Rhodes v. Avon Products, Inc.

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
DEAN RHOADES; DERMANEW, INC., a 
California corporation,
No. 05-56047
Plaintiffs-Appellants,
v.  D.C. No.
CV-05-02169-R
AVON PRODUCTS, INC., a New York
OPINION
corporation,
Defendant-Appellee.

Appeal from the United States District Court
for the Central District of California
Manuel L. Real, District Judge, Presiding
Argued and Submitted
May 7, 2007—Pasadena, California
Filed October 15, 2007
Before: John T. Noonan, Andrew J. Kleinfeld, and
Richard A. Paez, Circuit Judges.
Opinion by Judge Paez
13943
13946 RHOADES v. AVON PRODUCTS, INC.
COUNSEL
Steven A. Freund and Donald B. Rosen, Law Offices of Ste-
ven A. Freund; and Howard Posner, Los Angeles, California,
for the plaintiffs-appellants.
RHOADES v. AVON PRODUCTS, INC. 13947
Michelle M. Graham, and William R. Golden, Jr., Kelley
Drye & Warren, LLP, New York, New York, for the
defendant-appellee.
OPINION
PAEZ, Circuit Judge:
In this trademark declaratory relief action, we must decide
whether the district court properly dismissed Plaintiffs’ case
for lack of subject matter jurisdiction. In their complaint,
Plaintiffs sought a declaration that several of their trademarks
did not infringe on Defendant’s registered marks. The juris-
dictional issue turns on whether Plaintiffs alleged a constitu-
tionally sufficient case or controversy in their First Amended
Complaint (“FAC”). We must also decide whether related
proceedings that were pending before the Trademark Trial
and Appeal Board (“TTAB”) provided an appropriate basis
for the district court to invoke the doctrine of primary juris-
diction in order to dismiss Plaintiffs’ action and, if not,
whether the court properly exercised its discretion under 28
U.S.C. § 2201 when it declined to assert jurisdiction.
We have jurisdiction pursuant to 28 U.S.C. § 1291, and we
hold that the allegations in the FAC alleged a true case or con-
troversy that established subject matter jurisdiction. We also
hold that, although the TTAB provides a forum to address
trademark registration issues, the availability of such a forum
does not justify the application of the doctrine of primary
jurisdiction as a basis for dismissing Plaintiffs’ federal court
action. Thus, Plaintiffs were not required to wait for the com-
pletion of TTAB proceedings before seeking declaratory
relief in federal court. We further hold that, under the circum-
stances of this case, the district court abused its discretion in
declining to assert jurisdiction over Plaintiffs’ request for
declaratory relief. Finally, because of the firmly expressed
13948 RHOADES v. AVON PRODUCTS, INC.
views of the assigned district judge, we direct that, on
remand, the case be reassigned to a new judge.
I.
FACTUAL AND PROCEDURAL BACKGROUND
DermaNew is a cosmetics and skin care company that pat-
ented and distributes, among other things, hand-held mic-
rodermabrasion devices and related skin care products.1
DermaNew’s various products and slogans include “Der-
maNew,” “KeraNew,” “GemaNew,” “DermaNew Institute,”
“If It Is Not DermaNew, It Is Not Personal Microdermabra-
sion,” and “DermaNew Palm Microdermabrasion System.”
Plaintiff Dean Rhoades, who owns DermaNew and these
products, has attempted to register these marks with the
United States Patent and Trademark Office (“PTO”). Avon
Products, Inc., (“Avon”), a well-known beauty product com-
pany that distributes a skin-care product line called ANEW,
challenged DermaNew’s registration applications in the
TTAB. Avon contested five of DermaNew’s registration
applications by filing opposition proceedings, and requested
the cancellation of the registration of two more. See 37 C.F.R.
§§ 2.61-2.209 (describing the rules of practice in trademark
cases). At the time Plaintiffs commenced their federal court
action, therefore, seven trademark proceedings were pending
before the TTAB. Avon also initiated opposition or cancella-
tion proceedings against DermaNew in other countries,
including Brazil, Canada, Hong Kong, Israel, South Korea,
and the European Community.
In 2001, soon after Avon filed its first TTAB opposition
1
Microdermabrasion is a cosmetic procedure popular in spas and doc-
tors’ offices in which the dead outermost surface layer of the skin is par-
tially or completely removed by light abrasion. The procedure does not
need to be performed by a physician, and is commonly used in conjunc-
tion with facial spa treatments.
RHOADES v. AVON PRODUCTS, INC. 13949
proceeding, the parties began settlement negotiations. Accord-
ing to DermaNew’s First Amended Complaint, at a settlement
meeting attended by Rhoades and his wife at Avon’s coun-
sel’s law offices, John Bergin, Avon’s in-house chief trade-
mark counsel
became agitated and pounded his fist on the table,
explaining in substance, if not these actual words,
“You have 60 days to get rid of all your products
with the DermaNew trademark on it and you will
never use it again or Avon will sue you for trade-
mark infringement and you will have to pay for our
losses and legal fees, too.” Additional comments by
Bergin at that meeting included repetition of the
threat of a trademark infringement lawsuit, and a
promise that Avon would appeal any adverse court
decision.
