Lucent Information Management, Inc. v. Lucent Technologies, Inc.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

This trademark case involves the question of what constitutes “use” sufficient to establish common law trademark rights. Lucent Information Management, Inc. (“LIM”) argues that it had common law rights in the mark “LUCENT” prior to Lucent Technologies, Inc. (“LTI”), based on its usage of that mark before LTI filed an intent to use (“ITU”) application with the United States Patent and Trademark Office (“PTO”), indicating its intention to use the mark LUCENT in commerce. LIM further alleges that LTI did not act in good faith in adopting and using the mark. We find that LIM’s limited use of the mark did not constitute prior use in commerce sufficient to establish rights in the mark, and that, as a result, LTI’s *313adoption and use of the mark did not constitute trademark infringement, and was in good faith as a matter of law.

II. FACTUAL AND PROCEDURAL HISTORY

A. LIM’s Adoption and Use of the Name and Mark LUCENT

We accept as true the facts set forth by the district court, which drew all reasonable inferences in favor of LIM. In 1995 Norman Feinstein, Samuel Weinberg, Edward Eisen, and Cliff Armstrong formed LIM, a Pennsylvania corporation, to provide document imaging and management services, acting as a consultant on and reseller of software and hardware. LIM selected the name LUCENT during the summer of 1995 after finding it in a dictionary. Since its formation, LIM has operated out of the Bala Cynwyd, Pennsylvania, office of Feinstein’s other business, Corporate Consultants, Inc., an employee benefits company. The four principals are LIM’s only employees and Feinstein’s employees at Corporate Consultants perform LIM’s clerical and bookkeeping work. In the fall of 1995, LIM began using contacts and referrals to inform individuals and companies of its services. On September 5,1995, Feinstein sent a one-page letter on Corporate Consultants’ letterhead to about 50 people to announce the services LIM would offer. On October 5, 1995, Armstrong installed a modem for the Israel Bonds Office in Philadelphia. While Armstrong, not LIM, received the payment of $323.50 for the installation, the purchaser’s invoice shows LIM’s name and address, and viewed favorably to LIM, this transaction was its first sale.1

Through the end of 1995, LIM continued to seek clients from existing contacts and referrals. LIM did not do any public or paid advertising, relying instead on word of mouth and its solicitations of business from acquaintances of its principals. In November 1995, LIM made sales presentations to acquaintances at NBC in New York, Aramark in Pennsylvania, and Nixon Uniform in Delaware, but these presentations did not result in sales. From December 1, 1995, to February 5, 1996, LIM made about 12 presentations and continued to promote the new business with people the principals met socially and in business. The date of February 5,1996, is significant because on that the date AT & T announced the creation of LTI to the public through a huge media campaign. On February 16, 1996, LIM made another sale, entering into a support agreement with a local bank. Finally, on April 29, 1996, LIM filed an application with the PTO to register LUCENT for computer and office-related services.2

B. LTI’s Adoption and Use of the Name and Mark LUCENT

LTI is the telecommunication and technology business spun-off from AT & T in 1996. A consultant suggested LUCENT as a potential name for the new business. Frank L. Politano, a trademark attorney, coordinated the trademark clearance. In November 1995, AT & T obtained a trademark name search and two trademark search reports, all of which located companies using the mark LUCENT or variants of it. One of the three search results included a reference to LIM.

On November 30, 1995, LTI through its predecessor in interest filed an intent to use application (“ITU”) with the PTO for the mark LUCENT for various telecommunications and computer-related goods *314and services.3 When AT & T announced the spin-off on February 5, 1996, major newspapers and media covered the event. Many articles included LUCENT in the headline and LTI mailed out over 1.2 million announcements to potential customers. Like most of America, LIM learned about LTI in February 1996. On March 15, 1996, LIM’s trademark counsel, John Caldwell, sent LTI a letter objecting to LTI’s use of the name LUCENT, stating that LIM had adopted and used LUCENT on a “nationwide” basis. This cease-and-desist letter stated in part:

In August and September, 1995, [LIM] began corresponding under the Lucent name.... This was a nationwide effort. ... A copy of the letter sent at that time, with the addresses redacted, is enclosed. I also enclose a brochure available from [LIM] at that time.... I look forward to hearing from you with your assurance that a new name will be found for your company ...

