Lahoti v. Vericheck, Inc.

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

DAVID LAHOTI, an individual,  No. 10-35388
Plaintiff-Appellant,
v.  D.C. No.
2:06-cv-01132-JLR
VERICHECK, INC., a Georgia Corp.
OPINION
Defendant-Appellee.

Appeal from the United States District Court
for the District of Washington
James L. Robart, District Judge, Presiding

Argued and Submitted
January 13, 2011—Seattle, Washington

Filed February 16, 2011

Before: Susan P. Graber and Milan D. Smith, Jr.,
Circuit Judges, and Charles R. Breyer,* District Judge.*

Opinion by Judge Charles R. Breyer

*The Honorable Charles R. Breyer, United States District Judge for the
Northern District of California, sitting by designation.

2637
 LAHOTI v. VERICHECK, INC. 2641
COUNSEL

Derek A. Newman and Randall Moeller, Newman & New-
man, LLP, Seattle, Washington, for the plaintiff-appellant.

Shannon M. Jost, Stokes Lawrence, P.S., Seattle, Washington,
for the defendant-appellee.

OPINION

BREYER, District Judge:

Appellant David Lahoti appeals from the district court’s
finding, on remand, that he violated the Lanham Act, the
Anticybersquatting Consumer Protection Act (ACPA), the
Washington Consumer Protection Act (WCPA), and Wash-
ington common law. The appeal turns in significant part on
whether the district court followed this court’s instructions on
remand in finding that Respondent Vericheck, Inc.’s VERI-
CHECK mark is suggestive, and thus entitled to trademark
protection. We find that the district court did follow our
remand instructions and that its resulting findings were not
clearly erroneous.

BACKGROUND

The underlying facts of this case are set out in detail in
Lahoti v. Vericheck, Inc., 586 F.3d 1190 (9th Cir. 2009), and
will not be repeated here. In that case, we affirmed the district
court’s finding that Lahoti acted in bad faith. Id. at 1202-04.
We included a detailed discussion of the principles involved
in differentiating between suggestive (i.e., distinctive) and
descriptive trademarks. Id. at 1196-1202. Following that dis-
cussion, we held that, “[w]hile the district court perhaps could
have relied exclusively on the registration of the Arizona
Mark to determine suggestiveness, it did not do so,” but
2642 LAHOTI v. VERICHECK, INC.
instead “improperly required that the Mark describe all of
Vericheck’s services, examined the Mark in the abstract, and
concluded that it could not analyze the Mark’s component
parts.” Id. at 1204. Accordingly, we vacated the district
court’s judgment and remanded. Id. We did not reach “the
district court’s conclusions that Vericheck established all
other elements of its trademark infringement, ACPA, and
WCPA claims, and that Vericheck was entitled to attorneys’
fees.” Id.

On remand, the district court considered our opinion and
post-appeal briefing; it did not augment the record. In its
Amended Findings of Fact and Conclusions of Law, the dis-
trict court discussed the principles we articulated, and con-
cluded, again, that the VERICHECK mark is suggestive. The
court further found that the mark is strong and entitled to pro-
tection. The court concluded that Lahoti had violated the
ACPA, and found that Lahoti’s use of the mark constituted
infringement. The court again held that Lahoti violated the
WCPA, and that Vericheck was entitled to an injunction, the
maximum statutory damages, and attorneys’ fees and costs.

Lahoti again appealed.

STANDARD OF REVIEW

We review a district court’s classification of a trademark’s
strength for clear error. Lahoti, 586 F.3d at 1195. Accord-
ingly, “we defer to the lower court’s determination unless,
based on the entire evidence, we are possessed of a definite
and firm conviction that a mistake has been committed.” Id.
at 1196 (internal quotation marks omitted).

We also review a lower court’s determination of the likeli-
hood of confusion for clear error. See Perfumebay.com Inc. v.
eBay, Inc., 506 F.3d 1165, 1172-73 (9th Cir. 2007). However,
we review interpretations of state law, such as the WCPA, de
novo. Id. at 1173. We also review de novo whether a trade-
 LAHOTI v. VERICHECK, INC. 2643
mark case is exceptional under 15 U.S.C. § 1117(a). Earth-
quake Sound Corp. v. Bumper Indus., 352 F.3d 1210, 1216
(9th Cir. 2003). But we review for abuse of discretion a dis-
trict court’s award of attorneys’ fees in an “exceptional case.”
Id.