Avon responds that these allegations are “wholly fabricated.”
Settlement negotiations lasted more than four years,
always, according to the FAC, “under the explicit threat of a[
trademark] infringement lawsuit.” For example, on October 4,
2001, Avon’s counsel sent a letter “for settlement purposes
only” that stated that “Avon has lost confidence that a settle-
ment will realistically take place” and that “if [DermaNew] is
unwilling to accept [Avon’s settlement] terms . . . , we will
immediately proceed with all pending proceedings and initiate
whatever additional proceedings or litigation is [sic] neces-
sary to protect Avon’s trademark rights.” On March 22, 2005,
Avon’s counsel informed DermaNew’s counsel that “Avon
would not ‘give up its right to damages’ ” unless DermaNew
accepted Avon’s settlement offer. DermaNew interpreted this
statement as threatening an infringement lawsuit because only
in a federal court infringement lawsuit could Avon recover
damages. See 15 U.S.C. § 1114.2 Finally, on March 24, 2005,
Avon’s counsel declared negotiations to be “at an impasse.”
2
Again, Avon denies that it threatened Plaintiffs.
13950 RHOADES v. AVON PRODUCTS, INC.
On March 24, 2005, DermaNew filed a complaint in the
Central District of California, seeking a declaratory judgment
that its trademark applications do not infringe on Avon’s. See
28 U.S.C. § 2201. Avon responded with a motion to dismiss
under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6),
asserting that the district court lacked subject matter jurisdic-
tion and, in the alternative, that the court should decline to
exercise jurisdiction because the action was brought in bad
faith to avoid discovery obligations in the TTAB proceedings.
DermaNew responded by amending its complaint (“the
FAC”), and by filing an opposition to the motion to dismiss.
The FAC attempted to cure the alleged jurisdictional defects
in the original complaint, while the opposition to the motion
to dismiss forcefully disputed the allegations of bad faith. The
opposition noted, for instance, that “by filing the instant com-
plaint [for declaratory relief] Rhoades will have the same dis-
covery obligations, including depositions, as he would in the
multitude of proceedings in the TTAB, except the discovery
will be in one proceeding rather than seven or more.”
Avon’s reply to the opposition argued that the FAC did not
cure the jurisdictional defects, largely because the alleged
threats of infringement litigation were excludable under Fed-
eral Rules of Evidence 408, which limits the use of statements
made during settlement negotiations. At the hearing on the
motion to dismiss, DermaNew’s counsel tried to respond to
Avon’s arguments, but the court ruled, without any additional
elaboration:
I think that the complaint is improper, brought for an
improper motive, and I’m not exercising my discre-
tion to undertake the declaratory judgment action
since it should be back where it belongs and be fin-
ished there motion [sic]. And the motion to dismiss
is granted.
When DermaNew tried to argue that one district court action
would better serve judicial economy than seven TTAB actions
RHOADES v. AVON PRODUCTS, INC. 13951
that might ultimately end up as an infringement action in the
district court anyway, the court interrupted:
“Counsel, I’ve already ordered. I gave you the
opportunity of an order.”
The hearing was brief, essentially consisting of the above col-
loquy.
The court followed its oral ruling with a written order dis-
missing the action pursuant to Rules 12(b)(1) (lack of juris-
diction) and 12(b)(6) (failure to state a claim upon which
relief can be granted). DermaNew timely appealed.
II.
STANDARD OF REVIEW
We review de novo dismissals under Rules 12(b)(1) and
12(b)(6). Holcombe v. Hosmer, 477 F.3d 1094, 1097 (9th Cir.
2007). “[F]or the purposes of” reviewing such dismissals, and
where, as here, no evidentiary hearing has been held, “all
facts [alleged in the complaint] are presumed to be true.” Id.;
see McLachlan v. Bell, 261 F.3d 908, 909 (9th Cir. 2001).
District court decisions “about the propriety of hearing declar-
atory relief actions . . . [are] reviewed for abuse of discretion.”
Wilton v. Seven Falls Co., 515 U.S. 277, 289-90 (1995).
III.
DISCUSSION
A. Dismissal Under Rule 12(b)(1)3
3
We agree with DermaNew that the district court erred in denying Der-
maNew’s motion to amend the judgment to reflect a dismissal based
solely on Rule 12(b)(1), and not based on Rule 12(b)(6). Avon’s motion
to dismiss was grounded entirely in the argument that DermaNew had not
13952 RHOADES v. AVON PRODUCTS, INC.
As required by Article III, courts may adjudicate only
actual cases or controversies. U.S. CONST. art. III, § 2, cl.1.
When presented with a claim for a declaratory judgment,
therefore, federal courts must take care to ensure the presence
of an actual case or controversy, such that the judgment does
not become an unconstitutional advisory opinion. See Pub.
Serv. Comm’n v. Wycoff, Co., 344 U.S. 237, 244 (1952) (“The
disagreement [underlying the declaratory relief action] must
not be nebulous or contingent but must have taken on a fixed
and final shape so that a court can see what legal issues it is
deciding, what effect its decision will have on the adversaries,
and some useful purpose to be achieved in deciding them.”).
