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Thomas E. Graham*
A decision issued December 13, 1996, by the United States District
Court for the District of New Jersey casts doubt on Congress's ability
to permit private parties to pursue certain claims against a state
or its instrumentalities in federal court under the federal trademark
statute. See College Savings Bank v. Florida Prepaid Postsecondary
Education Expense Board, Nos. CIV. 95-4516 (GEB), CIV. 94-5610 (GEB),
1996 WL 728173 (D.N.J. Dec. 13, 1996). Relying on the United States
Supreme Court's 1996 decision in Seminole Tribe of Florida v. Florida,
116 S. Ct. 1114 (1996), the district court held that the Eleventh
Amendment to the United States Constitution prohibits Congress from
taking away a state's immunity from suit for certain false advertising
claims under the Lanham Act. In contrast, the court also held that
Congress effectively abrogated the states' Eleventh Amendment immunity
from suits brought under the Patent Act. The decision raises questions
about the degree to which the rights embodied in the Lanham Act
can be considered constitutionally protected "property"
and the extent to which states may violate the Lanham Act without
fear of being sued in federal court.
Plaintiff, College Savings Bank of Princeton, New Jersey ("CSB"),
brought suit against Florida Prepaid Postsecondary Expense Board
("Florida Prepaid"), an instrumentality of the State of
Florida. CSB alleged that since 1987 it had marketed a deposit contract,
called the "CollegeSurer CD," that was administered according
to a patented method designed to provide funds for future, though
presently uncertain, college expenses. CSB claimed that Florida
Prepaid's sale of such a plan willfully infringed CSB's patent.
CSB also alleged that Florida Prepaid had engaged in false advertising
in violation of Section 43(a) of the Lanham Act, by misrepresenting
its product, thus hampering CSB's efforts to sell its own investment
contracts.
The alleged misrepresentations were that the State of Florida guaranteed
beneficiaries the full amount necessary to cover education expenses
at a participating postsecondary institution; that tax liability
under the program would be deferred until the student was enrolled
at college; that the program's investments were backed by the full
faith and credit of the United States; and that Florida Prepaid
failed to disclose that CSB had asserted a patent infringement claim
against it. Significantly, however, CSB did not allege that Florida
Prepaid had made any false statements concerning CSB's CollegeSurer
CD.
CSB relied on Section 43(a)(2) of the Lanham Act as the jurisdictional
basis for suit. This section, included in the Trademark Remedy Clarification
Act of 1992 ("the TRCA"), Pub. L. No. 102-542, 106 Stat.
3567 (codified as amended at 15 U.S.C.A. §§ 1114(1), 1121,
1125(a)(2) (West Supp. 1996)), explicitly provides for suits against
states and their instrumentalities, officers and employees under
Section 43(a) to the same extent as nongovernmental entities. The
Patent Act was similarly amended in 1992. See Patent and Plant Variety
Protection Remedy Clarification Act of 1992, Pub. L. 102-560, 106
Stat. 4230 (codified as amended 35 U.S.C.A. § 296(a) (West
Supp. 1996)). Congress's express purpose in passing the TRCA was
to abrogate state sovereign immunity and, consistent with existing
Eleventh Amendment decisions in similar contexts, Congress rested
its authority to do so on its Article I Commerce Clause powers and
its powers to enforce the substantive provisions of the Fourteenth
Amendment. See S. Rep. No. 280, 102d Cong., 2d Sess. 8 (1992), reprinted
in 1992 U.S.C.C.A.N. 3087, 3088, 3094.
However, on March 27, 1996, the Supreme Court significantly altered
the Eleventh Amendment landscape with its landmark decision in Seminole
Tribe. In that case, the Court held that, although Congress had
clearly expressed its intent to abrogate the states' Eleventh Amendment
immunity in passing the statute in question, no Article I power
granted Congress the constitutional authority to do so. In reaching
its result, the Seminole Tribe Court explicitly overruled precedent
that had permitted Congress to abrogate a state's Eleventh Amendment
immunity pursuant to the Interstate Commerce Clause. 116 S. Ct.
at 1128 (overruling Pennsylvania v. Union Gas Co., 491 U.S. 1 (1989)).
The Court held that "Article I cannot be used to circumvent
the constitutional limitations placed upon federal jurisdiction."
Thus, after Seminole Tribe, Congress may only abrogate Eleventh
Amendment immunity pursuant to the powers granted by Section 5 of
the Fourteenth Amendment. See Fitzpatrick v. Bitzer, 427 U.S. 445
(1976).
Seeking to avail itself of this shift in Eleventh Amendment jurisprudence,
Florida Prepaid moved to dismiss CSB's claims, arguing lack of subject
matter jurisdiction. Florida Prepaid's argument in favor of dismissal
was two-fold: first, the statute on which CSB based jurisdiction
was unconstitutional because Congress could not base its abrogation
of immunity on the Commerce Clause after Seminole Tribe; and second,
the amendment to the Lanham Act was not "appropriate legislation"
because it was not directed at remedying the type of conduct expressly
prohibited by the Fourteenth Amendment's substantive provisions.
After holding that Florida Prepaid was indeed an "arm of the
state" and therefore entitled to Eleventh Amendment immunity
and that Florida Prepaid had not waived its claim to immunity, the
district court addressed whether Congress had validly abrogated
Florida Prepaid's sovereign immunity to CSB's claims. Adhering to
the Supreme Court's analysis in Seminole Tribe, the court engaged
in a two-part inquiry, asking first "whether Congress ha[d]
'unequivocally expresse[d] its intent to abrogate the immunity'
. . . ; and second, whether Congress has acted 'pursuant to a valid
exercise of power.'"