App. 289-90. Caldwell enclosed a copy of a promotional brochure and a letter to solicit clients on LIM letterhead dated September 5,1995.4

On April 12, 1996, R.A. Ryan, AT & T’s trademark counsel, responded to the March 15, 1996 letter, stating that she did not agree that LTI’s use of the name “Lucent Technologies” created a likelihood of confusion, that the companies’ markets did not overlap, and that their services and products are not confusingly similar. As we noted above, LIM thereafter filed an application to register the mark LUCENT. LIM’s then-trademark counsel responded to the April 12, 1996 letter with a proposed agreement that each party would refrain from opposing the other parties’ registration of the mark, and would use trade dress, advertising and marketing in a manner that would avoid likelihood of confusion. The parties, however, did not enter into that agreement. Shortly thereafter, LIM began this litigation.5

C. Procedural History

LIM filed this suit on September 12, 1996, in the district court. LIM alleged that LTI infringed its trademark in violation of 15 U.S.C. § 1125(a), and alleged service mark and trade name infringement and unfair competition and deceptive trade practices under Delaware law (counts I-V). LIM sought injunctive relief, recovery of LTI’s profits, and treble damages. LTI answered on October 3, 1996, denying infringement and raising several affirmative defenses, but generally admitting use of the name.6

On July 3, 1997, LTI moved for summary judgment as to counts I-V of the complaint, on the ground that LTI had prior rights to the name and mark LU-CENT. The district court granted LTI’s summary judgment motion as to counts I*315V in an opinion and accompanying order dated November 5, 1997. Lucent Info. Management v. Lucent Technologies, Inc., 986 F.Supp. 253 (D.Del.1997). While there were further proceedings in the district court, this appeal and thus the opinion concerns only those counts.7 After the further proceedings LIM filed a timely appeal on April 17,1998.

III. STANDARD OF REVIEW

We review the district court’s order granting, summary judgment de novo, and we apply the same test the district court applied in the first instance. See Petruzzi’s IGA Supermarkets, Inc. v. Darling-Delaware Co., 998 F.2d 1224, 1230 (3d Cir.1993). Consequently, we must determine whether the record, when viewed in the light most favorable to LIM, shows that “there is no genuine issue as to any material fact” and that LTI is “entitled to a judgment as a matter of law.” Fed. R.Civ.P. 56(c). We confine our discussion to the trademark infringement count as LIM has not briefed the case under state law.

IV. DISCUSSION

A. Trademark Infringement

Trademark law protects owners in the exclusive use of their marks when use by another is likely to cause confusion. See A & H Sportswear Inc. v. Victoria’s Secret Stores, Inc., 166 F.3d 197, 205 (3d Cir.1999) (en banc). Thus, to obtain relief a plaintiff in an infringement case must demonstrate its ownership of the mark. In considering who owns the mark LU-CENT, the question before us is whether a reasonable trier of fact could find that LIM’s activities prior to November 30, 1995, when LTI filed its ITU, established prior rights in the mark through use in commerce.

We consider events before November 30, 1995, because federal registration of a trademark is prima facie evidence of the mark’s validity, the registrant’s ownership of the mark, and its exclusive right to use the mark in commerce. 15 U.S.C. § 1115(a). Nevertheless, there are limitations on the right as section 7(c) of the Lanham Act states that “the filing of an application to register [a mark] shall ... confer[ ] a right of priority, nationwide in effect, ... against any other person except for a person ... who, prior to such filing, has used the mark.” 15 U.S.C. § 1057(c). Consequently, the parties agree that LIM must establish rights in the name and mark LUCENT by its prior “ ‘use [of the mark] in commerce’ — ‘use’ being defined as ‘the bona fide use of a mark in the ordinary course of trade....’” 15 U.S.C. § 1127.