Absent a true case or controversy, a complaint solely for
declaratory relief under 28 U.S.C. § 2201 will fail for lack of
jurisdiction under Rule 12(b)(1). See Fleck and Assoc., Inc. v.
Phoenix, an Arizona Mun. Corp., 471 F.3d 1100, 1103-04
(9th Cir. 2006) (noting, in a declaratory relief action, that a
true “case or controversy” is required to withstand a Rule
12(b)(1) motion for lack of jurisdiction).
[1] “[A]n action for a declaratory judgment that a patent [or
trademark] is invalid, or that the plaintiff is not infringing,
[presents] a case or controversy if the plaintiff has a real and
reasonable apprehension that he will be subject to liability if
he continues to manufacture his product.” Hal Roach Studios,
Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555-56
(9th Cir. 1990) (internal quotation marks, alterations, and cita-
tions omitted).
In applying this standard, we focus[ ] upon the posi-
tion and perceptions of the plaintiff, declining to
satisfied the jurisdictional “case or controversy” requirement, and such
motions in this circuit may be brought “only under 12(b)(1).” Bland v.
Fessler, 88 F.3d 729, 732 n.4 (9th Cir. 1996). We therefore construe the
district court’s ruling as based on Rule 12(b)(1), and assess its merits
accordingly.
RHOADES v. AVON PRODUCTS, INC. 13953
identify specific acts or intentions of the defendant
that would automatically constitute a threat of litiga-
tion. The acts of the defendant [a]re instead to be
examined in view of their likely impact on competi-
tion and the risks imposed upon the plaintiff, to
determine if the threat perceived by the plaintiff
were [sic] real and reasonable.
Cheesebrough-Pond’s, Inc. v. Faberge, Inc., 666 F.2d 393,
396 (9th Cir. 1982); see also 6 J. Thomas McCarthy, Trade-
marks and Unfair Competition § 32.51 (4th ed. 2007) (noting
that to state “an actual controversy . . . [a] threat of infringe-
ment does not have to be said in so many words. It can be
expressed in the attitude of the defendant as expressed[, for
example,] in ‘circumspect language in a letter.’ ”).4
We conclude that DermaNew’s FAC sufficiently alleged
the requisite “reasonable apprehension” for purposes of Rule
12(b)(1). Even though concrete threats are not required, under
our circuit’s “flexible approach,” in order to demonstrate a
reasonable apprehension of an infringement suit, see id., Der-
maNew’s FAC alleges three:5 1) Avon’s lawyer specifically
threatened a trademark infringement suit at a meeting; 2)
Avon’s counsel wrote a letter threatening “additional proceed-
ings or litigation”; and 3) Avon’s counsel told DermaNew’s
4
To the extent that both parties rely on the Federal Circuit’s articulation
of this test, which requires an “explicit threat or other action by the paten-
tee [or trademark owner],” see Fina Research, S.A. v. Baroid, Ltd., 141
F.3d 1479, 1481 (Fed. Cir. 1998), that reliance is misplaced, as that burden
is heavier than what we require.
5
DermaNew did not need the court’s approval to file an amended com-
plaint when it did. Under Rule 15(a), “[a] party may amend the party’s
pleading once as a matter of course at any time before a responsive plead-
ing is served.” Fed. R. Civ. P. 15(a). At the time DermaNew filed its FAC,
Avon had filed only its motion to dismiss. We have held that “a motion
to dismiss the complaint is not a responsive pleading” within the meaning
of Rule 15(a). Miles v. Dep’t of Army, 881 F.2d 777, 781 (9th Cir. 1989).
Therefore, DermaNew’s FAC was procedurally appropriate.
13954 RHOADES v. AVON PRODUCTS, INC.
counsel that Avon would not give up its right to damages. The
first instance explicitly mentioned a trademark infringement
suit; the second and third can imply only that course of action.
As for the second threat, in light of the pending TTAB pro-
ceedings, a federal infringement suit was the only conceivable
“additional” type of litigation. The reference to damages in
the third threat is notable because the TTAB cannot grant
relief on an infringement claim — either injunctive or dam-
ages — so Avon’s focus on damages must refer to that
recourse as well.6
[2] Under the circumstances of this case, DermaNew’s per-
ception of threats was more than reasonable. Not only did
Avon allegedly make three concrete threats of infringement
litigation, but it did so on the heels of years of unsuccessful
and tense settlement negotiations, and after Avon initiated
seven actions in the TTAB. DermaNew thus had good reason
to worry about the stability and profitability of its product
lines, and to suspect that Avon would make good on its
threats and seek hefty damages for any infringement. See
Cheesebrough-Pond’s, 666 F.2d at 393 (holding that Plain-
tiffs had alleged a reasonable apprehension of an infringement
suit where “[f]ailure of this court to resolve the dispute would
force Cheesebrough to choose between continuing to forego
competition in [its] market, and entering the market, risking
substantial future damages and harm to relationships with its
customers and retailers”).
