Lahoti v. Vericheck, Inc.: Ninth Circuit Remands Cybersquatting Case

Lahoti v. Vericheck Inc., No. 08-35001 (9th Cir., Nov. 16, 2009)

Opinion

On November 16th, the Ninth Circuit held that the district court’s finding that the mark “VeriCheck” was an inherently distinctive, legally protectable mark was based in part on erroneous legal reasoning and in part on valid reasoning. Accordingly, it vacated the lower court’s award of summary judgment in favor of the defendant and remanded. However, the Ninth Circuit affirmed the district court’s finding that the counterclaim defendant acted in bad faith. The court noted that it is proper for a court to consider the fact that the PTO has allowed others to register the mark at issue without requiring a showing of secondary meaning as weighing in favor of a finding of inherent distinctiveness.

The Ninth Circuit held that because the district court did not rely exclusively on the proper legal standard, its finding that Disputed Mark was distinctive must be vacated -- even if there may have also existed proper legal grounds for finding the mark distinctive. The court also held that Lahoti acted at least “partially in bad faith” by gambling that the district court would agree with his interpretation of trademark law. He knew or should have known that he would risk cybersquatting liability if his gamble failed.

BNA and Michael Atkins, a Seattle trademark lawyer, provide relevant overviews of the case.

VeriCheck, Inc. (“VeriCheck”), a Georgia corporation that provides electronic financial transaction processing services, had unsuccessfully attempted to secure the vericheck.com domain name in 1999. David Lahoti claimed that in anticipation of future business pursuits, he registered a number of domain names with the “veri-” prefix, acquiring the vericheck.com domain name in 2003. After a failed negotiation in 2004 between Vericheck and Lahoti, VeriCheck filed an arbitration complaint pursuant to the Uniform Domain-Name Dispute-Resolution Policy in 2006. Although the arbitrator ordered the transfer of the Domain Name to VeriCheck, Lahoti sought a declaratory judgment that he did not violate the Lanham Act’s cybersquatting or trademark infringement provisions. Vericheck counterclaimed that Lahoti’s actions violated the Lanham Act, the Anti-Cybersquatting Consumer Protection Act (“ACPA”), the Washington Consumer Protection Act (“WCPA”), and Washington common law.

The Ninth Circuit reasoned that the proper standard of appellate review was for “clear error,” and it held that the district court’s decision that the “VeriCheck” mark was a distinctive, legally protectable mark under the ACPA and federal trademark law was based in part on reasoning contrary to federal trademark law and based in part on reasoning that could support the district court’s conclusion. Accordingly, because the district court did not rely exclusively on the proper legal standard, the appellate court vacated and remanded the judgment to the extent it determined the Disputed Mark was distinctive.

The appellate court also held that the record supported the district court’s summary judgment determination that Lahoti was motivated by a bad faith. Not only did he intend to profit from his use of the Disputed Mark, but also he was a repeat cybersquatter who has been admonished by other judicial bodies for cybersquatting. The court reasoned that Lahoti’s failed defenses in these other cases made it unlikely that he legitimately believed that his use of the Domain Name was wholly lawful in this case.

This case is significant because it maintains that the issue of whether a mark is suggestive or descriptive is a fact-intensive question that poses a difficult decision in many close cases. This case falls in line with a series of cases that have been reluctant to allow for the ACPA safe harbor defense that protects registrants who "believed and had reasonable grounds to believe that the use of the domain name was a fair use or otherwise lawful." 15 U.S.C. 1125(d)(1)(B)(ii).