ANALYSIS

A. Distinctiveness of the VERICHECK Mark

The main issue in this appeal is whether the district court
properly found that Vericheck’s mark is distinctive; “Veri-
check cannot prevail on its trademark claims unless its Dis-
puted Mark is distinctive.” Lahoti, 586 F.3d at 1197. A
suggestive mark is inherently distinctive, but a descriptive
mark that lacks secondary meaning is not distinctive and is
not entitled to trademark protection. Id. (citing Two Pesos,
Inc. v. Taco Cabana, Inc., 505 U.S. 763, 768 (1992)). On
remand, the district court agreed with Vericheck that the mark
is suggestive, not descriptive.

Lahoti argues that the district court repeated the same
errors on remand that it made initially, demonstrating a failure
to analyze the VERICHECK mark in its industry context. In
the original appeal, we noted three errors. First, the district
court seemed to require that, in order to be considered
descriptive, the VERICHECK mark would have to describe
the “broad array of electronic transaction processing services
that Vericheck provides.” Lahoti, 586 F.3d at 1201. Second,
the district court found that the VERICHECK mark could
have described services unrelated to those offered by Veri-
check, when in fact the mark must be evaluated “as if it were
seen on the goods or services.” Id. (internal quotation marks
omitted). And third, the district court improperly declined
Lahoti’s request that the mark be broken down into its compo-
nent parts. Id. We conclude that the district court rectified
these errors on remand.
2644 LAHOTI v. VERICHECK, INC.
[1] Analyzing the case anew on remand, the district court
indisputably recited the relevant legal principles that we set
out. The district court then went on to find that, “[w]hen
viewed in the context of Vericheck’s services, whether in
whole or in part, including Vericheck’s check verification ser-
vices, the VERICHECK mark does not immediately convey
information about the nature of Vericheck’s services.” The
district court explained that, “in reaching [its] conclusion,” it
“considered the component parts of the VERICHECK mark
‘as a preliminary step on the way to an ultimate determination
of the probable consumer reaction to the composite as a
whole.’ ” Thus, the district court conducted its analysis as
instructed.

Moreover, the holding that it reached as a result of that
analysis was not clearly erroneous. “If consumer response
requires any sort of ‘multistage reasoning process’ to identify
the characteristic of the product which the mark suggests, then
the mark should not be regarded as ‘merely descriptive.’ ” 3
Louis Altman & Malla Pollack, Callmann on Unfair Competi-
tion, Trademark and Monopolies § 18:10 (4th ed. Supp.
2010). Here, for example, consumers must separate “veri”
from “check” and reason that “veri” is short for “verification
services.” In addition, similar marks have been found to be
suggestive. See, e.g., Pilot Corp. of Am. v. Fisher-Price, Inc.,
501 F. Supp. 2d 292, 303 (D. Conn. 2007) (holding that
“Magna Doodle” is only suggestive of children’s magnetic
drawing toy, noting that it “requires some imagination to get
from ‘magna’ to ‘magnetic’ ”); In re Shutts, 217 U.S.P.Q.
(BNA) 363, 364-65 (T.T.A.B. 1983)1 (holding that “Sno-
Rake” is not merely descriptive of snow removal tool); Levi
Strauss & Co. v. R. Josephs Sportswear Inc., 28 U.S.P.Q. 2d
(BNA) 1464, 1471 (T.T.A.B. 1993) (holding that “Action
Slacks” is suggestive of pants made of stretchy fabric).
1
Decisions of the Patent Trademark Office Trademark Trial and Appeal
Board are not binding but are to be given great weight. See In re Dr Pep-
per Co., 836 F.2d 508, 510 (Fed. Cir. 1987).
 LAHOTI v. VERICHECK, INC. 2645
Moreover, the district court based its holding that the
VERICHECK mark is distinctive not only on its own analysis
of distinctiveness, but also on the PTO’s 1975 issuance of a
trademark to the Arizona company, also for check verification
services. In the first appeal, we “agree[d] with the district
court that the PTO’s registration of the Arizona Mark is evi-
dence of the Disputed Mark’s distinctiveness, given the strong
similarity between the appearance and purposes of the Ari-
zona Mark and the Disputed Mark.” Lahoti, 586 F.3d at 1199.
We explained that, while a statutory presumption of distinc-
tiveness only applies when the same mark has been registered,
“courts may also defer to the PTO’s registration of highly
similar marks.” Id.