Avon attempts to evade the case and controversy estab-
lished by the FAC by arguing that the declaratory relief action
was brought in bad faith. The district court agreed, stating that
6
The powers of the TTAB are limited to “determin[ing] and decid[ing]
the respective rights of [trademark] registration.” 15 U.S.C. § 1067(a); see
also 15 U.S.C. §§ 1063(a), 1064. In contrast, a federal district court may,
in addition to determining registration rights, 15 U.S.C. § 1119, also hear
actions for trademark infringement, 15 U.S.C. § 1114, for which it may
grant injunctive relief, 15 U.S.C. § 1116, and award damages, 15 U.S.C.
§ 1117.
RHOADES v. AVON PRODUCTS, INC. 13955
“the complaint was brought for an improper motive,” but we
are not so convinced. Avon emphasizes McCarthy’s comment
that “an applicant . . . cannot short-circuit the administrative
process by filing suit for declaratory judgment in the federal
courts,” see 6 McCarthy § 32:53, but ignores McCarthy’s
caveat on that very point, applicable here, that
if the declaratory plaintiff has in fact been threatened
with litigation for infringement . . . , it should be
allowed to bring an action for declaratory judgment
to determine non-infringement, and join with it a
claim of invalidity of the mark and a prayer for can-
cellation of the declaratory defendant’s federal regis-
tration.
6 McCarthy § 32:55.
[3] Moreover, Avon’s “ample evidence” of DermaNew’s
“bad faith” is irrelevant or de minimis. As evidence of this
“bad faith,” Avon filed declarations that allegedly established
that 1) DermaNew’s trademarks infringed on Avon’s regis-
tered marks, 2) the failure of settlement negotiations was due
in part to DermaNew’s “ever changing cast of counsel,” and
3) by filing suit, DermaNew sought “to evade [TTAB] discov-
ery.” We cannot understand how the allegations contained in
these declarations demonstrate bad faith. First, the alleged
infringement is itself the subject of the lawsuit; Avon cannot
premise its bad faith argument claim on the assumption that
it will prevail on the ultimate trademark dispute.
[4] Second, having carefully reviewed the record, we can-
not but conclude that the failed settlement negotiations were
just that—failure to agree on a settlement. We are unsure why
Avon insists that DermaNew’s “changing” counsel or reluc-
tance to accede to Avon’s settlement requests illustrates bad
faith in filing a declaratory relief action. If anything, it sug-
gests that DermaNew filed the action after settlement stalled
because it feared an infringement lawsuit. Third, Avon’s alle-
13956 RHOADES v. AVON PRODUCTS, INC.
gation that DermaNew filed this action to avoid TTAB dis-
covery is perplexing given that, as DermaNew points out,
“Avon will certainly propound the same discovery in district
court, [so] any avoidance of discovery would have been a
temporary convenience at best.” DermaNew may have had
strategic reasons for bringing this action, but that should not
affect whether DermaNew’s complaint alleged a case or con-
troversy that established jurisdiction. As the First Circuit put
it in a similar case, “absent a showing of bad faith so substan-
tial as to foreclose equitable relief, [ ] subjective aims do not
matter.” PHC v. Pioneer Healthcare, Inc., 75 F.3d 75, 79 (1st
Cir. 1996).7
Avon also posits two direct responses to the threats
recounted in the FAC. First, Avon argues that the threats are
“wholly fabricated.” Second, it argues that to the extent they
are not fabricated, they are privileged, having occurred during
the course of settlement negotiations, and therefore may not
be considered by this court. Neither contention has merit.8
7
Avon’s citation to Bausch & Lomb, Inc. v. CIBA Corp., 39 F. Supp. 2d
271 (W.D.N.Y. 1999), to support its allegation of bad faith in fact under-
mines the argument. In Bausch & Lomb, the district court declined to exer-
cise jurisdiction because it determined “this action was designed in part as
a weapon to strengthen B & L’s hand in any negotiations.” Id. at 275. In
that case, however, no settlement negotiations preceded the declaratory
relief action, so the court noted that “[i]f B & L had genuinely wanted to
resolve the dispute amicably, it could have sought to do so without starting
a lawsuit.” Id. In contrast, in this case settlement negotiations spanned sev-
eral years without success before the filing of the declaratory judgement
action. Avon characterizes the facts here as “far more egregious [with
respect to a bad faith showing] than those facing the Bausch & Lomb
Court.” We think not. Bausch & Lomb revealed its own bad faith by
bringing a federal court action without attempting settlement, whereas
DermaNew took this squabble to court only after years of effort to avoid
litigation. Bausch & Lomb thus evidences the lack of bad faith in this case.
8
Avon devotes a significant portion of its brief to explaining why pend-
ing TTAB proceedings do not themselves create a reasonable apprehen-
sion of an infringement lawsuit for declaratory judgment purposes. Avon
relies on McCarthy’s treatise and the Federal Circuit standard for this
RHOADES v. AVON PRODUCTS, INC. 13957
1. Factual Allegations For the Purpose of Reviewing
Motions to Dismiss
[5] Avon’s contention that DermaNew’s allegations of
threats of an infringement suit are false is not relevant at this
stage in the litigation. Although both parties submitted decla-
rations in connection with the motion to dismiss, because no
evidentiary hearing was held we must accept DermaNew’s
version of events as true for the purposes of establishing juris-
diction and surviving a 12(b)(1) motion. McLachlan, 261 F.3d
at 909; see also Mattel, Inc. v. Greiner and Hausser GmbH,
354 F.3d 857, 862 (9th Cir. 2003) (noting that to establish the
jurisdiction necessary to withstand a Rule 12(b)(1) motion,
“conflicts between the facts contained in declarations submit-
ted by the two sides must be resolved in” the plaintiff’s
favor).
