In Poly-America, L.P. v. Stego Industries, L.L.C., Civil Action No. 3:08-cv-2224 (May 18, 2011), Poly seeks damages, injunctive relief, and a judgment declaring that Stego’s trademark of the color yellow applied to polyethylene plastic sheeting used in the construction industry as a vapor barrier and vapor retarder (i) should not have been registered under the Lanham Act, (ii) is not entitled to trade dress protection, and (iii) was fraudulently procured. Prior to the lawsuit, Poly manufactured yellow vapor barrier in response to a request from a customer. After being threatened with a lawsuit by Stego, Poly decided not to sell yellow sheeting, and instead chose to file the lawsuit. Stego argued that the lawsuit was brought in bad faith, making it an exceptional case permitting it to recover reasonable attorneys’ fees under Section 35 of the Lanham Act if it was the prevailing party. Poly claimed that Section 35 does not apply because this case does not concern “a violation of any right of the registrant of a mark registered in the Patent and Trademark Office,” but rather that Poly is entitled to recover its attorneys’ fees as damages under Section 38 of the Lanham Act upon proof of its fraudulent procurement claim. Alternatively, if Section 35 does apply and Poly proves its fraudulent procurement claim by clear and convincing evidence, Poly argued that the Court should award Poly its attorneys’ fees under Section 35.

The Court identified cases in the Fifth Circuit that have awarded Section 35 attorneys’ fees to the prevailing party in exceptional cases, regardless whether it was the plaintiff or the defendant that succeeded on the merits. The fee-shifting provision of Section 35 can be invoked when either party’s conduct constitutes bad faith, even if the prevailing party is not the registrant of the mark. The fact that Poly initiated this declaratory judgment action to invalidate Stego’s trademark does not stop the Court from finding this to be an exceptional case upon a showing by Stego that Poly brought this action in bad faith. Similarly, Poly could invoke Section 35’s fee-shifting provision if it prevails and is able to show by clear and convincing evidence that this is an exceptional case as contemplated by the statute. Because only a “prevailing party” may recover attorneys’ fees, the issue did not need to complicate the trial on the merits. The Court will determine whether this is an exceptional case, within the meaning of Section 35’s fee-shifting provision, only upon a motion by the prevailing party after trial.

Further, Section 35 specifically “permits rather than mandates an award of fees” – thereby giving the Court discretion to determine on a case-by-case basis whether an award of fees is warranted – whereas Section 38 “commands that a person who procured registration of a mark by false or fraudulent means ‘shall be liable for any damages sustained in consequence thereof.’” Thus, reading Section 38 to prohibit recovery of attorneys’ fees as damages would not have “the perverse effect of incentivizing parties like Stego to mislead the PTO to issue trademarks” because in addition to being potentially liable for damages, a party who defrauds the PTO may be ordered to pay the attorneys’ fees of a party who prevails in an action to invalidate the fraudulently procured trademark. Accordingly, Poly cannot recover attorneys’ fees as damages under Section 38 of the Lanham Act.

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