Lahoti argues, however, that the district court erred by fail-
ing to consider material changes in fact and law since 1975.2
To the extent that this argument was not foreclosed by our
assertion in the first appeal that “the district court perhaps
could have relied exclusively on the registration of the Ari-
zona Mark to determine suggestiveness,” Id. at 1204, it is
nonetheless unavailing. Lahoti claims that there has been a
legal trend in the past thirty-five years to treat similar marks
as descriptive. But three federal trademark registrations that
Lahoti raises for the first time on appeal— VERICARD, Reg-
istration No. 3,780,924; VERIFONE, Registration No.
3,818,824; and VERI-TAX, Registration No. 3,786, 958—
undermine his argument. If those similar marks were not dis-
tinctive, the PTO would not have registered them on the Prin-
cipal Register. In addition, we noted in the last appeal that
“the parties did not present any evidence with regard to
whether technological changes impact” the interpretation of
2
Lahoti also seeks to distinguish the Arizona Mark, because it included
a design component. This difference did not trouble us on the first appeal.
See Lahoti, 586 F.3d at 1199-1200 & n.6 (noting that the Arizona Mark
contained a design component, but holding that the Arizona Mark is evi-
dence of the VERICHECK mark’s distinctiveness, as the two marks are
“identical in text”).
2646 LAHOTI v. VERICHECK, INC.
the Arizona Mark. Id. at 1200. Finally, the PTO has com-
pleted its initial examination of Vericheck’s application to
register VERICHECK and has approved it for publication for
opposition, indicating that the PTO still considers the mark dis-
tinctive.3

[2] We owe a great deal of deference to the district court’s
trademark classification. The district court’s initial conclusion
was based “in part on reasoning that is contrary to federal
trademark law.” Id. at 1201. On remand, it recited the correct
law, and it applied that law properly. Accordingly, the district
court’s conclusion that the mark is distinctive is AFFIRMED.
See also id. at 1198 (noting “only a handful of published opin-
ions in the past forty years in which a district court’s determi-
nation that a mark is suggestive rather than descriptive was
held to be clearly erroneous”).

B. Likelihood of Confusion

[3] Lahoti further appeals the district court’s holding that
the domain name www.vericheck.com is likely to be confused
with the VERICHECK mark. Courts analyzing the likelihood
of confusion look at eight factors: (1) the strength of the
mark; (2) the similarity of the marks; (3) proximity of the
goods/services; (4) similarity in the marketing channels used;
(5) the type of goods/services and the degree of care likely to
be exercised by purchasers; (6) evidence of actual confusion;
(7) defendant’s intent in selecting its mark; and (8) likelihood
of expansion into other markets. See AMF Inc. v. Sleekcraft
Boats, 599 F.2d 341-49, 348 (9th Cir. 1979), abrogated on
other grounds by Mattel Inc. v. Walking Mountain Prods.,
353 F.3d 792, 810 n.19 (9th Cir. 2003). Specifically in the
3
Lahoti argues that this fact is meaningless in light of the application’s
de-emphasis of Vericheck’s check verification services. However, the
application described Vericheck’s services as “financial transaction verifi-
cation services” and used the word “check” five times in the short excerpt
quoted by Lahoti.
 LAHOTI v. VERICHECK, INC. 2647
internet context, “the three most important Sleekcraft factors
. . . are (1) the similarity of the marks, (2) the relatedness of
the goods or services, and (3) the parties’ simultaneous use of
the Web as a marketing channel.” Interstellar Starship Servs.,
Ltd. v. Epix, Inc., 304 F.3d 936, 942 (9th Cir. 2002). When
this internet trinity suggest a likelihood of confusion, the other
Sleekcraft factors must weigh strongly against a likelihood of
confusion for the court to find no infringement. Id. (internal
citation and quotation marks omitted). Accordingly, we ana-
lyze the internet trinity first.