[6] In other words, the question presented is whether Der-
maNew’s FAC is, on its face, sufficient to survive a motion
to dismiss, not whether the alleged facts will ultimately prove
accurate. Therefore, when determining whether the district
court erred in dismissing the complaint, we must take Der-
maNew’s allegations as true. These allegations describe con-
crete threats of an infringement lawsuit that easily establish a
proposition, but has missed our own precedent holding just the opposite.
See Cheesebrough-Pond’s, 666 F.2d at 396 (explicitly rejecting the analy-
sis of a Seventh Circuit case holding that “the filing of a notice of opposi-
tion to registration with the Patent and Trademark Office is not equivalent
to a charge of infringement”). While we have noted that “a simple opposi-
tion proceeding in the Patent and Trademark Office generally will not
raise a real and reasonable apprehension of [an infringement] suit,” our
“flexible approach” to these cases precludes any such black and white
lines. Id. (holding that notice of opposition action, under the circumstances
of that case, created reasonable apprehension of trademark infringement
suit) (emphasis added). In any case, DermaNew has never claimed that the
pending TTAB proceedings created the reasonable apprehension here.
Instead, it relies on three alleged threats of a trademark infringement
action in federal court.
13958 RHOADES v. AVON PRODUCTS, INC.
case or controversy. Cf. Bausch & Lomb, 39 F. Supp. 2d at
273-74 (holding allegations insufficient to confer jurisdiction
where the purported threats were nothing more than “unattri-
buted ‘rumors’ ”).
2. Federal Rule of Evidence 408
Even discounting the allegations of oral threats, Der-
maNew’s FAC establishes jurisdiction. It alleges that Avon’s
counsel threatened an infringement suit by letter, a copy of
which we have reviewed. The letter, which promises that
Avon will “initiate whatever additional proceedings or litiga-
tion is necessary to protect Avon’s trademark rights,” is suffi-
cient in itself to leave DermaNew with a reasonable
apprehension of an infringement suit. Avon argues that we
should ignore the letter because “allegations based on settle-
ment discussions . . . are inadmissible for any purpose, includ-
ing showing jurisdiction,” and the letter specifically warned it
was “written for settlement purposes only and shall not be
admissible for any purpose in any legal proceeding.” Quite
simply, this argument is not an accurate statement of the law.
[7] Rule 408 provides as follows:
Rule 408. Compromise and Offers to Compro-
mise
(a) Prohibited uses — Evidence of the following is
not admissible on behalf of any party, when offered
to prove liability for, invalidity of, of amount of a
claim that was disputed as to validity or amount, or
to impeach through a prior inconsistent statement or
contradiction:
(1) furnishing or offering or promising to
furnish — or accepting or offering or prom-
ising to accept — a valuable consideration
RHOADES v. AVON PRODUCTS, INC. 13959
in compromising or attempting to compro-
mise the claim; and
(2) conduct or statements made in compro-
mise negotiations regarding the claim,
except when offered in a criminal case and
the negotiations related to a claim by a pub-
lic office or agency in the exercise of regu-
latory, investigative, or enforcement
authority.
(b) Permitted uses — This rule does not require
exclusion if the evidence is offered for purposes not
prohibited by subdivision (a). Examples of permissi-
ble purposes include proving a witness’s bias or prej-
udice; negating a contention of undue delay; and
proving an effort to obstruct a criminal investigation
or prosecution.
The text of the rule is clear: evidence from settlement negotia-
tions may not be considered in court “when offered to prove
liability for, invalidity of, or amount of a claim that was dis-
puted as to validity or amount, or to impeach through a prior
inconsistent statement or contradiction.” Rule 408, however,
does not bar such evidence when “offered for [other] purposes
. . . [such as] proving a witness’s bias or prejudice.” See, e.g.,
United States v. Technic Servs., Inc., 314 F.3d 1031, 1045
(9th Cir. 2002) (holding that evidence from settlement negoti-
ations was admissible to prove “obstruction of the EPA’s
investigation”); United States v. Pend Oreille Pub. Utility
Dist. No. 1, 926 F.2d 1502, 1507 n.4 (9th Cir. 1991) (same,
where the evidence was “introduced only to prove that dis-
puted lands were suitable for agricultural use prior to con-
struction of [a] dam”). Notwithstanding the letter’s attempt to
claim an absolute privilege, therefore, statements made in set-
tlement negotiations are only excludable under the circum-
stances protected by the Rule.