It is a well-settled principle that a plaintiff must establish that it had prior rights or “priority” in the mark. See Scott Paper Co. v. Scott’s Liquid Gold, Inc., 589 F.2d 1225, 1231 (3d Cir.1978) (“relief is only available if the plaintiff establishes priority”). Because LTI filed its ITU on November 30, 1995, LTI has priority over anyone using the mark after that date unless the person earlier used the mark. 15 U.S.C. §§ 1051(b), 1057(c). Accordingly, inasmuch as LIM does not assert prior registration, see Zazu Designs v. L’Oreal, S.A., 979 F.2d 499, 503 (7th Cir.1992), it can prevail only if it shows prior use of the mark “in a way sufficiently public to identify or distinguish the marked goods in an appropriate segment of the public mind as those of the adopter of the mark.” Blue Bell, Inc. v. Farah Mfg. Co., Inc., 508 F.2d 1260, 1266 (5th Cir.1975).

LIM points out that this is a “reverse confusion” case, and contends that Fisons Horticulture, Inc. v. Vigoro Indus., *316Inc., 30 F.3d 466 (3rd Cir.1994), controls the outcome. See also A & H Sportswear, 166 F.3d at 207. Reverse confusion exists when a junior user uses its size and market penetration to overwhelm the senior, but smaller, user. The “senior user” is the first to adopt and use a mark anywhere in the country. The “junior user” is the second user, regardless of whether it adopts and uses a mark in a geographically remote location. See 4 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 26.01[1] (4th ed.1996). Reverse confusion doctrine protects the senior user’s control of its mark and the goodwill created by the mark from a junior user’s employment of the mark, and protects the public from being deceived into believing that the senior user’s product emanates from, is connected to, or is sponsored by the junior user.

The facts in this case fit the reverse confusion model: LIM is the little start-up alleging that its identity and goodwill, built upon alleged use of a mark, have been threatened by LTI’s swamping the market with the allegedly later use of the same mark. But, as LTI points out, LIM must show, as did the senior user in Fisons, that it is in fact the senior user. In Fisons, the senior user was the uncontested owner of the registered mark in dispute, so there was no need for it to establish rights through prior use. Fisons, 30 F.3d at 469. Thus, in that case we were able to proceed to a likelihood-of-confusion analysis. But we cannot apply the senior user versus junior user analysis of Fisons unless and until we determine that there are two “users” of the same mark. Because the record cannot support that finding, we do not undertake a likelihood-of-confusion analysis.

We measure “use” by the four-factor test of Natural Footwear Ltd. v. Hart, Schaffner & Marx, 760 F.2d 1383, 1398-99 (3d Cir.1985). That case represented and is clearly applicable to the commonly recurring fact pattern of concurrent use of confusingly similar common-law trademarks in different regions. Here, we do not have geographic competition, with a senior user allegedly being established in an area, and a junior user moving in on that territory or trying to use the same mark in another region. From its outset LTI was willing and able to operate nationwide, and has undisputed national market penetration.8

The facts before us vary from the classic geographic extent of use cases. However, we may assess the basic issue — market penetration based upon prior use of the mark — applying the Natural Footwear test, which, like similar tests in other circuits, measures the extent of a senior user’s actual use and zone of expansion. See, e.g., Peaches Entertainment Corp. v. Entertainment Repertoire Assocs., Inc., 62 F.3d 690, 693 (6th Cir.1995) (examining whether the defendant had established a market presence or market penetration in any specific locality as of the date of registration of plaintiffs mark and noting that the market area is frozen at the time of the registration by the senior user).9

A party asserting trademark ownership in a trading area must show “clear entitle[ment]” to protection of its trademark in a particular market. See *317Natural Footwear, 760 F.2d at 1397. In other words, that party must introduce evidence to show its trademark “has achieved market penetration that is ‘significant enough to pose the real likelihood of confusion among the consumers in that area.’ ” Id. (quoting Sweetarts v. Sunline, Inc., 380 F.2d 923, 929 (8th Cir.1967)). Natural FooUvear adopted a four-factor test “to determine whether the market penetration of a trademark in an area is sufficient to warrant protection: (1) the volume of sales of the trademarked product; (2) the growth trends (both positive and negative) in the area; (3) the number of persons actually purchasing the product in relation to the potential number of customers; and (4) the amount of product advertising in the area.” Natural Footwear, 760 F.2d 1383, 1398-99 (internal citations omitted).

