Cello Holdings v. Lawrence-Dahl

Citation: Cello Holdings v. Lawrence-Dahl Cos.; Storey v. Cello Holdings, 89 F. Supp. 2d 464 (S.D.N.Y. 2000); 2002 U.S. Dist. LEXIS 1029 (S.D.N.Y. Jan. 24, 2002), vacated, 347 F.3d 370 (2d Cir. 2003)

Factual Background
Plaintiff Cello used the federally registered mark CELLO for high-end audio equipment systems since 1985. Defendant Storey, owner of a small vintage audio-equipment company, registered the domain name "cello.com." Although Storey was aware of Cello's CELLO brand, he claimed that his registration of "cello.com" was merely part of an attempt to register the generic names of various musical instruments.

In June 1997, within days after registering "cello.com," Storey contacted many companies using the name "cello," including Cello, and tried to sell the domain name. In October 1997, Cello brought suit asserting federal and state dilution claims. In February 2000, while the parties' cross-motions for summary judgment were pending, Cello moved to amend its complaint to add a claim under the ACPA.

Trial Court Proceedings
The court denied both summary judgment motions on the claims of federal dilution and cybersquatting, finding genuine issues of material fact on (1) whether Cello's CELLO mark was famous or distinctive in view of Cello's limited sales due to the expensive nature of its goods and because "cello" is a common noun widely used by third parties as trademarks and company names, (2) whether Storey's "cello.com" domain name used for vintage audio equipment diluted Cello's CELLO mark for high-end recording equipment, as Cello's customers were sophisticated consumers that were not likely to be confused, and (3) whether Storey had a "bad faith intent to profit."

On the last issue, the court noted that although Storey's lack of proprietary rights in the name CELLO combined with his pattern of registering and trying to sell domain names to potentially interested parties could be considered a bad-faith intent to profit, his explanation of trying to register the generic names of musical instruments could negate bad faith. Furthermore, because Storey tried to sell the domain name to many potentially interested parties using the name "cello," there was a question of whether he was actually "trying to extort a particular (or any) trademark holder," or merely attempting in good faith to sell a domain name to interested parties, since "cello" was a common noun.

Finally, the court noted that even if Cello proved that its CELLO mark was being diluted or that it owned superior rights to Storey, Cello "has not demonstrated why it has any greater right to 'cello.com' than the other dozens of companies that have registered 'Cello,' alone or in combination, or that have been using 'Cello' in their company name."

On the eve of trial, Cello advised the court that the case had been settled. The court later dismissed the case with prejudice, subject to reinstatement within 30 days. Because neither party requested reinstatement, the dismissal became final. Shortly after the case was dismissed, Storey sent Cello a letter, again offering to sell the domain name.

A few weeks later Cello filed a UDRP complaint against Storey. Cello did not mention in its UDRP Complaint Storey's recent letter offering to sell the "cello.com" domain name. Despite Storey's argument that the dismissal of this civil action with prejudice barred Cello's claims, the UDRP Panel ruled in favor of Cello and ordered transfer of the "cello.com" domain name to Cello. Cello later sued Storey in Virginia state court to confirm the UDRP arbitration award, and Storey filed this second action in New York seeking a declaratory judgment that his use of "cello.com" was not unlawful under the ACPA and arguing that Cello was precluded from relitigating its claims regarding the "cello.com" domain name because the prior action was dismissed with prejudice.

The Virginia court stayed that action pending a resolution of this case. This decision addressed the parties' cross-motions for summary judgment and Storey's motion for sanctions under Rule 11. The court granted Storey's motion for summary judgment, and denied Cello's, holding that the dismissal of the prior action with prejudice "operated as an adjudication on the merits in [Storey's] favor and [Cello] was therefore barred from asserting future claims against [Storey] based upon the same causes of action that were or could have been asserted in the first case."

Cello asserted the same claims in the UDRP action as it did in the prior civil action and sought the same relief in both actions &mdash; transfer of the "cello.com" domain name &mdash; for the same reasons. The court also granted Storey's motion for sanctions and imposed sanctions against both Cello and its counsel because Cello made numerous factual representations and asserted legal arguments and defenses in its answer and other papers filed with the court that had no reasonable basis in law or fact. The court awarded Storey its reasonable attorney's fees and costs incurred as a result of the Rule 11 violations.

Appellate Court Proceedings
On appeal, the Second Circuit vacated the district court's grant of summary judgment to Storey and remanded the case for further proceedings. It also vacated the Rule 11 sanctions. As an initial matter, the appeals court rejected Cello's argument that the district court lacked subject-matter jurisdiction over Storey's complaint because: (1) the complaint was properly based on Storey's right to bring an action under 15 U.S.C. §1114(2)(D)(v) to establish that his registration or use of a domain name was not unlawful under the ACPA, and (2) the UDRP's "contractual forum selection clause" did not bar Storey from bringing an action in a different court because the UDRP expressly provides that a domain name owner can seek "independent resolution" of the dispute in "a court of competent jurisdiction."

Turning to the issue of res judicata, the Second Circuit initially rejected Cello's argument that Storey's unsuccessful assertion of a res judicata defense in the UDRP proceeding prevented Storey from raising res judicata in this action. As it noted in its discussion on jurisdiction, UDRP proceedings are not the exclusive remedy for domain name disputes. The UDRP proceeding was relevant "only insofar as it triggered Storey's right to sue under §1114(2)(D)(v)."

The Second Circuit next ruled that res judicata did not bar Cello's cybersquatting claim in the second action. Specifically, Cello could have a claim based on actions occurring after dismissal of the first action because the "bad faith intent to profit" element of an ACPA claim could be based on a "registrant's ongoing use of the domain name." In other words, the dismissal of the first action was "contingent on [Storey's] ongoing legal use of "cello.com." Because Storey sent a letter to Cello offering to sell "cello.com" after the dismissal of the first action, Cello could sue under the ACPA based on that letter. The court emphasized, however, that it was not deciding whether the letter, by itself, would be sufficient to establish an ACPA claim. The appeals court also reversed the district court's imposition of Rule 11 sanctions on Cello and its counsel. Although some of Cello's factual contentions were "highly suspect," they were not "utterly lacking in support." Moreover, Cello's legal contentions were not "patently contrary to existing law."

This page uses content from Finnegan’s Internet Trademark Case Summaries. This entry is available under the GNU Free Documentation License.