13960 RHOADES v. AVON PRODUCTS, INC.
[8] Here, DermaNew does not rely on the threats in an
attempt to prove whose trademark is valid, or to impeach
Avon. Instead, it uses the threats to satisfy the jurisdictional
requirements of an action for declaratory relief.9 This is per-
fectly acceptable under Rule 408. Avon’s citation to Aspen
Title & Escrow, Inc. v. Jeld-Wen, Inc., 677 F. Supp. 1477 (D.
Ore. 1987), for the proposition that “settlement conferences in
their entirety are covered under Rule 408, even when pur-
ported threats are made during those conferences,” is mislead-
ing and taken out of context. The “threat” at issue in Aspen
Title was the statement “we will put you out of business,”
which “Aspen contends . . . show[ed] a specific intent by
defendants to drive Aspen out of business.” Id. at 1485. The
district court in that case excluded the threat because it
occurred during settlement negotiations, and rightly so; the
threat was offered for the purpose of establishing an antitrust
conspiracy—for the purpose, in other words, of proving liabil-
ity. Aspen Title, therefore, is inapposite.
[9] Avon makes much of the “policy behind” Rule 408, as
if any recognition of statements made during settlement will
ruin the “freedom of communication with respect to compro-
mise” that the Rule protects. Clemco Indus. v. Comm. Union
Ins. Co., 665 F. Supp. 816, 829 (N.D. Cal. 1987). Yet the
Rule, by its own terms, is one of limited applicability. In other
words, Rule 408 is designed to ensure that parties may make
offers during settlement negotiations without fear that those
same offers will be used to establish liability should settle-
ment efforts fail. When statements made during settlement are
introduced for a purpose unrelated to liability, the policy
underlying the Rule is not injured.
[10] DermaNew’s FAC, having alleged a case or contro-
versy, established subject matter jurisdiction. Avon’s argu-
9
The “other purpose” need not be specifically mentioned; those men-
tioned by Rule 408 are not an “exhaustive” list, “but [are instead] only
illustrative.” Technic Servs., 314 F.3d at 1045.
RHOADES v. AVON PRODUCTS, INC. 13961
ments to the contrary are unavailing. We therefore hold that
the district court erred in dismissing the case based on Federal
Rules of Civil Procedure 12(b)(1).10
B. Discretionary Dismissal
The district court’s written order dismissed the case on the
basis of Rule 12(b)(1). In its oral ruling at the hearing, how-
ever, it also stated it was “not exercising . . . discretion to
undertake the declaratory judgment action.” Because of the
court’s firm ruling, we view its invocation of this ground as
an alternative basis for dismissing DermaNew’s complaint.
Accordingly, we address this discretionary ruling, and hold
that the court erred here as well.
1. Primary Jurisdiction
[11] In deciding not to assert jurisdiction under 28 U.S.C.
§ 2201, the district court stated that the complaint “should be
back where it belongs and be finished there” before the
TTAB. Although the court did not cite any authority, it
appears to have invoked the doctrine of primary jurisdiction
as a basis for declining to hear the case. See PHC, 75 F.3d at
80 (interpreting a district court’s ruling declining to hear a
declaratory relief action about trademark rights as based on a
primary jurisdiction rationale even though the “district court
did not use this phrase” because it said that “it saw no reason
‘to take this case’ from ‘an administrative scheme designed to
hear it’ ”). We hold, however, that this was not an appropriate
reason to decline to entertain DermaNew’s lawsuit.11
10
In light of this conclusion, we need not address DermaNew’s argu-
ment that the district court erred in denying DermaNew’s motion to amend
the judgment to reflect that the dismissal was “without prejudice.”
11
Although we review the ultimate decision to decline to exercise juris-
diction for abuse of discretion, see Wilton, 515 U.S. at 289-90, we conduct
de novo review of the court’s application of the primary jurisdiction doc-
trine, Int’l Bhd. of Teamsters, Chauffeurs Warehousemen & Helpers, Gen-
eral Truck Drivers, Office Food and Warehouse Local 952 v. Am.
Delivery Serv. Co., Inc., 50 F.3d 770, 773 (9th Cir. 1995).
13962 RHOADES v. AVON PRODUCTS, INC.
The primary jurisdiction doctrine provides: When
there is a basis for judicial action, independent of
agency proceedings, courts may route the threshold
decision as to certain issues to the agency charged
with primary responsibility for governmental super-
vision or control of the particular industry or activity
involved.
United States v. Culliton, 328 F.3d 1074, 1081 (9th Cir.
2003). We have never addressed whether a district court
should defer, on primary jurisdiction grounds, a trademark
declaratory relief action pending the completion of related
TTAB proceedings. The First and Second Circuits have both
addressed similar circumstances, however, and have held that
the primary jurisdiction rationale does not justify deferral. We
agree.
In PHC v. Pioneer Healthcare, 75 F.3d 75 (1st Cir. 1996),
the First Circuit considered a dispute over the name “Pioneer
Healthcare.” Pioneer threatened PHC with an infringement
lawsuit in two letters and initiated TTAB proceedings, and
PHC responded with a declaratory judgment action in federal
district court. Id. at 77-78. The district court dismissed the
complaint for lack of jurisdiction and failure to state a claim,
as well as because of primary jurisdiction considerations. Id.
at 78-80. The First Circuit reversed, holding, inter alia, that
the action “should not be deferred based on primary jurisdic-
tion concerns.” Id. at 80.