Applying this test, we reach the same result as did the district court in granting LTI’s motion for summary judgment. LIM’s “volume of sales” in 1995 consisted of Armstrong’s single sale for $323.50. This court has held that sales volume must be more than de minimis. “When sales activity does not exceed even a minimum threshold level, a court may properly conclude that market penetration ... simply has not been demonstrated.” Id. at 1400 (finding de minimis clothing sales of less than $5,000 and total of over 50 customers in at least two of the three years for which sales data were available). LIM asks us to consider Blue Bell, 508 F.2d at 1265, in which the Court of Appeals for the Fifth Circuit held that “even a single use in trade may sustain trademark rights if followed by continuous commercial utilization.” Here, though, if we look for “continuous commercial utilization” beyond the first sale, as required under Blue Bell, we do not find that the continuous use — the further promotional efforts — “sufficiently public to identify or distinguish the marked goods in an appropriate segment of the public mind as those of the adopter of the mark.” Id. at 1266.

Because LIM made only a single sale in the period before LTI filed its ITU, we cannot find and review “growth trends,” the second factor in the Natural Footwear test. ■ LIM' has argued that it had the potential and intention to offer services to a nationwide market, but even considering the volume of potential clients in the Philadelphia area, we must conclude that the ratio of existing customers to potential customers is minute.

As for the fourth and final factor, advertising and promotion, LIM stresses that its efforts were not to reach the general public at first, but rather to cultivate its clientele from existing contacts. LIM does not assert that its advertising and promotion to the public were extensive in any region, let alone nationwide. We may take into account in this respect and more generally the nature of the market LIM has entered and the services it offers. LIM contends that as a start-up company with a limited budget, offering relatively ^expensive services which are not “sampled” easily by customers, it would be expected to take time for it to win over clients. Accordingly, it is understandable that it would try to establish the business through a small circle of existing business and personal contacts. LIM correctly notes that sales or presentations made to acquaintances or friends may be bona fide commercial uses. But see Jaffe v. Simon & Schuster Inc., 1987 WL 124312, 3 U.S.P.Q.2d 1047, 1049 (S.D.N.Y.1987) (“A [trademark] user’s early sales to friends and relatives do not ‘actually put the product on the market ....’”) (citation omitted).

But the fact remains that LIM existed for only about three months before LTI filed its ITU, had made but one sale in that period, had not invested any monies in public advertising or expanded beyond its initial set-up, and had made a relatively small number of sales presentations. LIM offers evidence of confusion generated by LTI’s launch, such as phone calls intended for LTI coming to its office or people wondering whether it stole the mark from *318LTI. Nevertheless, LTI is correct when it stresses that LIM wants to protect its intention to create goodwill and a successful business, and not the goodwill and business itself. Certainly any new business will need time to get off the ground, but the courts cannot aid that effort by awarding trademark rights in an unregistered mark that the business hopes or anticipates will be used but has not been used. Thus, we agree with the district court that LTI has prior rights in LUCENT because it filed its ITU on November 30, 1995, and LIM has not shown prior use.

B. LTI’s Good Faith Adoption and Use of the Mark LUCENT

LIM argues that LTI is liable for bad faith because it was aware of LIM’s existence and/or use of the mark, but proceeded to adopt it anyway.10 The issue is moot because LIM was not a senior user for the above reasons. See Zazu Designs, 979 F.2d at 504-05. p

In any case, the only evidence LIM has raised as to whether there was bad faith is LTI’s assertion of privilege during discovery as to what steps, if any, LTI took upon generating the trademark search which included the reference to LIM. In this context, we will not draw an adverse inference from the raising of privilege, as courts have found that reliance on the advice of counsel after conducting a trademark search is sufficient to defeat an inference of bad faith. See Astra Pharmaceutical Products, Inc. v. Beckman Instruments, Inc., 1983 WL 51933, 220 U.S.P.Q. 609, 612 (D.Mass.1983). Thus, while we have not decided whether a junior user’s knowledge of the senior user’s use of a mark is sufficient to attribute bad faith adoption of the mark, we see no reason to do so on this occasion. See A.J. Canfield Co. v. Honickman, 808 F.2d 291, 296 n. 7 (3d Cir.1986) (“[tjhose claims raise interesting issues” not necessary for decision).

