arbitrator ordered Lahoti to transfer the domain name to Vericheck. As was his right, Lahoti filed an action to challenge this decision in federal court.
To prevail on an ACPA claim, the "owner of a mark" needs to show that the defendant has registered, trafficked in or used a domain name that is confusingly similar to the plaintiff's mark and that the defendant "ha[d] a bad faith intent to profit from that mark." 15 U.S.C. § 1125(d). Here, on successive summary judgment motions, the District Court found that Lahoti acted in a bad faith attempt to profit from his use of the domain name. The court also held that Vericheck had established all other elements of its ACPA and trademark infringement claims. This included a finding that Vericheck had a valid trademark -- that it was the "owner of a mark."
On appeal, the 9th Circuit agreed with the District Court's ruling that Lahoti had acted in bad faith. The 9th Circuit noted that Loahoti had never used the domain name in connection with a bona fide offering of goods and service. Instead, he earned income when visitors to the site clicked on links to Vericheck competitors. Lahoti had also asked for as much as $72,500 to sell the domain name to Vericheck, even though he had no interests in the "Vericheck" name. The 9th Circuit also noted that "it is undisputed that Lahoti is a repeat cybersquatter." According to the panel, Lahoti's "use of the Domain Name to link to Vericheck's competitors and his willingness to sell the Domain Name only for exorbitant profits are quintessential cybersquatting practices."
However, the 9th Circuit was unwilling to accept the District Court's ruling that Vericheck held valid trademark rights in the name "vericheck."
It is a basic precept of trademark law that to achieve the legal status of a "trademark" or "service mark", a designation must be "distinctive." 2 MacCarthy on Trademarks § 11:2. No distinctiveness, no mark. However, distinctiveness is a matter of gradation. Toward one end of the spectrum, arbitrary, fanciful or suggestive marks are considered inherently distinctive. Toward the other end of the spectrum, generic marks and descriptive marks lacking a secondary meaning are considered not distinctive and do not receive trademark protection. The 9th Circuit noted that some marks are easy to classify as descriptive, such as a restaurant chain that seeks a trademark in "Delicious Foods" or a taxicab company that seeks a trademark in the name "Reliable Cab." Other marks are plainly distinctive, such as fanciful marks where the letters do not form a word in the dictionary, or where these is no logical connection between the marks and the goods it is associated with, such as Exxon gas and Xerox copiers.
Circuit Courts generally give deference to District Court rulings on distinctiveness. However, the 9th Circuit did not believe it could do so in this case, because the District Court had made several errors of law in its analysis:
• The District Court held that to be considered descriptive, the mark would have to describe all of Vericheck's businesses. According to the 9th Circuit, the proper test to determine if a mark is descriptive is whether it conveys any information about the nature of the mark owner's good or services.
• The District Court reasoned that the mark could have described services unrelated to those offered by Vericheck, such as baggage screening and pre-employment background verification. The 9th Circuit said that a mark should be evaluated as seen on the goods and services for which it is used.
• The District Court also held that a trademark should be looked at only as a whole. The 9th Circuit stated that a court may break a mark into its component parts as a preliminary step on the way to an ultimate determination of probable consumer reaction to the composite as a whole.
Of these three errors, the one with the most obvious impact on the District Court's ruling was that to be descriptive the mark needed to describe all instead of just any of Vericheck's businesses. Because Vericheck is in the check verification business, it would not be surprising for the District Court on remand to find that the mark was descriptive of these services. While the court process is far from complete, the 9th Circuit's ruling clearly has put the validity of Vericheck's trademark in real jeopardy.
If you are a trademark owner, it is critical to realistically evaluate possible challenges to the validity of your trademark before commencing an ACPA or other trademark action. While many ACPA and UDRP actions result in default judgments, in the right circumstances such actions can cause more harm than good.
David D. Johnson is a business lawyer whose practice focuses on litigation and other issues relating to digital media and consumer electronics companies. David can be contacted at (310) 785-5371 or DJohnson@jmbm.com.
