The US Court of Appeals for the Fifth Circuit affirmed a senior party mark but found that the district court committed clear error in finding that a similar junior party mark was valid. The Fifth Circuit also found that the district court abused its discretion in awarding attorneys’ fees to the senior user. Appliance Liquidation Outlet, L.L.C. v. Axis Supply Corp., Case No. 23-50413 (5th Cir. June 21, 2024) (Smith, Haynes, Douglas, JJ.)

Appliance Liquidation Outlet (ALO), a decades-old appliance store in San Antonio, Texas, brought a trademark action under the Lanham Act and Texas law (which in all relevant aspects tracks the Lanham Act) against Axis Supply Corporation, another San Antonio appliance store that opened in 2021. Axis’s store and social media prominently featured the phrase “Appliance Liquidation”:

ALO noted that Axis’s opening happened to coincide with an influx of customers conflating ALO with Axis. ALO’s storefront had prominently displayed a banner reciting “Appliance Liquidation Outlet” for years:

Although ALO had never registered its mark, ALO had long engaged in a variety of promotional activities to raise brand recognition, including partnering with local sports teams and holding antique exhibitions and car shows.

Soon after Axis opened its store, ALO experienced a rush of customers who failed to differentiate between the stores and believed that ALO operated both. ALO requested that Axis stop using “Appliance Liquidation” and sued Axis in state court when Axis refused. Axis removed the dispute to the federal district court. After a bench trial, the district court held for ALO, enjoining Axis from using “Appliance Liquidation” and “Appliance Liquidation Outlet” and causing confusion between the two businesses. The district court also awarded attorneys’ fees under 15 U.S.C. § 1117(a) to ALO, finding that Axis’s decision to change its name only a week before trial (about 1.5 years into the dispute) amounted to litigating in an unreasonable manner. Axis appealed.

The Fifth Circuit affirmed the district court’s holding that Axis had infringed ALO’s “Appliance Liquidation Outlet” mark but assigned clear error to the district court’s finding that “Appliance Liquidation” was valid mark. The Fifth Circuit also found that the district court had abused its discretion in awarding attorneys’ fees to ALO.

With respect to the marks’ validity, the Fifth Circuit noted that both marks were unregistered and thus were not presumptively valid. The Court found that the record did not support the conclusion that “Appliance Liquidation” was a source identifier and thus found that it was not a valid mark. However, the Fifth Circuit was satisfied that “Appliance Liquidation Outlet” served as a source identifier. The Court found that although “Appliance Liquidation Outlet” was descriptive, the evidence established that San Antonian consumers perceived the mark as conveying information about ALO, not merely reflecting a class of services or businesses, and thus was distinctive. The record also demonstrated that although ALO often referred to itself as “Appliance Liquidation” for short, it did not establish “Appliance Liquidation” as a trademark.

The Fifth Circuit held that the district court had not clearly erred in holding that “Appliance Liquidation Outlet” had acquired secondary meaning based predominantly on direct consumer testimony. Still, the Fifth Circuit conducted its own factor-by-factor analysis for distinctiveness and found that the mark was disruptive but had acquired secondary meaning as a source identifier.

In the Fifth Circuit, to determine whether a mark has acquired secondary meaning, courts consider the following seven factors:

1. Length and manner of use of the mark or trade dress.
2. Volume of sales.
3. Amount and manner of
4. Nature of use of the mark or trade dress in newspapers and
5. Consumer survey
6. Direct consumer
7. The defendant’s intent in copying the mark.

The Court found that most factors favored secondary meaning (length and manner of use of the mark, volume of sales, amount and manner of advertising, direct consumer testimony and the defendant’s intent in copying the mark). However, ALO had not conducted any direct consumer surveys, and there was little evidence of how magazines or newspapers used the mark. Therefore, those factors did not favor secondary meaning.

The Fifth Circuit also held that the district court had not clearly erred in its likelihood of confusion holding even though it was based entirely on evidence of actual confusion. The Fifth Circuit called attention to a consumer log that ALO had entered into the record. The log tracked employee interactions with consumers including those evidencing instances in which consumers believed ALO was affiliated with Axis. Axis argued that these records were insufficient because they failed to directly evidence the cause of the confusion. The Fifth Circuit reiterated that this link may be established by inference.

Finally, the Fifth Circuit held that the district court abused its discretion in awarding attorneys’ fees. The Court noted that in Octane Fitness v. ICON Health & Fitness (2014), the Supreme Court explained when a case is “exceptional” under Section 285 of the Patent Act, and that the Fifth Circuit, in Baker v. DeShong (2016), “merge[d] Octane Fitness’s definition of ‘exceptional’ into [its] interpretation of § 1117(a) [of the Lanham Act].”

Reconciling its 2021 decision in Spectrum Association Management v. Lifetime HOA Management with Octane Fitness and Baker, the Fifth Circuit noted that Spectrum did not cite Baker and relied on pre-Octane cases to hold that “[t]o make an ‘exceptional case’ showing, the prevailing party bears the burden of demonstrating by clear and convincing evidence that the defendant ‘maliciously, fraudulently, deliberately, or willfully infringes the plaintiff’s mark.’” Therefore, in the Fifth Circuit, “Octane Fitness’s standard provided additional grounds for making a case exceptional, adding to this circuit’s test but not replacing it.”

The Fifth Circuit noted that in Baker, the Court joined its sister circuits in adopting the meaning of “exceptional” under Octane Fitness into the Lanham Act.

Thus, the Spectrum Court “strayed from circuit precedent when it held that the pre-Octane Fitness clear-and-convincing-evidence standard remained good law. That part of the opinion, therefore, is subject to the rule of orderliness.” Spectrum was correct, however, to imply that Octane Fitness did not forbid courts from considering evidence of bad faith or willful infringement when applying its test.

Rather, the Fifth Circuit explained that “Octane Fitness expanded the category of cases that qualify as “exceptional” for § 1117(a). Whether a party has infringed or acted in bad faith can be relevant to whether a case is exceptional under Octane Fitness’s two-prong test. But such a showing is no longer an absolute prerequisite to a fee award under § 1117(a).”

In the present case, the district court held that Axis litigated in an unreasonable manner because it willfully infringed, refused to settle and discontinued using the infringing mark at the last minute. The Fifth Circuit noted that the district court had failed to make the necessary factual findings to establish willful infringement and approved the proposition that awarding attorneys’ fees based on a refusal to settle amounted to improper coercion. The Fifth Circuit also found that Axis discontinuing its use was not in and of itself demonstrative of unreasonable litigation, noting that the motivation behind discontinuing use does not necessarily infer improper motives for litigating.

The Fifth Circuit went on to hold that the factors relied on by the district court “do not support an inference that Axis litigated its case with an improper motive. The district court did not make the findings needed to brand Axis a willful infringer, and our precedent prohibits that court from drawing adverse inferences against Axis for its refusal to settle.”