The court had little difficulty holding that Congress intended
that states would be subject to Lanham Act claims, and it reached
the same conclusion with regard to the 1992 amendments to the Patent
Act. The second question, however, proved more troublesome. Noting
that "after Seminole Tribe, the only remaining authority for
Congressional abrogation of the States' immunity is [Section 5]
of the Fourteenth Amendment," the court found the ultimate
issue to be "whether the interests sought to be protected by
the 'false advertising prong' of the Lanham Act are 'property' for
purposes of the Fourteenth Amendment." The court answered this
question in the negative, holding that "[a]n interest in being
free from alleged false advertising simply does not qualify as a
property right for purposes of the Due Process Clause of the Fourteenth
Amendment, or indeed for any other purpose." The court reached
a contrary conclusion, however, regarding CSB's patent infringement
claim, holding that "a patent is 'property' for purposes of
the Fourteenth Amendment, and Congress can, under that Amendment,
abrogate Eleventh Amendment immunity for claims under the Patent
Act." Thus, the court held the attempt to subject states to
suit under Section 43(a) of the Lanham Act unconstitutional, concluding
that "Congress has no power, under the Fourteenth Amendment
or any other provision of the Constitution, to strip the states
of their Eleventh Amendment immunity and subject them to suits in
federal court for false advertising."
The breadth of the court's constitutional ruling remains open to
question. The court carefully limited its result to false advertising
claims and distinguished such cases from claims of trademark infringement.
Moreover, the court seemed further to restrict its holding to false
advertising cases in which the defendant "is alleged to have
made misleading statements about its own program, not to have misappropriated
some element of plaintiff's product." Therefore, the result
in College Savings Bank appears to govern only that portion of Section
43(a) making it unlawful to "misrepresent[] the nature, characteristics,
qualities, or geographic origin of [one's own] . . . goods, services,
or commercial activities."
This decision raises questions about the degree to which the rights
embodied in the Lanham Act can be considered constitutionally protected
"property." Historically, trademarks and other communicative
symbols used in connection with the sale of goods and services have
been viewed as a form of "property." See, e.g., Hamilton-Brown
Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 259 (1916) ("The
right to use a trademark is recognized as a kind of property, of
which the owner is entitled to the exclusive enjoyment to the extent
that it has been actually used."). As such, the policy of the
law has been to protect them as "valuable business assets,"
Jacob Siegel Co. v. FTC, 327 U.S. 608, 612 (1946), that can be bought,
sold, assigned and licensed. However, "[a]nalogies to other
forms of 'property,' from real estate to patents and copyrights,
falter on the basic definition of the scope of trademark 'property,'"
because, unlike these other forms, "any 'property' in trademarks
is created and defined by the mental state of customers." 1
J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition
§ 2:14 at 2-30 (4th ed. 1996).
The "property" aspects of trademarks and other communicative
business symbols are thus unique and appear to depend on the purposes
underlying legal protection for such symbols. These purposes are
two-fold. First, trademarks and their analogues are designed to
protect consumers from confusion about the source of goods and services.
See, e.g., Kentucky Fried Chicken Corp. v. Diversified Packaging
Corp., 549 F.2d 368, 388-89 (5th Cir. 1977) (holding that there
are no "property" aspects to trademarks absent likelihood
of consumer confusion). Second, these symbols signify the good will
of the business with which they are associated. See, e.g., McCarthy,
supra, § 2:15. Therefore, the trademark-type rights that the
law recognizes as "property" are "the right of the
public to be free of confusion and the synonymous right of a trademark
owner to control his product's reputation." James Burrough
Ltd. v. Sign of Beefeater, Inc., 540 F.2d 266, 274 (7th Cir. 1976),
appeal after remand, 572 F.2d 574 (7th Cir. 1978). In contrast,
the "property" aspects of patents and copyrights are designed
to "[protect] producers as an incentive to product innovation."
Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 157
(1989).
The result in College Savings Bank implies that, in order to be
considered "property" for purposes of the Fourteenth Amendment
and Congressional abrogation of state sovereign immunity pursuant
thereto, claims under Section 43(a) of the Lanham Act must implicate
both the public's right to be free from confusion and the plaintiff's
right to control its product's reputation. For example, although
Florida Prepaid's allegedly false representations about certain
aspects of its own product could breach the public's right not to
be confused, those representations did not appear to damage the
reputation or good will of CSB. As such, the court deemed that no
constitutionally recognized "property" rights were implicated
in the suit.
In contrast, claims under Section 43(a)'s infringement prong and
claims under its false advertising prong that involve misrepresentations
about the plaintiff's product implicate both potential consumer
confusion and the reputation and good will of the plaintiff's goods
or services. Theoretically, courts should therefore be more likely
to find that such claims involve Fourteenth Amendment property rights
and thus to uphold the TRCA as a valid abrogation of Eleventh Amendment
immunity.
Some danger exists, however, that courts will rely on College Savings
Bank as authority to deny property status to all of the rights granted
by Section 43(a) or, even more broadly, to hold that none of the
provisions of the Lanham Act implicate constitutionally protected
property interests. The effect of such a broad holding would be
that states could not, under any circumstances, be subject to Lanham
Act claims brought in federal court. Such a result could leave states
free, if states chose, to violate federal law by misleading consumers
and impugning the reputation of a private business's goods or services
without fear of having to answer for such conduct in a federal forum.
*Thomas E. Graham is a partner in the Winston-Salem office of Kilpatrick
Stockton LLP.
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