1. Similarity of the Marks

[4] Here, the VERICHECK mark and the
www.vericheck.com domain name are, as the district court
found, identical or confusingly similar. See Pub. Serv. Co. of
N.M. v. Nexus Energy Software, Inc., 36 F. Supp. 2d 436, 439
(D. Mass. 1999) (“e NERGYplace” and “energyplace.com”
”look virtually identical and sound identical”). This factor
weighs in favor of Vericheck.

2. Relatedness of Goods

[5] Second, the district court found that Lahoti uses
www.vericheck.com to provide services that compete with
Vericheck. Lahoti protests that, while Vericheck provides
check verification services, www.vericheck.com was an unre-
lated “directory-style website.” However, the district court
found that Lahoti’s website “includes links to companies
offering services that compete with those of Vericheck, such
as , as well as to websites that offer
‘Online Payments’ and ‘Merchant Processing.’ ” Lahoti does
not dispute those facts, protesting only that he “had no ability
to control the search results.” This is of little import; that
Lahoti sent visitors to competitors at all justified the district
court’s finding that his website competed with Vericheck’s
business. This factor weighs in favor of Vericheck.
2648 LAHOTI v. VERICHECK, INC.
3. Marketing Channels

[6] Third, the district court found that Lahoti and Veri-
check both used the Internet as a marketing channel. Lahoti
argues that this is an oversimplification, because he markets
to consumers while Vericheck markets to businesses. He does
not cite to the record in support of this point, however, so the
district court’s finding must be affirmed. But presuming
Lahoti is correct, this factor would not weigh strongly in Veri-
check’s favor. See Interstellar Starship Servs., Ltd., 304 F.3d
at 943 (where parties marketed to different online customer
bases, court properly balanced remaining Sleekcraft factors).
Therefore, although the internet trinity suggests a likelihood
of confusion, we will address the remaining Sleekcraft factors.

4. Remaining Sleekcraft Factors

[7] Strength of the mark is determined with a two-part test.
GoTo.com, Inc. v. Walt Disney Co., 202 F.3d 1199, 1207 (9th
Cir. 2000). The first part is conceptual strength. See id.; 2 J.
Thomas McCarthy, McCarthy on Trademarks and Unfair
Competition § 11:83 (4th ed. Supp. 2010). We have already
concluded that the district court properly found that VERI-
CHECK is a suggestive mark. The second part is commercial
strength, or the marketplace recognition value of the mark. Id.
The district court properly considered and rejected Lahoti’s
argument that the VERICHECK mark was rendered weak by
a “crowded field of third-party users.” The district court
examined the three prior uses Lahoti raised, noted that there
was “no credible evidence” that any of them had used the
VERICHECK mark to compete with Vericheck, and found
that this was “a far cry from the multitude of registrations and
uses that might suggest a weak mark.” In contrast, the district
court found that Vericheck had a longstanding use of the
mark, promoted it through trade shows and promotional
incentives, expanded its territory and client list and increased
its sales. The district court’s conclusion that the mark is
strong is valid. This factor favors Vericheck.
 LAHOTI v. VERICHECK, INC. 2649
[8] Next is evidence of actual confusion. Sleekcraft, 599
F.2d at 352. On this point, two witnesses testified on behalf
of Vericheck that there has been significant confusion as a
result of the www.vericheck.com website. The evidence
shows that Vericheck and its independent sales offices and
resellers receive a substantial number of telephone calls from
confused customers who could not find information about
Vericheck on www.vericheck.com.

Lahoti argues, however, that the district court should not
have considered the evidence of confusion, because it was hear-
say.4 Though the customers’ statements were clearly offered
for the truth of the matter, they are permissible under the
“state of mind” exception to the hearsay rule. See Fed. R.
Evid. 803(3); Conversive, Inc. v. Conversagent, Inc., 433 F.
Supp. 2d 1079, 1091 (C.D. Cal. 2006) (noting that the “major-
ity of circuit courts that have considered this issue have . . .
found that such evidence is admissible); 4 McCarthy, supra,
§ 23:15 (noting that the “majority of courts” have so found
and opining that such testimony “is not hearsay”). Accord-
ingly, this factor weighs in favor of Vericheck.