The court explained that, in general, “[t]he expertise of the
agency, avoidance of conflict, indications of legislative intent,
and other factors may permit, sometimes even require, . . .
deference by court to agency,” but that “[t]wo facts weigh[ed]
heavily against deference to the administrative proceeding
here.” Id. First, the TTAB
is not an ordinary administrative agency whose find-
ings control unless set aside after court review under
RHOADES v. AVON PRODUCTS, INC. 13963
a highly deferential standard. [Cf. Chevron U.S.A.
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
843-45 (1984).] Under the Lanham Act, where a
contested Board proceeding has already addressed
the validity of the mark, the Board’s findings can be
challenged in a civil action in district court through
new evidence, and, at least to a large extent, the
issues can be litigated afresh. 15 U.S.C. § 1071(b).
And Congress permits an initial proceeding in the
district court to challenge or affirm a federally regis-
tered mark in civil suits in which a federally regis-
tered mark is in issue, even without any prior resort
to the Board. 15 U.S.C. § 1119.
Second, at least where an infringement claim is
involved — whether directly asserted by an “owner”
or challenged in a declaratory action — there is often
some urgency. Ongoing business conduct is likely to
be involved and harm, possibly irreparable, may be
accruing. Further, [unlike a federal district court,] the
Board cannot give relief for an infringement claim,
either injunctive or by way of damages. [See 15
U.S.C. §§ 1063(a), 1064, 1067(a). Cf. 15 U.S.C.
§§ 1114-1119 (powers of the district court are much
broader).] Under these circumstances awaiting the
Board’s action is less attractive; and this is doubly so
because (as already noted) its administrative findings
can so easily be relitigated in court.
Id.
In arriving at this conclusion, the First Circuit relied on an
earlier Second Circuit opinion, Goya Foods, Inc. v. Tropicana
Prod., Inc., 846 F.2d 848 (2d Cir. 1988). There, the court
noted that
[i]f a district court action involves only the issue of
whether a mark is entitled to registration and if sub-
13964 RHOADES v. AVON PRODUCTS, INC.
ject matter jurisdiction is available, the doctrine of
primary jurisdiction might well be applicable,
despite the differences between the trademark regis-
tration scheme and other regulatory patterns. In such
a case, the benefits of awaiting the decision of the
[Patent and Trademark Office (“PTO”)] would
rarely, if ever, be outweighed by the litigants’ need
for prompt adjudication. But where, as in the pend-
ing case, a district court suit concerns infringement,
the interest in prompt adjudication far outweighs the
value of having the views of the PTO. Whether a liti-
gant is seeking to halt an alleged infringement or, as
in this case, seeking a declaration of non-
infringement, it is entitled to have the infringement
issue resolved promptly so that it may conduct its
business affairs in accordance with the court’s deter-
mination of its rights. Delaying consideration of
Goya’s claim pending the outcome of the TTAB pro-
ceedings undercuts the purpose of declaratory relief
by forcing Goya either to abandon use of trademarks
it has used for more than a decade or to persist in pil-
ing up potential damages.
Id. at 853-54 (citations and internal quotation marks omitted);
see also PHC, 75 F.3d at 80-81.
[12] We find this reasoning persuasive. Allowing the dis-
trict court to decline a declaratory relief action on a primary
jurisdiction rationale is sensible only if the agency is better
equipped to handle the action. Here, however, Congress has
not installed the PTO as the exclusive expert in the field. As
noted, parties may litigate these issues in federal court without
previously exhausting their claims before the TTAB. See, e.g.,
15 U.S.C. § 1071(b)(1). Indeed, we have previously noted this
potential for overlapping litigation as a reason why pending
TTAB proceedings may themselves, under certain circum-
stances, create a reasonable apprehension of an infringement
lawsuit. See Cheesebrough-Pond’s, 666 F.2d at 396 (holding
RHOADES v. AVON PRODUCTS, INC. 13965
that Plaintiff had alleged a reasonable apprehension of an
infringement lawsuit based on Defendant’s TTAB opposition
action in part because “a decision of the Patent and Trade-
mark Office allowing the registration of Chesebrough’s trade-
mark would not preclude a subsequent infringement action or
be determinative of the issues involved”). More importantly,
where, as here, there is a potential infringement lawsuit, fed-
eral courts are particularly well-suited to handle the claims so
that parties may quickly obtain a determination of their rights
without accruing potential damages.12
Avon’s attempts to distinguish PHC and Goya Foods are
not persuasive. It dismisses reliance on PHC because in that
case the infringement threats were not made during “privi-
leged settlement negotiations,” and because the PHC parties
had not been involved in “years of settlement talks.” As
already explained, however, in the context of this case the
threats of trademark infringement litigation are not privileged,
despite occurring during the course of settlement negotiations.
Avon suggests that the “years of settlement talks” prove
DermNew’s bad faith, but if anything, we think they prove the
opposite — that DermaNew did make a good faith attempt to
resolve the dispute amicably.
