Thursday, October 25, 2007
Compromising Position: Ninth Circuit Finds Rule 408 Inapplicable When Proving Reasonable Apprehension
In Rhoades v. Avon Products, Inc., 2007 WL 2983757 (9th Cir. 2007), the Ninth Circuit Court of Appeals applied Federal Rule of Evidence 408 in a way in which I don't think it has ever been applied before. I think that its decision was correct.
In Avon, the plaintiff, Dean Rhoades, the owner of DermaNew, a new cosmetics company, attempted to register certain products and slogans (such as "If It Is Not DermaNew, It Is Not Personal Microdermabrasion"), with the Patent and Trademark Office. Avon, which distributes the ANEW skin care product line, then proceeded to challenge several of DermaNew's applications before the Trademark Trial and Appeal Board, file opposition proceedings, etc.
The two parties subsequently entered into settlement negotiations, which lasted more than four years. As these negotiations began to break down, Avon's counsel sent a letter to DermaNew. The letter promised that Avon would "initiate whatever additional proceedings or litigation is necessary to protect Avon's trademark rights." The letter noted that it was "written for settlement purposes only and shall not be admissible for any purpose in any legal proceeding."
DermaNew thereafter filed a complaint in California Federal District Court, seeking a declaratory judgment that its trademark applications do not infringe on Avon's. Avon then moved to dismiss the complaint based upon, inter alia, lack of subject matter jurisdiction on the ground that DermaNew failed to establish that it had a real and reasonable apprehension that it would be subject to liability if it continued to manufacture its product, a requirement before a party can bring an action for a judgment declaring that it is not infringing a trademark. Avon claimed that its counsel's letter to DermaNew was inadmissible to prove this apprehension under Federal Rule of Evidence 408.
Federal Rule of Evidence 408(a) states that evidence of compromises, offers to compromise, and related statements are inadmissible to prove liability for, invalidity of, or amount of a claim that was disputed as to liability or amount, or to impeach through a prior inconsistent statement or contradiction. Rule 408, however, goes on to state that evidence is admissible if offered for purposes not prohibited by 408(a). The Rule then lists as three illustrative examples: proving bias, negating a contention of undue delay, and proving an effort to obstruct a criminal investigation or prosecution.
Of course, proving reasonable apprehension is not one of these examples, but on appeal the Ninth Circuit correctly found that these examples are merely illustrative. The more important part of Rule 408 is that it states that evidence of compromises, etc. is admissible unless it is used for a purpose specifically exluded under 408(a). Thus, because DermaNew was not using the letter to prove the (in)validity of Avon's trademark claim or the amount it could or could not recover on its claim, the letter was admissible as not covered by 408(a), despite the alleged disclaimer included by Avon's counsel. While this is the first case I have seen where Rule 408 has been found inapplicable in this declaratory judgment situation, courts facing such situations in the future should apply the Ninth Circuit's analysis.