[9] The district court noted that “[n]either party presented
evidence regarding the likelihood of expansion,” and so this
factor is neutral.

[10] Also, if a typical consumer of the goods or services at
issue exercises a high degree of care in purchasing the kind
of good or service at issue, this weighs against finding a like-
lihood of confusion. Sleekcraft, 599 F.2d at 353. The district
court found that “[e]xercising an average degree of care, a
potential purchaser could conceivably visit
instead of and consequently become frus-
4
Notably, we expressed no concern about this evidence in our original
order. See Lahoti, 586 F.3d at 1194 (noting simply that “Vericheck fre-
quently received calls from its customers complaining that they were con-
fused”).
2650 LAHOTI v. VERICHECK, INC.
trated or confused by the myriad links found there.” That rea-
soning is valid. See Electropix v. Liberty Livewire Corp., 178
F. Supp. 2d 1125, 1134 (C.D. Cal. 2001) (holding that “virtu-
ally no amount of consumer care can prevent confusion where
two entities have the same name”). This factor weighs in
favor of Vericheck.

[11] Finally, we already affirmed the district court’s find-
ing that Lahoti acted in a bad faith attempt to profit from his
use of the VERICHECK mark. Lahoti, 586 F.3d at 1202-04.
This factor, too, weighs in favor of Vericheck.

5. Conclusion as to Likelihood of Confusion

[12] The internet trinity, combined with the remaining
Sleekcraft factors, weigh overwhelmingly in favor of Veri-
check. Accordingly, we AFFIRM the district court’s finding
of a likelihood of confusion.

C. The ACPA

[13] Lahoti also appeals the district court’s finding that he
is liable for cybersquatting under the ACPA. Cybersquatting
is the bad faith registration of a domain name that is identical
or confusingly similar to another’s distinctive mark. Lanham
Act § 43(d), 15 U.S.C. § 1125(d)(1)(A). We already affirmed
the district court’s holding that Lahoti acted in bad faith and
is not entitled to safe harbor under ACPA. Lahoti, 586 F.3d
at 1202-04. There is also no question that the
www.vericheck.com domain name wholly incorporates the
VERICHECK mark. In light of our conclusion that the VERI-
CHECK mark is distinctive, the district court’s conclusion
that Lahoti violated the ACPA is also AFFIRMED.

D. The WCPA

Lahoti additionally appeals the district court’s holding that
he violated the WCPA. To prove a violation of the WCPA, a
 LAHOTI v. VERICHECK, INC. 2651
plaintiff must demonstrate that (1) the action complained of
is an unfair act or practice; (2) in the conduct of trade or com-
merce; (3) affecting the public interest; (4) injuring business
or property; (5) and with a causal link between the deceptive
act and the injury suffered. See Nordstrom, Inc. v. Tampour-
los, 733 P.2d 208, 210 (Wash. 1987).

[14] Confusion of the public typically satisfies the “public
interest” element of the WCPA. Id. at 212. Lahoti argues that
the district court erred in finding that he violated the WCPA,
because “the inadvertent infringement of a weak mark is not
sufficient to qualify as a public interest.” Seattle Endeavors,
Inc. v. Mastro, 868 P.2d 120, 127 (Wash. 1994). But this is
not a case of inadvertent infringement. First, Lahoti acted in
bad faith. Lahoti, 586 F.3d at 1202-04. Second, we have con-
cluded that the VERICHECK mark was both distinctive and
strong. Finally, though Lahoti argues that there is no admissi-
ble evidence that anyone in Washington State was actually
confused, there is a likelihood of confusion, and there was tes-
timony about significant actual confusion and testimony that
Vericheck has numerous customers in Washington State.5 The
district court’s finding of a violation of the WCPA is therefore
AFFIRMED.