Avon distinguishes Goya Foods by pointing out that the
“narrow issue” in that case was whether the plaintiff should
have leave to amend its complaint. That is indeed a proce-
dural difference between that case and the instant one, but it
is one without substance; in both cases the fundamental issue
was whether “the pendency of a PTO proceeding was . . . a
proper basis to forestall” an action for declaratory relief. Goya
12
For this reason, Avon’s contention that “Rhoades is just plain wrong
to argue that the District Court is the only forum that can adjudicate all
the issues between the parties in a single action” because the TTAB has
consolidated the United States proceedings is itself “plain wrong.” The
point is not the number of TTAB proceedings, but rather that only the dis-
trict court can award damages or injunctive relief in an infringement
action.
13966 RHOADES v. AVON PRODUCTS, INC.
Foods, 846 F.2d at 850. We therefore find both the First and
Second Circuit’s determinations to be entirely relevant and
instructive in this case.13
[13] In light of the above considerations, we hold that the
district court abused its discretion in declining to hear Der-
maNew’s action. We agree with the Second Circuit that some
situations might justify deferring a declaratory judgment case
when related TTAB proceedings are pending; specifically,
where the “district court action involves only the issue of
whether a mark is entitled to registration,” it might make
more sense to resolve the registration claims at the TTAB
first. See id., at 853-54. On the other hand, if, as here, a poten-
tial infringement claim “requires the district court to resolve
much or all of [the registration issues], it would waste every-
one’s time not to settle the registration issue now[, in district
court].” PHC, 75 F.3d at 81. The deciding factor should be
efficiency; the district court should exercise jurisdiction “if
this course is more efficient; otherwise, not.”14 Id. Avon had
ample opportunity to demonstrate the necessity of, or even
any factor weighing in favor of, deferring the action. Instead,
13
Avon relies heavily on an district court case, Citicasters Co. v. Coun-
try Club Commc’ns, No. 97-0678 RJK, 1997 WL 715034 (C.D. Cal. July
21, 1997) (unpublished), for its argument that district courts should
“defer[ ] to the TTAB in cases where that would be the most efficient
course of action.” In the first place, no one contests that assertion; the
question is whether, in this case, deferring to the TTAB would in fact be
the most efficient course. More importantly, however, besides lacking pre-
cedential value, it is not clear that Citicasters involved any of the notewor-
thy factors present here. Citicasters does not explain whether the federal
court proceedings there involved a claim for declaratory relief, nor is there
any indication that the federal case involved an infringement action.
14
Because the Supreme Court’s decision in Wilton v. Seven Falls, 515
U.S. 277 (1995), involved a pending parallel state court action, we do not
think that the factors that weighed in favor of deferral there, based mostly
on concerns about comity, are applicable to the pending parallel TTAB
proceedings in this case, to which the district court owes no special defer-
ence, see id. at 283-83 (citing factors from Brillhart v. Excess Ins. Co. of
Am., 316 U.S. 491 (1942)).
RHOADES v. AVON PRODUCTS, INC. 13967
it has urged upon this court borderline frivolous arguments
about Rule 408 and jurisdiction. Under the circumstances, we
see no reason not to order the district court to entertain this
action.
2. Remand to Different Judge
DermaNew has requested that, upon remand, the case be
assigned to a different judge. See 28 U.S.C. § 2106. We grant
that request.
[14] Under § 2106, remand to a different district is
appropriate if there is a demonstration of personal
bias or unusual circumstances. In determining
whether unusual circumstances exist the court con-
siders:
(1) whether the original judge would reasonably be
expected upon remand to have substantial difficulty
in putting out of his or her mind previously
expressed views or findings determined to be errone-
ous or based on evidence that must be rejected, (2)
whether reassignment is advisable to preserve the
appearance of justice, and (3) whether reassignment
would entail waste and duplication out of proportion
to any gain in preserving the appearance of fairness.
The first two factors are considered to be of equal
importance; moreover, a finding of either one would
support remand to a different judge.
United Nat’l Ins. Co. v. R & D Latex Corp., 141 F.3d 916,
920 (9th Cir. 1998) (quoting California v. Montrose Chem.
Corp., 104 F.3d 1507, 1521 (9th Cir. 1997)). We are per-
suaded by our review of the record that the assigned district
court judge “cannot reasonably be expected upon remand to
disregard his previously expressed views in this matter.” Id.
at 919-20.
13968 RHOADES v. AVON PRODUCTS, INC.
[15] In this case, the district judge granted Avon’s motion
to dismiss without allowing DermaNew’s counsel the oppor-
tunity to respond, even briefly, to Avon’s Rule 408 argument.
The judge reasoned that the complaint was “brought for an
improper motive” and that “it should be back where it
belongs.” As we have explained, we have carefully reviewed
the record and can find no evidence of any such “improper
motive” whatsoever, and furthermore, the judge’s invocation
of the primary jurisdiction doctrine was legally erroneous.
Under the circumstances of this case, we “conclude that if this
case were before him[, the judge] would have substantial dif-
ficulty in putting his previously expressed views out of his
mind.”
VACATED and REMANDED with direction that the
case be reassigned to a different judge, who should exer-
cise jurisdiction over this declaratory relief action.