V. CONCLUSION

For the foregoing reasons, we will affirm the district court’s order of November 5, 1997, granting LTI’s motion for summary judgment on counts I-V in the original complaint, dismissing LIM’s trademark infringement and related claims.

. On October 16, 1995, LIM met with Corporate Consultants to select products and services, and it then rendered services to it through November. The district court did not credit this as a sale because it involved services provided to Feinstein himself.

. That application listed the first use of LU-CENT as March 6, 1996; LIM amended the application after this suit was filed to claim the September 5, 1995 sale to the Israel Bonds Office as the date of first use.

. The Trademark Law Revision Act of 1988 added provisions allowing for registration of a mark on a showing that the applicant has a "bona fide intention ... to use a trademark in commerce.” 15 U.S.C. § 1051(b). Filing such an "intent-to-use” application establishes priority as of the date of filing (except as against those already using the mark), but a statement of actual use must be filed within 6 months, which may be extended to 24 months. 15 U.S.C. § 1051(d). At the same time the law was revised to provide that " 'use in commerce' means the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark.” 15 U.S.C. § 1127.

. Subsequently, LIM admitted that the letter had in fact been sent out on Corporate Consultants' letterhead. Significantly, the enclosed brochure did not in fact exist in September 1995, as LIM created it later.

. LIM has filed five opposition proceedings arising out of LTI’s application to file the LUCENT trademark with the United States Patent and Trademark Office which have been suspended pending the outcome of this appeal.

. On May 14, 1997, LIM filed a supplemental complaint, alleging five additional claims for copyright infringement, tortious interference, trade libel, Lanham Act violations, and fraud (counts VI-X). The district court determined that those claims involved distinct issues from counts I-V.

. LTI also moved for summary judgment on counts VI-X, and was granted summary judgment on March 24, 1998. See Lucent Info. Management, Inc. v. Lucent Technologies, Inc., 5 F.Supp.2d 238 (D.Del.1998). Inasmuch as LIM has briefed and argued only the dismissal of its original infringement claims, and not the dismissal of its supplemental claims, we address only the former.

. LIM cannot show national sales penetration or recognition of its mark, but appears to argue that there is a natural zone of expansion for its services — the entire nation — for it eventually could reach customers nationwide and hoped to do so. We need not reach the issue of calculating its zone of expansion as its commercial use of LUCENT has not been established even in a small area. See, e.g., ACCU Personnel, Inc. v. AccuStaff, Inc., 846 F.Supp. 1191, 1208-09 (D.Del.1994) (refusing to find zone of natural expansion in parts of Pennsylvania and Delaware from plaintiff's usage area in southern New Jersey).

. We note that a district court has used the Natural Footwear test to assess market penetration in a situation involving overlapping but not distinct geographic sales regions. See Smith v. Ames Dep’t Stores, Inc., 988 F.Supp. 827, 837-39 (D.N.J.1997), aff'd, 172 F.3d 860 (3d Cir.1998) (table).

. Applying the test in Fisons, we would consider whether LTI was 'careless” in searching for uses of the mark. Fisons, 30 F.3d at 480. In Fisons we suggested, substituting the parties here for those in that case, that "[t]he questions the district court should consider here are whether [LTI] conducted an adequate name search for other companies marketing similar goods under trademarks including the name[LUCENT], and whether it followed through with its investigation when it found there were such companies. Did [LTI] consider the likelihood of confusion with other companies’ marks and products (as opposed to considering the likelihood that someone would contest its new mark)? Did it attempt to contact companies using a similar mark, such as[LIM]? Was [LTI] careless in its evaluation of the likelihood of confusion?” Id.