E. Attorneys’ Fees

Lahoti challenges the district court’s grant of attorneys’
5
Lahoti does not appear to challenge the “in the conduct of trade or
commerce” element of the WCPA and, in any case, any challenge would
fail. Lahoti profited from the www.vericheck.com domain name when
search engines shared a portion of their revenues with him for reredirect-
ing visitors from the site. Lahoti also offered to sell www.vericheck.com
for amounts greater than the original registration fee. See Panavision Int’l,
L.P. v. Toeppen, 141 F.3d 1316, 1325 (9th Cir. 1998) (“[Defendant’s]
commercial use was his attempt to sell the trademarks themselves”), modi-
fied on other grounds by Yahoo! Inc. v. La Ligue Contre Le Racisme Et
L’Antisemitisme, 433 F.3d 1199, 1207 (9th Cir. 2006) (en banc) (per
curium).
2652 LAHOTI v. VERICHECK, INC.
fees under the Lanham Act and under the WCPA. He further
opposes Vericheck’s request for appellate fees.

1. Fees Under the Lanham Act

Pursuant to 15 U.S.C. § 1117(a), the court may award rea-
sonable attorneys’ fees to the prevailing party in exceptional
cases. Exceptional cases include cases in which the infringing
party acted maliciously, fraudulently, deliberately or willfully.
See Gracie v. Gracie, 217 F.3d 1060, 1068 (9th Cir. 2000).
The district court determined that this case was exceptional,
citing Lahoti’s willful registration and use of the
www.vericheck.com domain name, his “attempt to extort
thousands of dollars from Vericheck,” his disregard for Veri-
check’s trademark rights, his “pattern and practice of cyber-
squatting, including a pattern and practice of abusive
litigation practices,” and his “disregard for the submission of
inaccurate answers to interrogatories.” Having found the case
exceptional, the district court ordered Lahoti to pay Vericheck
$78,109.95 in fees and costs.

[15] Lahoti argues that this case is not exceptional and
compares it to Lindy Pen Co. v. Bic Pen Corp., 982 F.2d 1400
(9th Cir. 1993). But Lindy Pen involved unintentional
infringement. Id. at 1406. This case does not. We have
already affirmed the district court’s holding that Lahoti acted
in bad faith. Lahoti, 586 F.3d at 1202-04. Indeed, “bad faith
of one of the parties may be part of those exceptional circum-
stances warranting a fee award.” Stephen W. Boney v. Boney
Servs., Inc., 127 F.3d 821, 827 (9th Cir. 1997) (internal quota-
tion marks and alterations omitted). Based on Lahoti’s bad
faith and the other factors cited by the district court, this was
indeed an “exceptional” case under 15 U.S.C. § 1117(a). In
addition, we have no basis for concluding that the district
court’s award of $78,109.95 in fees and costs— an amount
unchallenged by Lahoti— is an abuse of discretion. The dis-
trict court’s award of fees under 15 U.S.C. § 1117(a) is
AFFIRMED.
 LAHOTI v. VERICHECK, INC. 2653
2. Fees Under the WCPA

[16] Lahoti’s argument that fees are not appropriate under
the WCPA is simply that there was no violation of the
WCPA. We have concluded otherwise. The fee award under
the WCPA is therefore AFFIRMED.

3. Appellate Fees

[17] Lastly, in its brief, Vericheck asks us to award it rea-
sonable attorneys’ fees as a sanction for Lahoti’s frivolous
appeal. Fed. R. App. P. 38; 28 U.S.C. § 1912. As a prelimi-
nary matter, such a request must be made in a separately filed
motion. See Fed. R. App. P. 38; Gabor v. Frazer, 78 F.3d
459, 459-60 (9th Cir. 1996) (order) (holding that Rule 38
request for sanctions in party’s appellate brief does not pro-
vide sufficient notice to opposing party). That procedural
issue notwithstanding, Lahoti’s arguments of error are not
“wholly without merit.” See McConnell v. Critchlow, 661
F.2d 116, 118 (9th Cir. 1981). Accordingly, this request is
DENIED.

CONCLUSION

For the foregoing reasons, we AFFIRM the district court’s
order, and DENY Vericheck’s request for appellate fees.